Seattle Income Tax Comes Into Focus

The Seattle income tax on high-income earners has formally been introduced to the City Council. The proposed income tax would generally kick in at the income thresholds of $250,000 and $500,000 for single and married couples, respectively. The income tax is designed to pass constitutional muster by using gross income instead of net income as the basis for taxation.

Last week, the City Council held a committee meeting to discuss the proposal and adopt specific amendments. The introduced version was somewhat different from the one that the City Council was briefed on during its June 14th meeting. That was to be expected as Council Central Staff had noted that the draft version was still incomplete at the time of discussion.

The introduced ordinance had a variety of changes in it, but the biggest modifications included:

• Expanding the applicability of the tax rate table to those filing as “head of household” and “qualifying widow(er) with dependent child” with the Internal Revenue Service (IRS). The original version did not include these filing statuses.
• Adding a provision for an automatic six-month extension to any filer who submits a Form 4968 to the IRS. Form 4968 is a standard extension request to file taxes within the extended six-month timeframe.
• Additional authority is given to the Financial and Administrative Services (FAS) director to estimate taxes due when a taxpayer fails to sumbit the required tax records to verify actual taxes due. The director would need to obtain certain facts and information to make the tax estimate.
• Authority of the FAS director to disclose tax information to other City agencies would be strictly limited to “official purposes” and “necessary for the implementation, administration or enforcement” of the income tax law. All other instances of City use would be prohibited.
• The definitional scope of “taxpayer” was expanded to include “non-grantor trusts,” which are considered to be a trust fund where a grant has relinquished control but whose beneficiaries live in Seattle and therefore are subject to the income tax.
• Lastly, language that regulates the annual adjustment of the income tax as it relates to inflation was modified. The revised language makes it clear that the annual adjustments apply to income thresholds, not the tax rate.

Amendments 3, 4, and 5

Councilmember Rob Johnson proposed three amendments:

• Amendment 3 sought to require the FAS director to transmit a report to the City Council by November 15, 2018. The report would specifically need to summarize adopted rules to implement the income tax law.
• Amendment 4 simply sought to clarify the requirement for a new ordinance to amend the proposed income tax ordinance if the City Council wanted to change the use of income tax proceeds beyond those identified in the law.
• Lastly, Amendment 5 proposed an increase in income tax rate from 2.0% to 2.25%, which would net an increase in revenue by approximately $15 million. According to Councilmember Johnson, the increased rate was largely developed to address a concern that Medicaid funding may be cut by the Republicans at the federal level and put downward pressure on Seattle to act to fill the gap locally.

All three amendments were passed.

Amendments 6, 7, 8, and 9

Councilmember Tim Burgess sponsored four amendments:

• Amendment 6 dealt with a finding for the ordinance clarifying that there was “inadequate provision of mental and public health services” and a “growing demand for transit.” Language stating that there was “increased demand for City services, including housing, education” in Seattle was removed. In effect, the change did not diminish the scope of the ordinance for the use of proceeds.
• Amendment 7 was another wordsmithing change to the ordinance findings clarifying that there is a “public need and demand for” public investments in housing, education, transit, and other services instead of just a “burden on” those services.
• Amendment 8 was a major revision to a finding for revenue used to fund education. Language that Councilmember Burgess proposed was more specific than the original language.
• Amendment 9 was proposed in order to further modify the use of tax proceeds to specific programs. Importantly, Councilmember Burgess’ amendment added language related to the homelessness crisis and constrained the scope of funding for “public services” by limiting it to affordable housing, education, and transit. Councilmember Sally Bagshaw offered a friendly amendment to add language that specified mental and public health services as authorized tax uses.

5.65.010 Use of tax receipts

A. All receipts from the tax levied in this Chapter 5.65 shall be restricted in use and shall be used only for the following purposes: (1) lowering the property tax burden and the impact of other regressive taxes; (2) ((replacing federal funding potentially lost through federal budget cuts;)) addressing the homelessness crisis; (3) providing ((public services, including)) affordable housing, education, and transit; (4) replacing federal funding potentially lost through federal budget cuts, including funding for mental health and public health services; (5) creating green jobs and meeting carbon reduction goals; and (((5))) (6) administering and implementing the tax levied by this Chapter 5.65.

All four of those amendments were adopted.

Amendment 11

Lastly, outside counsel to the City Council recommended that a technical amendment be adopted to preclude trust funds from being used as tax shelters as a means to avoid the income tax. The amendment was adopted.

Next Steps

The Affordable Housing, Neighborhoods, and Finance Committee will meet today to pass the income tax out of committee. Final action on the ordinance is currently planned to be taken by the full council on Monday, July 10th.

With the constitutionality of a progressive state income tax in doubt, and perhaps even the authority of a city government to levy one explicitly not authorized under state law (at least for net income), a legal challenge would be expected to work its way through the courts after the bill is passed. It remains to be seen exactly who would pursue such a lawsuit.

Seattle Dissects Its Income Tax Draft Ordinance