At Washington Policy Center, we view this proposal as not only one that will hurt Seattle businesses and residents, but also a way for income tax advocates to try to circumvent the legality of an income tax. Washington residents have voted NO nine times to instituting an income tax in our state. The City Council is merely trying to take this issue to court hoping to create a slippery slope that inhibits business growth and stunts personal finance growth as well. 
 

Dear Seattle City Council members,

I am concerned by recent reports that the Seattle City Council plans to pass an income tax. According to the City’s own financial department and as reported in The Seattle Times, Seattle’s annual spending has grown 33% to $5.4 billion since 2013.  That spending of roughly $7,700 per resident is 35% higher than the Washington state average government spending per resident.  In short, the proposed city income tax is not constitutional or legal, not needed and not in the best interest of the citizens of Seattle.  And, depending on how the tax is structured, it may be levied on non-Seattle residents who live in other cities, but work or invest in Seattle.

On constitutionality, Washington state law is clear that a city is prohibited from enacting an income tax (see RCW 36.65.030). The state Constitution also says that property must be taxed at a uniform rate, and the state Supreme Court has ruled repeatedly over many decades that income is property. In addition, voters have five times rejected constitutional amendments to impose a graduated income tax, and four times they have rejected proposals to call an income tax an “excise tax.”

Commenting on an unsuccessful effort to enact a city income tax in Olympia (Measure 1) last year, former state Supreme Court Chief Justice Gerry Alexander stated:

“As a lifelong Olympian I am opposed to the proposed income tax. My concerns are numerous, but start with the fact that the tax would be unlawful, In that regard, see RCW 36.65.030 which provides that a city ‘shall not levy a tax on net income.’ On top of that, the Washington Supreme Court has twice ruled that graduated income taxes violate the 14th Amendment to the State constitution.”

While the question of constitutionality is an important one, the bigger questions are whether Seattle needs a new taxing vehicle and whether it would be in the best interest of the citizens of Seattle.  Here is why the answer to both of those questions is no. 

Seattle already has a broad mix of taxes, fees for service and utility charges to customers.  Adding a new taxing vehicle will not address the concern about regressive taxes that many people share.  And, history shows that the Seattle income tax, as every other income tax has, would very likely extend to low and middle income families over time. 

The city’s largest current tax sources are property taxes, sales taxes, business revenue (B&O) taxes and utility taxes.  These sources of taxes are broad and have grown with the overall employment growth in Seattle.  As highlighted by Seattle’s own finance department, employment in greater Seattle has grown 19.0% from June 2009 to June 2016 compared to 11.1% employment growth in the US and 14.6% in Washington state.  Many of these jobs are high paying jobs that both directly support the city tax base and indirectly create other job opportunities that help employ other citizens in Seattle.  That same city budget report highlights that “the region has also outpaced the US in both income and wage growth during the recovery.”  And, when you experience healthy economic growth you increase taxable retail sales providing the city with the resources needed to fund operations.  Specifically, from 2010 to 2015 taxable retail sales increased 52% in the City of Seattle compared to 30% in the rest of the state. 

When employment growth is almost double the national rate and the quality of the jobs is outpacing national income and wage growth, you have a system that is already strong.  And, the resulting growth in taxes and revenues suggests that the revenue side of city governance is not where the challenges are.  I understand that there are important questions to answer on which spending areas to prioritize and on how best to invest citizen’s taxes and fees to most efficiently and effectively provide important government services to all.  Since our tax revenues and fee income continue to rapidly grow, I encourage the City Council to focus on balancing the needs of our citizens for important city services with the ongoing investments that will attract and retain people and opportunities in our city. 

As we have seen on a state-wide basis, not having a city income tax will be in the best interest of all Seattle and surrounding area residents.  Washingtonians recently voted on whether a state income tax would be in their best interest.  That initiative, I-1098, was defeated 64% to 36% in 2010 – including losing in King County.  But, the more important fact is that state tax revenues have increased from $28 billion to $38 billion since that vote 6 years ago and are projected to increase another $6 billion to $44 billion in the next four years.  Over the past 6 years, the state legislature also prioritized education by increasing K-12^th grade spending by $3,000 to over $12,500 per pupil per year and reduced tuition costs at state universities.  While any of us can make specific cases for unfairness in our state and city’s overall mix of taxes, in the bigger picture our system is working to substantially grow tax revenues, attract people and opportunity to our region and provide the resources governments need to support our fellow citizens and communities.

 Being involved with start-ups that hire Washingtonians in Seattle and recruit others to live here, I personally speak to people considering a move to the Seattle area every week.  Consistently these folks are attracted to our innovation culture, amazing outdoors and collaborative community.  And, they are attracted by our balance of taxes outlined above that encourage people and companies to invest, take risks and make purchases that help drive our economy. Specifically, they see no state or city income tax as a major competitive advantage for Washington and Seattle.  Companies like Amazon, Google and Microsoft have thousands of people living and working in Seattle and on the Eastside.  If Seattle creates a city income tax, I am confident many people will move out of greater Seattle or not come at all, and if applied only to Seattle residents, it will cause a migration from Seattle to cities like Bellevue and Redmond.

For these reasons, I encourage you to not pass a city income tax that is unconstitutional, not required given our substantial revenue growth, and not in the best long-term interest of the citizens of Seattle.

Thank you for considering this perspective and the supporting facts in your deliberations.

Sincerely,
Matt McIlwain