United States

Seattle tax on high-income earners overturned

The tax was scheduled to go into effect on Jan. 1, 2018

INSIGHT ARTICLE  | 

In what the former Seattle mayor called a “new formula for fairness” and a challenge to the state’s “antiquated and unsustainable tax structure,” Seattle became the first local jurisdiction in Washington state to pass an income tax when it was approved by city council and signed by the mayor in mid-July.

Originally schedule to become effective on Jan. 1, 2018, Seattle residents with incomes in excess of $250,000 ($500,000 for married couples filing jointly) would have been subject to a tax of 2.25 percent on income exceeding those thresholds. Qualifying taxable income may be earned or unearned. For example, if an individual earned a salary of $300,000, and had a gain from other sources of $100,000, the resulting local tax would have been assessed at 0 percent on the first $250,000 and at 2.25 percent on the remaining $150,000, or a total tax liability of $3,375 

Currently one of seven states that impose no personal income tax, many believed the Seattle tax to be in violation of the state’s constitution, which requires all taxes to be uniformly imposed upon the same class of property. That provision may be violated because, at the very least, the tax is imposed only on incomes above a certain threshold, leaving lower incomes unburdened. Additionally, the Washington legislature has expressly prohibited counties and cities from imposing a “net income tax.”

A complaint filed on the day the law was signed challenged the legality of the Seattle income tax under both the state constitution and state statutes. The complaint also alleged that the tax is on net income and thus directly in violation of state law.

In just under five months after passing, taxpayers received their first court victory. On Nov. 22, 2017, Judge John R. Ruhl of the King County Superior Court ruled on the first four complaints to the city income tax, finding that the tax was a tax on income, and not a permissable excise tax, prohibited by statute. While Judge Ruhl addressed the tax as it pertains to current statutory law, he did not address the taxpayer’s constitional arguments. The city has expressed its intent to appeal the decision. Seattle-based high-income earners should consider the matter far from over and anticipate developments in the next six months. 

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