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Paul Lawrence, an attorney for the City of Seattle makes the case for the municipal income tax on high earners before Judge John Ruhl. (GeekWire Photo / Monica Nickelsburg)

Seattle’s new income tax on high earners hit its first legal roadblock Wednesday when King County Superior Court Judge John Ruhl struck down the law, ruling that it violates Washington state law.

The legislation in question would levy a 2.25 percent tax on any income that is above $250,000 for individuals and $500,000 for high earners. For example, a Seattleite earning $300,000 annually would be subject to a 2.25 percent tax on $50,000. The City Council passed the ordinance with the expectation that it would be challenged in court, as Washington state law says, “a county, city, or city-county shall not levy a tax on net income.”

And challenged it was, by several plaintiffs who made their case before Judge Ruhl in Seattle Friday. Attorneys for the city claimed that income does not qualify as property, weakening the legal precedent set by previous cases. They also claimed that the city has a right to tax people on the privilege of living in Seattle proper because city of residence is elective.

“Where you choose to live is a voluntary choice and you make that choice based on what the benefits are to that choice and also the detriment, whatever the tax consequences are to making that choice,” said Paul Lawrence, an attorney for the city, during the hearing. “If they don’t like the tax consequences that Seattle has chosen to do, an income tax, they can move to Bellevue.”

Attorneys for the city listen to plaintiffs’ arguments against the municipal income tax. (GeekWire Photo / Monica Nickelsburg)

That sentiment struck a nerve with some in the tech community, like Seattle Chamber of Commerce Chair and Flying Fish co-founder Heather Redman.

“If we ‘move to Bellevue’ lots of people will not be able to move their jobs to Bellevue and lots of kids will not be able to switch schools instantly either … so this concept that Paul is touting will have disastrous impacts on the climate — and on people’s already stressed lives — as adults and kids have to commute back into the city if they can’t afford or are determined not to pay the tax,” she said.

The Seattle City Council unanimously approved the tax back in July. The revenue would go toward the city’s housing affordability agenda and carbon reduction goals and supplant federal funds if they are cut. The revenue is also intended to alleviate the burden of Washington’s property and sales taxes, which are often called the most regressive in the country.

Following Wednesday’s ruling, Seattle Mayor Tim Burgess issued the following statement:

In order to build a more just and equitable society for all, we need a serious overhaul of our state’s tax structure. We know some argue against any income taxes at all, but we would point out that we already have a corporate income tax in this state — through the business and occupation tax. But we need more progressive tax sources, not fewer. The Seattle income tax was an attempt to move toward this goal, and we are hopeful that it will be upheld on appeal.

The tech industry is split on the merits of the tax. Former Microsoft CEO Steve Ballmer has said the tax could create an “unfavorable business climate” in the city. Madrona Managing Director Matt McIlwain launched the Opportunity for All Coalition over the summer to fund legal challenges to the income tax.

“I think that the hearing made it very clear that this law is illegal and unconstitutional and that we don’t need to go past the statutory legality questions,” McIlwain told GeekWire after last week’s hearing.

Then there are others in the community, like venture capitalist Nick Hanauer, the early Amazon investor and progressive crusader who supports the tax as a way to fund social services.

“You want good neighborhoods, schools, roads, fire, police, somebody has to pay for it,” Hanauer told Bloomberg. “And the people with money are where you have to go to get the money.”

Hanauer, as well as Microsoft co-founder Bill Gates and Amazon CEO Jeff Bezos, would not be subject to the tax because all three men live in the suburbs outside of Seattle proper. Still, Gates and Bezos are often targeted as symbols of the city’s wealth inequality.

“Here, we have the tragic irony of the two richest people of the world living right next to thousands of people with no homes at all,” said Seattle lawmaker Kshama Sawant during a past City Council meeting on the income tax. “And far from paying their fair share, Seattle’s wealthiest pay the least in taxes.”

Today’s ruling is a speedbump for the city but not the end of the road. An appeal was all but guaranteed, regardless of the outcome. The case will likely not be concluded until it reaches the Supreme Court.

Full text of the ruling is available below.

Seattle Income Tax Ruling by GeekWire on Scribd

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