Kunath v. City of Seattle

444 P.3d 1235

S. Michael KUNATH, Respondent/Cross Appellant,

v.CITY OF SEATTLE, Appellant/Cross Respondent,Economic Opportunity Institute, Appellant/Cross Respondent,Suzie Burke, an individual; Gene Burrus and Leah Burrus, as individuals and the marital community comprised thereof, Paige Davis, an individual; Faye Garneau, an individual; Kristi Dale Hoofman, an individual; Lewis M. Horowitz, an individual; Teresa Jones and Nigel Jones, as individuals and the marital community comprised thereof; Nick Lucio and Jessica Lucio, as individuals and the marital community comprised thereof; Linda R. Mitchell, an individual; Erika Kristina Nagy, an individual; Don Root, an individual; Lisa Sterritt and Brent Sterritt, as individuals and the marital community comprised thereof; and Norma Tsuboi, an individual, Respondents,

v.City of Seattle, a municipality; Seattle Department of Finance and Administrative Services, a department of the City of Seattle; and Fred Podesta, Director of the Seattle Department of Finance and Administrative Services, in his official capacity, Appellants.

Dena Levine, an individual, Christopher Rufo, an individual; Martin Tobias, an individual; Nicholas Kerr, an individual; Chris McKenzie, an individual, Respondents,

v.City of Seattle, a municipal corporation, Appellant.

Scott Shock; Sally Oljar; Steve Davies; John Palmer, Respondents,

v.City of Seattle, a Washington municipal corporation, Appellant.

No 79447-7-I

Court of Appeals of Washington, Division 1.

FILED: July 15, 2019

As Amended on Denial of Reconsideration August 7, 2019

Brian Trevor Hodges, Pacific Legal Foundation, 255 S King St., Suite 800, Seattle, WA, 98134, Ethan Blevins, Attorney at Law, 839 W 3600 S, Bountiful, UT, 84010-8423, Robert M. McKenna, Daniel J. Dunne Jr., Orrick Herrington & Sutcliffe, 701 5th Ave. Ste. 5600, Seattle, WA, 98104-7045, Philip Albert Talmadge, Talmadge/Fitzpatrick/Tribe, 2775 Harbor Ave. Sw, Third Floor Ste. C, Seattle, WA, 98126-2138, Gerry Lee Alexander, Attorney at Law, 910 Lakeridge Way Sw, Olympia, WA, 98502-6036, Ryan P. McBride, Scott M. Edwards, Lane Powell PC, 1420 5th Ave Ste. 4200, Seattle, WA, 98101-2375, Eric Rolf Stahlfeld, Attorney at Law, 145 Sw 155th St. Ste. 101, Burien, WA, 98166-2591, for Respondents.

Paul J. Lawrence, Jamie L. Lisagor, Gregory J. Wong, Pacifica Law Group LLP, 1191 2nd Ave. Ste. 2000, Seattle, WA, 98101-3404, Kent Charles Meyer, Seattle City Attorney's Office, 701 Fifth Avenue, Suite 2050, Seattle, WA, 98104-7095, Hugh Davidson Spitzer, Attorney at Law, 5604 16th Ave. Ne, Seattle, WA, 98105-2521, Claire Elizabeth Tonry, Eric D. ‘Knoll’ Lowney, Smith & Lowney PLLC, 2317 E John St., Seattle, WA, 98112-5412, for Appellant/Cross-Respondent.

Matthew F. Davis, Davis Leary PLLC, 3233 56th Pl. Sw, Seattle, WA, 98116-3105, for Respondent/Cross-Appellant.

Robert Lee Mahon III, Perkins Coie LLP, 1201 3rd Ave. Ste. 4900, Seattle, WA, 98101-3095, for Amicus Curiae on behalf of Ethnic Business COAlition, Greater Seattle Business Association.

William E. Bloor, City of Port Angeles, 321 E 5th St., Port Angeles, WA, 98362-3206, for Amicus Curiae on behalf of City of Port Angeles.

Sheila Marie Gall, Association of Washington Cities, 1076 Franklin St. Se, Olympia, WA, 98501-1346, for Amicus Curiae on behalf of Association of Washington Cities.

Mark Edward Barber, Annaliese Harksen, City of Olympia, 601 4th Ave. E, Po Box 1967, Olympia, WA, 98507-1967, for Amicus Curiae on behalf of City of Olympia.

Dmitri L. Iglitzin, Jennifer L. Robbins, Barnard Iglitzin & Lavitt LLP, 18 W Mercer St. Ste. 400, Seattle, WA, 98119-3971, for Amicus Curiae on behalf of Washington State Labor Council.

Heidi L. Greenwood, City of Port Angeles, 321 E 5th St., Port Angeles, WA, 98362-3206, for Amicus Curiae on behalf of City of Port Townsend.

Katherine George, Johnston George LLP, 2101 4th Ave. Ste. 860, Seattle, WA, 98121, for Amicus Curiae on behalf of Rental Housing Association of WA, Seattle-King County Association of Realtors.

Harriet Kay Strasberg, Attorney at Law, 203 4th Ave. E Ste. 520, Olympia, WA, 98501-1190, for Amicus Curiae on behalf of Wa State Senators.

