Just-released records show city attorney warned Seattle officials that a city income tax is against the law
SEATTLE— Recently released public records show that when Seattle passed an income tax in 2017, city councilmembers already knew local income taxes are barred by state law. For the first time, the contents of a legal memo have been revealed in which an attorney for the City of Seattle offered counsel as to the illegal and unconstitutional nature of city income tax proposals. The release closes a public records lawsuit filed by Washington Policy Center (WPC) against the City of Seattle.
“This memo makes clear that Seattle already knew what everyone else knew – a city income tax is illegal,” said Jason Mercier, Government Reform Director for Washington Policy Center. “It is unfortunate that this sound advice was ignored in 2017 and Seattle taxpayers are now being forced to pay legal costs for a futile effort to circumvent the law.”
The 2014 Seattle income tax legal memo said: “The legislature has not granted cities the authority to impose an income tax. In fact, the legislature has specifically prohibited cities from imposing a net income tax . . . Even if that statute did not exist, the City would still need an express grant of authority from the legislature to impose a net income tax.”
WPC sued Seattle last September for refusing to provide a copy of a November 2014 City of Seattle legal memo pertaining to an income tax that had been provided to an outside organization, the Economic Opportunity Institute. WPC’s public records lawsuit also sought to invalidate the novel claim of “spousal privilege” to redact emails relating to Seattle’s 2017 imposition of an income tax. The settlement agreement with Seattle was finalized on April 9th.
Along with receiving unredacted copies of the public records, Seattle agreed to pay WPC’s attorney fees and court costs of $9,242.00.
Other public records provided by Seattle were emails between Councilmember Sally Bagshaw and her husband Bradley Bagshaw directly relating to Seattle’s 2017 effort to impose an income tax. These records, sent on Bagshaw’s Gmail account, had previously been denied under a claim of “spousal privilege.”
“Faced with hard evidence that the City had waived its attorney-client privilege by sharing the 2014 memo with outside parties, the City argued that no waiver could occur without formal action by the City Council,” explained William Crittenden, WPC’s attorney. “Because Bradley Bagshaw was not licensed to practice law the City resorted to arguing that his emails with Sally Bagshaw about the legality of an income tax were private communications between spouses. The City rolled over early in the litigation because these arguments were absurd, and WPC would have won in court, costing the City a lot more than just $9,242. This case should discourage other agencies from trying to keep important public records secret.”
In one of the Bagshaw emails, Bradley tells the Councilmember: “A sound argument can be made that a Constitutional interpretation long relied upon is best changed by a Constitutional amendment, not by the Court. This argument will have extra force in our fine state where income taxation is politically poisonous outside Seattle, and where Supreme Court judges are, as we and they well know, elected statewide.”
“Mr. Bagshaw is 100% correct. Whether a graduated income tax is imposed at the state or local level is a decision that needs to be made with a constitutional amendment,” said WPC’s Mercier. “Elected officials shouldn’t attempt to circumvent the voters’ consistent opposition to income taxes by trying to set up lawsuits for the court to change the rules.”
Seattle’s 2017 income tax was invalidated by King County Judge Ruhl in November 2017. It is currently scheduled for oral arguments before Division 1 Court of Appeals on June 6, 2019.
LINKS to Source documents:
Notable quotes from the City of Seattle’s public records supplied to WPC:
In 2014, Seattle's attorneys gave the city council the following advice:
“You asked whether the City Council could impose a ‘millionaire’s tax,’ i.e. an income tax on high incomes. The short answer is that the City cannot, even if the tax is framed as an excise tax. The City cannot impose such an income tax because the Washington Supreme Court has ruled that a graduated income tax violates the state constitution and because the legislature has not authorized cities to impose an income tax. In fact, the legislature specifically prohibits cities from imposing a net income tax.”
