Group led by Matt McIlwain and Rob McKenna sues Seattle over income tax

Puget Sound Business Journal
By Ashley Stewart
August 9, 2017

A group of Seattle entrepreneurs, employers and employees on Wednesday filed a lawsuit to challenge Seattle’s income tax with backing from the nonprofit founded by Seattle venture capitalist Matt McIlwain and former Washington attorney general Rob McKenna.

The ordinance, passed July 10, enacts a 2.25 percent tax starting in Jan. 1, 2018 on every dollar a Seattle resident earns above $250,000 for individuals, or $500,000 for married couples who file joint tax returns.

The legal basis for the challenge, filed in King County Superior Court, is simple: “You really don’t have to go any farther than the fact that cities and counties in Washington are expressly prohibited from taxing net income,” McKenna said, referring to the state law that explicitly bans local jurisdictions from levying such a tax.

The nonprofit, the Opportunity for All Coalition, argues Seattle’s income tax is illegal, unnecessary and will eventually expand to all cities for all income levels.

The group’s legal team includes McKenna, former Supreme Court Chief Justice Gerry Alexander, former Supreme Court Justice Phil Talmadge and Orrick Herrington partner Dan Dunne.

The lawsuit argues the income tax would not only affect Seattle’s wealthiest residents, but reach the middle class including small business owners and home owners.

One of the major complaints about the income tax from the business community concerns S corporations, small businesses that pass the company’s income through shareholders. While the businesses’ income might appear on an individual’s tax return as net income, it’s not necessary for personal use. The argument is the city will tax income that might otherwise be used to reinvest in a business, which could prevent growth and hiring.

Representatives from the city of Seattle did not immediately respond to a request for comment on the lawsuit.

Dena Levine, a plaintiff in the case and owner of a Seattle insurance company, says she doesn’t usually meet the $250,000 income threshold.

She’s worried, however, that the law will prevent her from investing in her business and cut into her retirement. She owns a home in Seattle and its eventual sale is part of her retirement plan. Any profit from the sale, though, would be taxed as income under the new law.

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