Seattle is sticking it to the rich with a tax on the wealthy — in a state with no income tax

Reporting from Seattle —  Inspired by a Trump administration threat to slash federal funding to cities, Seattle’s City Council struck back this week, unanimously imposing a rare city income tax on the rich.

The new tax measure requires individual city residents to pay a 2.25% tax on any income earned beyond $250,000 annually; couples who file jointly will pay the same rate on earnings beyond $500,000.

The high-earner tax, expected to be quickly challenged in court, would help support the city’s affordable housing, climate change, education and transit efforts at a time when federal tax cuts are expected to diminish funding for such programs.

“Our goal,” said Mayor Ed Murray, a progressive Democrat who is leaving office in December, “is to replace our regressive tax system with a new formula for fairness while ensuring Seattle stands up to President Trump’s austere budget that cuts transportation, affordable housing, healthcare and social services.”

A number of cities have adopted local income taxes, but no other city has solely targeted high earners and few have adopted so high a tax rate. The measure has opened the door to political warfare in the state, one of only seven across the country that has no income tax.

“We have an increasing affordability gap between the have and have-nots. The middle class is being squeezed as well. And one of the reasons is our outdated, regressive and unfair tax structure,” said Seattle council member Lisa Herbold, a co-sponsor of the tax measure.

Washington’s reliance on sales tax revenue hits the poor the hardest, proponents of the new tax measure argue. Some on the lower end of the income spectrum pay six times as much in state and local taxes in comparison to higher-wage earners.

In a city of soaring rents and housing prices, the income tax will help bridge the widening gap with a “new formula for fairness,” Murray said.

Other cities are flirting with similar tax-the-rich proposals. San Francisco, which already has a 1.5% income tax assessed on workers through their employers, is weighing a half-percent tax increase on residents making more than $1 million. Also under consideration is a plan to tax corporate profits.

Some of the richest so-called “Seattle billionaires” won’t be chipping in to pay the new tax in Seattle, however. They don’t live here. Microsoft co-founders Bill Gates (the world’s richest man, says Forbes, with $86 billion) and Paul Allen ($20 billion), along with Amazon.com Chief Executive Jeff Bezos (the world’s second-richest, with $75 billion) and ex-Microsoft CEO and now-L.A. Clippers owner Steve Ballmer ($30 billion) all have lakefront mansions in the ritzy eastern suburbs outside the city.

Ballmer spoke against the tax, saying “it would drive up wages here and cause [company executives] to think about moving jobs elsewhere. That will certainly happen.”

But backers of the measure rallied supporters, including software developer Carissa Knipe, who told the council before its 9-0 vote on Monday that she earns more than $170,000 and endorses the tax measure.

“Seattle should serve everyone, not just rich folks,” she said. “I would love to be taxed.”

State voters have repeatedly rejected an income tax, most recently in 2010 when a statewide Tax the Rich initiative was defeated by a 2-1 ratio. It would have taxed individuals earning more than $200,000 yearly and couples making beyond $400,000 a year.

To no one’s surprise, it took all of a few hours after Seattle’s tax passage for the first lawsuit to be announced. The conservative, anti-tax Freedom Foundation quickly issued a statement saying the tax violates state law and invited other opponents to join the foundation in suing the city.

Tom McCabe, the foundation’s CEO, said that “it’s a lie” that only the rich will have to pay the tax. “No matter who starts out paying it, everyone will eventually suffer” if the tax is eventually applied to other wage earners, as he expects, and perhaps is extended statewide, he said in a statement.

State Republican Party Chairwoman Susan Hutchison, surrounded by chanting pro-tax supporters at a news conference outside City Hall, urged residents to “forcefully resist the tax” by refusing to pay it. She and others believe the measure violates a state constitutional requirement of tax equitability. State law also bars cities from taxing net income and requires state approval for enactment of any new municipal taxes.

Socialist council member Kshama Sawant, the other tax bill co-sponsor, said the city was already anticipating legal challenges, and asked her followers Monday: “If we need to pack the courts, will you be there with me?”

Some polls have shown widespread support for the tax, though 62% of more than 700 voters opposed it in a KING-5 TV flash poll after the tax was approved.

John Burbank, executive director of the tax-supporting Economic Opportunity Institute, said a closer look at the proposal shows higher-wage earners are not likely to pay exorbitant income taxes. “If you make $300,000, for example, you pay tax only on the amount beyond $250,000.” That $50,000 difference levied at 2.25% will cost a taxpayer about $1,100 a year, he calculated.

“Households with incomes below $21,000 are paying, on average, 16.8% of their income in state and local taxes,” Burbank added, “while those with incomes above $500,000 pay just 2.4%.”

Paul Guppy, a tax opponent from the Washington Policy Center think tank in Seattle, says the tax could poison the business environment, which in Seattle — America’s fast-growing city, according to the Census Bureau — is on an Amazon.com-fueled growth binge.

“We’re known across the world as a place that doesn’t have an income tax,” Guppy said. But passage of a city income tax “sends a certain signal to people planning to make a life here,” and he warned they’d likely go elsewhere.

That didn’t seem to be a worry for those in the City Council chambers Monday. After the final vote, the packed house rose in applause. Later, outside, surrounding GOP Chairwoman Hutchison, demonstrators drowned out her news conference with chants of “Tax the rich!”

The tax won’t be collected until the start of 2019 — or later, and possibly never, depending on the outcome of any legal challenges.

Anderson is a special correspondent.

ALSO

Seattle mayoral race becomes a crowded contest with 21 candidates

Column: That new Seattle study is a big problem for fans of a higher minimum wage — or is it?

Column: Is California’s move to a $15 minimum wage a good idea? Here are the facts.