Constitutionality of Income Taxation in the Western States: Putting Seattle’s New Income Tax in Perspective Western States Association of Tax Administrators 2017 Annual Conference in Missoula, Montana Presented by Norman J. Bruns Garvey Schubert Barer Seattle, Washington

Seattle’s New Income Tax May 1, 2017: City Council unanimously adopted a resolution establishing an ambitious timeline for developing an income tax ordinance (Res. No. 31747) Resolution called for City to coordinate with the “Trump Proof Seattle” Coalition in developing an income tax. July 10, 2017: City Council unanimously adopted an income tax ordinance (Ord. No. 125339) April 15, 2019: due date for first returns and tax payments (for income received on and after January 1, 2018)

Seattle’s New Income Tax Incidence: the total income of every resident Measure: amount reported on line 22 of IRS Form 1040 line 15 of IRS Form 1040A line 9 of IRS Form 1041 The equivalent of any IRS form not reported on Schedule K-1 for a beneficiary Rate: 2.25% of total income over the following amounts $250,000 (if filing status is single, head of household, qualifying widow(er) with dependent child, or married filing separately) $500,000 (if filing status is married filing jointly) These thresholds are indexed in future years

Seattle’s New Income Tax Is In Litigation City’s Hurdle 1: scope of City’s taxing authority City’s Hurdle 2: state statute (RCW 36.65.030) prohibits city tax on net income City’s Hurdle 3: tax uniformity clause of state constitution, as interpreted by multiple court cases, prohibits income taxation City’s Hurdle 4: Supreme Court will reject precedent only if the established rule is “incorrect and harmful” or prior decision is “so problematic that we must reject it”

Some Key Dates in Income Tax History 1861: first federal income tax imposed (allowed to expire in 1872) 1881: federal income tax upheld in Springer v. US (1866 tax year) 1893: onset of Panic of 1893 1894: second federal income tax adopted (Civil War pensions) 1895: federal income tax struck down in Pollock v. Farmers Loan & Trust 1901: Territory of Hawaii imposes an income tax 1909: 16th Amendment to US Constitution proposed 1911: State of Wisconsin imposes an income tax 1913: 16th Amendment ratified and third federal income tax adopted 1916: federal income tax upheld in Brushaber v. Union Pacific

WSATA Members by Year of Statehood Texas 1845 California 1850 Oregon 1859 Nevada 1864 Colorado 1876 Montana 1889 (Nov 8) Washington 1889 (Nov 11) Idaho 1890 (July 3) Wyoming 1890 (July 10) Utah 1896 New Mexico 1912 (Jan 6) Arizona 1912 (Feb 14) Alaska 1959 (Jan 3) Hawaii 1959 (Aug 21)

WSATA Members by Year of Adoption of Corporate Income Tax Hawaii (Territory) 1901 Montana 1917 California 1929 Oregon 1929 Idaho 1931 Utah 1931 New Mexico 1933 Arizona 1933 Colorado 1937 Alaska (Territory) 1949 Nevada n/a Texas n/a Washington n/a Wyoming n/a

WSATA Members’ Income Tax Litigation Constitution Authorizes Income Tax Arizona (graduated rates) Colorado (graduated rates) California Texas (strings attached) Utah (strings attached) No Uniformity Clause Alaska Hawaii Uniformity Clause But No Case New Mexico Wyoming (no income tax) Uniformity Clause Plus Case(s) Oregon (tax upheld) Idaho (tax upheld) Montana (tax upheld) Washington (tax struck down)

Alaska Alaska Steamship Co. v. Mullaney, 180 F.2d 805 (9th Cir. 1950)

Oregon Standard Lumber Co. v. Pierce, 112 Or. 314, 228 P. 812 (1924) Redfield v. Fisher, 135 Or. 180, 292 P. 813 (1930)

Idaho Diefendorf v. Gallet, 51 Idaho 619, 10 P.2d 307 (1932)

Montana O’Connell v. State Board of Equalization, 95 Mont. 91, 25 P.2d 114 (1933) Mills v. State Board of Equalization, 97 Mont. 13, 33 P.2d 563 (1934) State v. Toomey, 135 Mont. 35, 335 P.2d 1051 (1958)

Washington Aberdeen Savings & Loan Assoc. v. Chase, 157 Wash. 351, 289 P. 536 (1930) Burr v. Chase, 157 Wash. 393, 289 P. 551 (1930) Culliton v. Chase, 174 Wash. 363, 25 P.2d 81 (1933) Jensen v. Henneford, 185 Wash. 209, 53 P.2d 607 (1936) Power, Inc. v. Huntley, 39 Wn.2d 191, 235 P.2d 173 (1951) Cary v. City of Bellingham, 41 Wn.2d 468, 250 P.2d 114 (1952)

Seattle’s New Income Tax Is In Litigation City’s Hurdle 1: scope of City’s taxing authority City’s Hurdle 2: state statute (RCW 36.65.030) prohibits city tax on net income City’s Hurdle 3: tax uniformity clause of state constitution, as interpreted by multiple court cases, prohibits income taxation City’s Hurdle 4: Supreme Court will reject precedent only if the established rule is “incorrect and harmful” or prior decision is “so problematic that we must reject it”

Questions? Comments? Thank you!