Coronavirus shows us why WA has always needed an income tax

The state Supreme Court recently declined to review Seattle’s tax-the-rich case. Here's how we got here — and where we might go next.

State Supreme Court

The state Supreme Court recently declined to review a Seattle income tax case. The path ahead is muddy and uncertain, but there is a path, writes Katie Wilson. (Ted S. Warren/AP)

Policymakers are feverishly reacting to new and urgent crises created by the coronavirus pandemic, from mask shortages to mass unemployment. But another storm is brewing in the background as entire sectors of the economy shut down and tax revenues dwindle: State and local budgets are in deep trouble. There’s no guarantee the ship will right itself anytime soon. We were due for a recession, and arguably the global economy was already running on fumes. Here in Washington state, our ability to weather a downturn is hampered by our chart-topping regressive tax system. Our go-to options for raising public funds make things worse for those who are struggling the most.

For nearly three years, a Seattle law aimed at changing this picture has been plodding through the courts. But on April 2 — the day before Gov. Jay Inslee announced $445 million in budget cuts, including funds to hire school guidance counselors and address climate change — the Washington state Supreme Court announced that a majority had declined to review Seattle’s progressive income tax case.

Read more: How to fund coronavirus relief? Tax big business

This decision surprised and frustrated income tax champions and opponents alike. It leaves an uncertain and muddy path ahead for progressive tax reform. But still, there is a path. If we’re going to travel it, as I think we must, it will help to understand how we got here. The story begins almost a century ago, during the Great Depression.

The origins of the state’s regressive tax system

In 1932, a vast Hooverville stretched south of downtown Seattle. Farmers across the state had suffered through years of plummeting prices, drought and high property taxes — then the primary source of revenue for state and local governments. The Washington State Grange, the farmers association, was a leading voice for progressive tax reform. Gov. Roland Hartley had recently vetoed personal and corporate net income tax bills approved by the Legislature, so the Grange turned to the people. Initiative 69 promised a graduated income tax to fund schools and reduce or eliminate state property taxes. The measure won urban support from labor groups and the new Unemployed Citizens League, and it passed with a landslide of 70%; an income tax proved more popular than Franklin D. Roosevelt or the repeal of the Bone Dry Law (aka Prohibition), both on the same ballot.

But it wasn’t to be. Business interests quickly sued, and, in 1933, the state Supreme Court overturned the new law in a surprise 5-4 ruling — possibly because the justices had by then, like everyone else, received their tax forms in the mail. The court held that income is a form of property and, therefore, subject to the “uniformity clause” in our state’s constitution, which says that property may be taxed only at a flat rate. In other words, no graduated or progressive tax allowed.

That momentous decision, reinforced two years later after the Legislature tried again to implement an income tax, paved the way for the tax system we have today. One of only seven states with no income-based taxes, Washington relies instead on sales, excise, property and business & occupation taxes. Importantly, this last one is calculated on gross revenue, so it favors high-margin and vertically integrated industries. It’s also arguably a kind of income tax. Curiously, Washington’s first B&O tax was upheld by that same court — on that same day in 1933 — with the assurance that it was only a temporary, emergency measure. Of course, it’s still in place today, riddled with special-interest loopholes, including, until just last month, a deep discount for one very large aerospace company.

An income tax journeys through the courts

The decades following that first vote saw a string of attempts to allow or enact income taxes, but all failed at the ballot. Fast forward to 1993, when University of Washington law professor Hugh Spitzer published an article arguing that the 1933 decision was based on a misreading of previous case law; he also pointed out that many courts, including the U.S. Supreme Court, have roundly rejected the notion that income is property. So why not pass a progressive income tax, let it be challenged and give today’s state Supreme Court a chance to revisit and reverse that faulty ruling? In 2010, a community-labor coalition convened by the Economic Opportunity Institute (EOI) set out to do just that.

Initiative 1098 would have imposed a tax on high-income households to fund education and health services and reduce other taxes. Bill Gates Sr. was the public face of the campaign, while the rising tech industry helped to fund the opposition: Steve Ballmer, CEO of Microsoft at the time, was the top opposition contributor with $425,000, and Jeff Bezos made the top five with $100,000. It turned out to be an inauspicious year for a statewide tax vote. “By [that fall] the Tea Party had gotten revved up and 2010 became a year for the repudiation of the Obama administration, the Affordable Care Act, and as a result we got swamped,” says John Burbank, executive director of EOI. The opposition’s main message: Sure, it might be “tax the rich” at first, but let them get a foot in the door, and you’re up next. In eight months, I-1098 went from polling two-thirds in favor to going down hard with nearly two-thirds voting against.

In the years after this defeat, EOI hatched a new plan: Why not pass a city income tax instead? This strategy had the obvious advantage of being free to choose a locality not totally in the grip of anti-tax ideology; but it also introduced new legal risks. The authority of cities to enact taxes without specific permission from the state was a disputed question, and, more worryingly, a 1984 state law on combined city-county governments included a provision that seemed to explicitly prohibit cities from taxing net income. If the court threw out a local income tax law on the grounds that cities didn’t have that kind of authority, it might never even consider the fundamental question of whether income is a form of property.