“Former Supreme Court Justice Philip Talmadge and constitutional law expert Hugh Spitzer debated whether the current court would follow the Culliton line of cases. Justice Talmadge said, ‘Washington law is unambiguous. Income is property.’ He concluded that I-1098 ‘would violate Washington’s Constitution’ and quoted a 1974 Attorney General Opinion…” [This footnotes WPC’s I-1098 Talmadge letter]
“There is some speculation that the City could avoid the Culliton decision by framing a high-earner income tax as an excise tax on the privilege of earning income. But that would not affect the constitutionality of the tax. The court looks at the actual character of the tax and not just at the label. In fact, in Jenson, the second case in which the court overturned a state income tax in the 1930s, the legislature characterized the tax as an excise tax on the privilege of receiving income. Despite that characterization, the court ruled that the tax was an unconstitutional income tax…”
“The legislature has not granted cities the authority to impose an income tax. In fact, the legislature has specifically prohibited cities from imposing a net income tax. Under RCW 36.65.030, ‘A county, city, or city-county shall not levy a tax on net income.’ This statute prohibits the City from imposing the type of tax that was at issue in Culliton and that was proposed on a state-wide basis by I-1098. Even if that statute did not exist, the City would still need an express grant of authority from the legislature to impose a net income tax.”
“Conclusion. To summarize, the Washington Supreme Court ruled in the 1930s that income is property and that a tax on income is subject to the same constitutional constraints as any other tax on property. That means that an income tax must have a uniform rate and that the tax rate is subject to the one percent cap. The court has rejected prior efforts to characterize an income tax as an excise tax on receiving income. Finally, cities must have express authorization from the legislature to impose a tax. The legislature has not authorized cities to impose an income tax and, under RCW 36.65.030, prohibits cities from levying a net income tax. Finally, the Washington Supreme Court has ruled that the authority of cities to license for revenue does not permit cities to impose an income tax or an excise tax on earning revenue.”
Key quotes from the Bagshaw emails:
“If the City of Seattle imposes the tax on adjusted gross income being currently discussed, it would in all likelihood be held invalid under RCW 36.65.030 in any court challenge. If a court were to invalidate on this statutory basis, it would likely not reach the issue of whether an income tax is consistent with the Washington Constitution.”
“In my opinion, this tax will not survive a court challenge for two reasons. First, cities are prohibited by statute from enacting any tax on net income. Second, the proposed tax would be unconstitutional under current Washington precedent holding that ‘income taxes’ are ‘property taxes’ which the Washington Constitution requires to be uniform, that is, not progressive. The precedent is from the 1930s and runs contrary to most modern thinking, and forcing the Supreme Court to reconsider this ruling is one reason advanced for pursuing this tax. However, given the statutory prohibition against cities enacting income taxes, it is unlikely that a court would even consider constitutionality and simply reject the tax on statutory grounds. The tax as currently proposed would accomplish nothing.”
“In contrast, the progressive tax on net income currently proposed would do nothing to make our tax system more equitable because it would never become law. It would even fail to achieve its more limited goal of forcing the Supreme Court to reconsider the constitutionality of a progressive income tax in Washington.”
“As far as the position paper reads, this is a tax without a mission. ‘Let’s raise $100 million because we can!’ is a poor argument that plays right into the Republicans long-standing criticism of the ‘tax and spend Democrats’ except it’s worse here — the Democrats don’t even have a spending plan, just a tax plan. Instead, how about attacking the problem that the tax is designed to address by using the money raised to reduce the highly regressive sales tax. When the new Sound Transit tax kicks in this coming April, our sales tax rate in Seattle will be 10.1%, with 2.7% going to the City of Seattle. I suggest using the $100 hundred million (or the $40 million if we go for the sure thing) to reduce or eliminate that 2.7%. It would make our tax system substantially more progressive and help retailers attract business to Seattle. Win — win.”
“A sound argument can be made that a Constitutional interpretation long relied upon is best changed by a Constitutional amendment, not by the Court. This argument will have extra force in our fine state where income taxation is politically poisonous outside Seattle, and where Supreme Court judges are, as we and they well know, elected statewide.”