PUBLISHED OPINION

Verellen, J. ¶1 Whether the income tax levied by the city of Seattle is statutorily authorized and constitutional depends on the precise nature of the tax. For decades, scholars have debated whether an income tax is a property tax, an excise tax, or its own separate category of tax.¹ In a series of decisions dating back to 1933, the Washington Supreme Court has unequivocally held income is property, a tax on income is a tax on property, taxes on property must be uniformly levied, and a graduated income tax is not uniform. Therefore, the Washington Constitution bars any graduated income tax.²

¶2 Here, the superior court ruled Seattle did not have statutory authority to enact its graduated income tax. Seattle and the Economic Opportunity Institute (EOI) initially sought review in our Supreme Court, arguing in part that the Supreme Court should reconsider the precise nature of an income tax. The Supreme Court transferred the appeal to this court. We are constrained by stare decisis to follow our Supreme Court’s existing decisions that an income tax is a property tax. We have no authority to overrule, revise, or abrogate a decision by our Supreme Court.

¶3 We conclude Seattle has the statutory authority to adopt a property tax on income, but our state constitution’s uniformity requirement bars Seattle’s graduated income tax. Therefore, the Seattle income tax ordinance is unconstitutional.

FACTS

¶4 Seattle enacted an ordinance in July of 2017 imposing an income tax on high-income residents.³ Seattle "imposed a tax on the total income of every resident taxpayer in the amount of their total income multiplied by" 2.25 percent for all income above a certain threshold.⁴ The ordinance defines "total income" as "the amount reported as income before any adjustments, deductions, or credits on a resident taxpayer’s United States individual income tax return for the tax year, listed as ‘total income’ on line 22 of Internal Revenue Service Form 1040."⁵

¶5 The tax creates two classes of taxpayers: individuals filing singly and married taxpayers filing jointly.⁶ The tax subdivides each class based on income. Individual taxpayers earning more than $250,000 and married taxpayers earning more than $500,000 must pay 2.25 percent of all income over those thresholds.⁷ To illustrate, a family earning $600,000 would pay $2,250 in taxes, which is 2.25 percent of $100,000.

¶6 The Dana Levine group of plaintiffs, the Suzie Burke group, the Scott Shock group, and individual Michael Kunath (tax opponents)⁸ filed four separate lawsuits to enjoin enforcement of the ordinance.⁹ The court granted EOI’s motion to intervene as a defendant and consolidated the lawsuits.¹⁰

¶7 The superior court granted summary judgment for the tax opponents, concluding no statute gave Seattle the authority to levy an income tax and, even if Seattle otherwise had the authority, RCW 36.65.030 prohibited it from levying a net income tax.¹¹ The court also denied EOI’s constitutional challenges to RCW 36.65.030. Having resolved the case on statutory grounds, the court declined to rule on Shock’s remaining equal protection challenges to the ordinance.¹² Kunath then moved to sanction Seattle and EOI under Civil Rule 11 and for an award of attorney fees under the common fund doctrine.¹³ The court denied both motions.¹⁴

¶8 Seattle and EOI appeal the court’s grant of summary judgment, and Kunath cross appeals the court’s denial of his motions for sanctions and attorney fees.

ANALYSIS

I. Background

¶9 After 1930, article VII, section 1 of our state constitution has required that "[a]ll taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word ‘property’ as used herein shall mean and include everything, whether tangible or intangible, subject to ownership."¹⁵

¶10 Our Supreme Court’s first opportunity to interpret this language came in the 1933 case of Culliton v. Chase.¹⁶ That year, voters passed a statewide initiative levying a graduated tax on net income.¹⁷ Taxpayers challenged the initiative, arguing the graduated income tax was unconstitutional because it taxed property and therefore violated the recently-enacted uniformity clause in article VII, section 1.¹⁸ In declaring the tax unconstitutional, the Culliton court first distinguished income taxes from excise taxes, reasoning that excise taxes are levied on an activity—such as the sale, consumption, or manufacture of goods—or upon a privilege or license granted by the state.¹⁹ The court also distinguished income taxes from estate taxes, reasoning that an estate tax "is not really a tax at all" because "[i]t is an impost laid but one time" on the state-granted right of heirs "to take" from an estate.²⁰

¶11 Turning to the "comprehensive definition of ‘property’ " in the constitution, the court classified income as intangible property, stating, "Income is either property under [article VII, section 1], or no one owns it."²¹ "The overwhelming weight of judicial authority is that ‘income’ is property and a tax upon income is a tax upon property."²² Because any income tax in Washington had to be uniform or be unconstitutional,²³ the graduated income tax was unconstitutional under article VII, section 1.²⁴

¶12 Three years later, the court again considered a net income tax in Jensen v. Henneford.²⁵ The State levied a graduated income tax on " ‘every resident of [Washington] for the privilege of receiving income therein while enjoying protections of its laws.’ "²⁶ Based on that language, the State argued it levied an excise tax not subject to the constitution’s uniformity clause.²⁷ But "[t]he character of a tax is determined by its incidents, not by its name."²⁸ Because Culliton established that the broad definition of property in ...