Judging these to be risks worth taking, EOI built a coalition to try this strategy in the city of Olympia in 2016 — but the measure failed narrowly at the ballot, and at the same time Donald Trump won the presidency. This created an opening for action in progressive Seattle, and in the early days of 2017, the Trump Proof Seattle coalition was born. (Disclosure: I helped to convene this coalition through my work with the Transit Riders Union.) The coalition proposed a tax on high-income households to raise funds to help the city cope with whatever vicissitudes — federal budget cuts, attacks on immigrants — a Trump administration might bring. A Seattle income tax ordinance sailed through the city council in July of that year with a unanimous vote.

As anticipated, the lawsuits came fast and furious. The first ruling, from the King County Superior Court that November, was bad for income tax advocates. But the state Court of Appeals ruling in July 2019 was shockingly good: While it invalidated the law on the grounds that the lower court wasn’t in a position to question the higher court’s 1930s decisions, in every other respect it was a victory. Cities, the appeals court said, do have the constitutional authority to tax income. Moreover, the prohibitive 1984 law was ruled invalid, following an argument advanced by EOI’s attorney Claire Tonry. By resolving the question of local authority in the city’s favor, the Court of Appeals seemed to be clearing the way for the state Supreme Court to home in on the underlying question: Is income property?

That brings us to this April’s decision. The justices faced a hornets’ nest of legal issues, all of heightened importance as we enter a new era of economic upheaval. Rather than stride in and bring some definitive resolution, the state Supreme Court, in a 5-3 decision, simply declined to get involved. Why? We are left to speculate, since the decision came with no explanation at all.

A silver lining — and the fight ahead

So, where do we go from here? First of all, we shouldn’t give up on our Supreme Court justices. The UW’s Spitzer believes they may be more amenable to taking up a state income tax case than a local one. “My hunch is that if the Legislature took the responsibility of enacting an income tax, or the voters adopted it, it’s likely that the court would uphold it,” he says. A statewide ballot battle is no picnic, as we’ve seen, and in recent history it’s been hard getting more than a handful of state legislators to even say the words “income tax” in public without promising, in the same breath, that they would never vote for such a thing. But never say never — our world is changing rapidly, and I don’t think it’s out of the question that a statewide progressive income tax law could be passed within the decade.

Of course, if the state Supreme Court were to strike such a law down, ruling once again that income is property, then we’d be in a tight spot indeed. At that point a progressive income tax would be impossible without amending our state constitution, which requires a two-thirds supermajority vote of the House and Senate, followed by a majority vote of the people. Again, not an impossibility, but it would take a truly powerful and statewide popular movement to make this happen.

In the meantime, all this leaves Seattle in an uncertain spot. With no guidance from our state’s highest court, the appeals court ruling becomes the law of the land, and Seattle’s tax on the rich is dead. But there is a silver lining: Seattle and other cities can now tax income, if only at a flat rate.

“This is a new declaration of authority that many argued the city didn’t have,” says EOI's Tonry. “This is very significant in terms of giving cities a new revenue tool. It’s potentially a very significant amount of revenue, too.” The rate would max out at 1%, thanks to a constitutional cap on property taxes, but Burbank says this could still generate hundreds of millions of dollars per year. It’s possible that with some creative use of exemptions and grants to lower-income households, this could be contorted into a reasonably progressive revenue source. Figuring this out will take some time, and could involve further legal challenges, so the city should get to work on it.

But people need economic relief right now, and vital public programs and services are under threat. The austerity drumbeat is already sounding. Therefore, the state Supreme Court’s disappointing decision should embolden lawmakers, organizers and advocates to push forward with an array of other progressive revenue measures, state and local. Now is the time to pass a capital gains tax, a wealth tax, maybe some excise taxes on luxury goods like fancy cars and boats. Let’s bump up our state estate tax, too — dead rich people don’t need their wealth anymore, but the living poor sure do.

It’s also time to reform how we tax businesses in Washington state. Lawmakers should work on restructuring state and local B&O taxes to be less regressive, as well as closing bad loopholes. But most urgently, Seattle must take the lead in implementing a new progressive business tax. A payroll-based business tax is almost the mirror image of an income tax. Rather than taxing the money at its destination, you go to the source. Councilmembers Kshama Sawant and Tammy Morales have put forward one proposal for how to do this and how best to direct the revenue. If their colleagues don’t agree with the details, they should propose another way.

Economic crises break apart the status quo, creating openings for systemic change. The legal system stymied Depression-era farmers and workers in Washington state in their efforts to win progressive tax reform. But taking a broader view, that decade was a winner. Many other states established progressive individual and corporate income taxes in the 1930s, and under Roosevelt’s leadership a series of Revenue Acts raised federal taxes on corporations and the wealthy. A national system of social security and unemployment insurance was established for the first time. All of this happened because poor and working people — in Washington state and across the country — organized at an unprecedented scale, rallied in the streets, went on strike, formed unions and demanded change. Let’s make this decade a winner, too.

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About the Authors & Contributors

Katie Wilson

Katie Wilson

Katie Wilson, a contributing columnist, is the General Secretary of the Transit Riders Union.