A non-profit founded by Madrona Venture Group Managing Director Matt McIlwain is filing a lawsuit against the City of Seattle over a new plan to levy an income tax on its wealthiest residents.
McIlwain launched the Opportunity for All Coalition earlier this month to fund legal challenges to the income tax, which he says is “illegal” and “unnecessary.”
It will be the second legal challenge to the income tax filed Wednesday. Another group of Seattleites filed a separate complaint over the income tax, with backing from conservative think tank The Freedom Foundation. Prominent Seattle property owner Suzie Burke, businesswoman and activist Faye Garneau, and Microsoft lawyer Gene Burrus are among the plaintiffs.
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.”
Related: Double duty: How startups and small businesses could be hit twice under Seattle’s new income tax
“The tax is illegal based on state law, including no state authorization for local income taxes and a specific state law that prohibits local net income taxes,” McIlwain told GeekWire in an email Wednesday.
In 2010, Washington voters defeated Initiative 1098, which would have instituted a state income tax on people making more than $200,000 a year by a two-to-one margin. It’s a controversial issue in a region facing record growth, in part because of the bustling tech industry which has added thousands of high-paying jobs.
The Opportunity for All Coalition is filing today’s lawsuit on behalf of several individuals, according to McIlwain. As Madrona’s managing director, McIlwain invests in a wide range of software-focused companies, like Accolade, Extrahop, Qumulo, and Smartsheet. He also sits on the board of the Fred Hutchinson Cancer Research Center and Washington Policy Center.
“I believe there are times when you need to serve your community,” McIlwain told GeekWire when the Opportunity for All Coalition launched. “In defeating the city income tax, we can help maintain a system of opportunity and job creation for innovators and workers.”
McIlwain has long been an outspoken critic of implementing an income tax in Washington state. At a conference in January, McIlwain said the state’s existing revenue sources are sufficient and argued that the absence of an income tax attracts tech talent to the region.
McIlwain is concerned that a city-specific income tax will encourage entrepreneurs to set up shop outside of the city limits. In the long run, he says that will hamper the region’s vibrant startup ecosystem.
“I went to public high school in Miami, Fla., where many of my closest friends were first or second-generation immigrants,” McIlwain said in an email. “Many of us had to work hard to make the most of the opportunities that life presented us. In my current role, I see a similar cycle of hard work, advancement, and opportunity in the entrepreneurs we work with every day. These entrepreneurs and their companies create jobs, build innovative products and add more resources to our communities and, there are so many smaller businesses owners and individual workers who are in similar situations.”
Councilmember Lisa Herbold, who championed the income tax ordinance, says it will help small businesses in the long run by generating revenue that could reduce the burden of the city’s Business & Occupation (B&O) tax. She sponsored an amendment to the legislation that adds B&O to the list of taxes could be alleviated by funds from the income tax.
“If we’re stating that we have a commitment to addressing the regressivity in our existing tax structure, we all know that that means property tax,” Herbold told GeekWire in an interview. “We all know that that means sales tax. But not everybody knows that that also means our B&O tax structure. So that’s what that amendment was about.”
But some members of the business community are skeptical that implementing the income tax now will actually reduce other taxes down the line.
Washington state currently relies on sales, property, and business taxes as its primary sources of funding. The system is often called the “most regressive in the country” as lower earners pay a higher percentage of their income in taxes. Advocates of a Seattle income tax packed public hearings, leading up to the Council’s vote, to show their support for the ordinance.
The Opportunity for All Coalition’s lawsuit is the second legal challenge the income tax faces. A Seattle man filed the first lawsuit in July. McIlwain says that the lawsuit his organization is filing today is likely to be joined with other cases as the legal battle over the income tax develops.
“Overturning this city income tax will help to create the most opportunities for the most citizens of our city and state,” McIlwain said. “To me, that feels like a cause worth investing time in.”
The complaint, backed by McIlwain’s Opportunity for All Coalition, and the complaint from the Freedom Foundation are included in full below.