A Seattle income tax: Here's what it could mean for you



Click through this slideshow to see the states with the highest and lowest taxes on alcohol. less A city income tax? It could happen if a measure from the Transit Riders Union gains enough support. But who that measure would affect and how much it would impact them? We've explained it here.

Click through ... more A city income tax? It could happen if a measure from the Transit Riders Union gains enough support. But who that measure would affect and how much it would impact them? We've explained it here. Photo: Stuart Dee, Getty Images Photo: Stuart Dee, Getty Images Image 1 of / 27 Caption Close A Seattle income tax: Here's what it could mean for you 1 / 27 Back to Gallery

If our voting history is any measure, Seattle seems happy to tax itself.

Voters last November turned out in full support of Sound Transit 3, a light rail-heavy plan that will cost taxpayers $54 billion through several tax hikes, not the least of which is a not-insignificant increase the cost of car tabs.

Now, with the threat of President Donald Trump pulling federal dollars from city coffers, a group has come up with another tax to more than replace that funding -- and only at cost to the city’s most well-to-do households.

Seattle’s Transit Riders Union (TRU) has come up with a plan to enact a city income tax on those households earning more than $250,000 per year.

The tax would take aim at so-called “unearned income,” such as interest and dividends.

But in a city that's already expensive to live in, what does that really mean, and who would it impact?

Tax the rich, feed the poor

For starters, the income tax the TRU is seeking would only apply to households with a total income of more than $250,000 per year. The group contends that somewhere between 5 percent and 10 percent of Seattle households fall into that income bracket.

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The leading version of the measure (the plan isn’t “set in stone” yet) would charge a 2.5 percent tax on “unearned income” for those households. Unearned income is defined as income from capital gains, interest and dividends. The tax would not include business income or any income exempt from federal income taxes, according to the Transit Riders Union.

Historically, Seattleites have supported taxes, but this would be the first major progressive tax, said Stephen Gose, the vice chair of the Seattle chapter of the Democratic Socialists of America, a group backing the proposal.

“But the issue is that they (the taxes) are almost always of a regressive nature, so we are taxing the most vulnerable people,” Gose said. “This will be an actual progressive tax. Most people in the city don’t make enough money that this will affect them.”

Transit Riders Union estimated the tax could generate $100 million for the city. If that’s true, that would more than account for the funding the city receives from the federal government.

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In 2015, the city used about $85 million in federal funds for city services.

Ideally, excess funds from the tax could prove useful for the city (and perhaps stave off yet another property tax, but that's another story), but the measure is about more than just a city tax.

A bigger goal

The dollars and cents of the thing sound good on paper, but, ultimately, the details are far from set in stone, Gose said.

The TRU and its coalition of supporters hope to find support in Seattle’s City Council and with Mayor Ed Murray to pass a city ordinance for the income tax. If not that route, then perhaps through a citizens initiative.

In either case, the proposal will likely see some changes as it moves forward.

But the real goal of the income tax isn’t just to raise a few bucks in Seattle. It’s to open up the doors for a progressive statewide income tax down the road.

Once upon a time, in 1932, Washington voters actually heartily approved a statewide income tax. But opponents sued over the tax and the state Supreme Court ruled 5-4 that the tax violated a provision of the constitution that held that property was to be taxed uniformly. Since the income tax was progressive (meaning if you earned more, you paid more), and income was property, the tax violated the constitution, the majority ruling argued.

Since then, efforts at a state income tax have all failed, and Washington remains one of seven states that have no income tax (two more states only tax some types of income).

City income taxes are more rare, but local jurisdictions in a handful of states have income taxes ranging up to 1.5 percent, according to the Tax Foundation.

While counties in Washington lack the authority to tax people’s income, cities just might, the TRU argues.

Seattle’s progressive, have-another-tax attitude may be primed to pass such a measure, but it will be the opposition that will help it get the court’s approval.

Gose, the TRU and other supporters of the measure assume that anti-tax groups will sue to block the measure, eventually forcing it before the state’s Supreme Court.

And a modern, progressive court is more likely to issue a ruling that would open the door to a state income tax, even if it found Seattle didn’t have the authority to raise its own income tax (which is a possibility).

The idea of a progressive income tax is meant to offset an otherwise regressive tax system in Washington state, Gose said. Many taxes wind up being a larger share of a low income earner’s wages than of a high income earners. Sales tax, for example, is the same rate no matter how much you earn, so if you earn less, it can wind up as a larger percentage of your overall tax burden (although technically in Washington you can claim sales taxes as a deduction on federal income taxes).

Federal income taxes, for example, are progressive, meaning those who earn more pay a larger share of their income in taxes. But federal payroll taxes for Medicare and Social Security are regressive, and pencil out as a much higher burden for lower income earners than the richest people, according to the Tax Policy Center.

Regardless of the outcome of the TRU proposal, it’s not likely to happen overnight.

Even if an ordinance got through the city council and earned Murray’s approval in short order, a court battle could stall the measure for months or even years.

Daniel DeMay covers Seattle culture, business and transportation for seattlepi.com. He can be reached at 206-448-8362 or danieldemay@seattlepi.com. Follow him on Twitter: @Daniel_DeMay.