1 2 3 4 5 6 7 8 IN THE SUPERIOR COURT OF THE STATE OF WASHINGTON FOR KING COUNTY 9 10 11 12 DENA LEVINE, AN INDIVIDUAL; CHRISTOPHER RUFO, AN INDIVIDUAL; MARTIN TOBIAS, AN INDIVIDUAL; NICHOLAS KERR, AN INDIVIDUAL; CHRIS McKENZIE, AN INDIVIDUAL; Case No. 13 14 15 16 PLAINTIFFS, v. CITY OF SEATTLE, A MUNICIPAL CORPORATION; DEFENDANT. 17 18 Plaintiffs allege: I. 19 20 COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 1. NATURE OF ACTION Plaintiffs seek a declaratory judgment that City of Seattle Ordinance 125339, “an 21 ordinance imposing an income tax on high-income residents,” is unlawful and invalid because the 22 City lacks the authority and power under Washington law and under its charter to levy this Seattle 23 Income Tax. Among other reasons, the Legislature has never granted Washington cities and 24 municipalities the authority to tax personal income, and Washington law expressly prohibits any 25 city from imposing any tax on net income. As a result, Plaintiff seeks preliminary and permanent 26 injunctions against any steps to impose the Seattle Income Tax. 27 28 2. This lawsuit is intended to invalidate an unlawful income tax promoted to Seattle citizens under the false pretense that it will tax only the “wealthiest residents” to satisfy a populist Orrick Herrington & Sutcliffe LLP 1 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 proposal to “tax the rich.” However, the illegal tax is already targeted at, and certain to injure, 2 numerous current and future residents who are nothing more than hard-working middle class 3 citizens, as the following hypothetical examples illustrate: 4 a. Julia could be a recent widower living on social security and her deceased 5 husband’s modest pension. She and her husband bought their house in the 6 1960’s, and it will sell in 2018 for a gain of more than $850,000, enough to 7 support Julia for her expected remaining life in a senior living community. 8 Julia thinks taxing the rich is fair, but is surprised when her real estate 9 agent informs her that, in addition to the excise tax of 1.78% on the sale 10 price, she will pay an additional 2.25% in income tax on the amount by 11 which her sales price, social security and pension for the year exceed 12 $250,000. In other words, Julia is “rich.” She had no idea that her nest 13 egg, for which she already paid property taxes every year over 50 years, 14 was targeted by the City’s illegal Income Tax. 15 b. Charles and Lynn could be first-generation residents of Seattle. Through 16 hard work and ambition, they scrimped and eventually saved enough 17 money to start their own small business. After more than 20 years of 18 personal sacrifice, taking just enough in salaries to live on, they are ready 19 to sell their business to fund their retirement, but with a gain of more than 20 $500,000, and the City of Seattle will take a 2.25% cut. Regrettably, 21 Charles and Lynn must sell their home in the International District and 22 move to avoid Seattle’s illegal tax on the sale of their business. 23 c. Devin could have an advanced degree from one of the world’s finest 24 institutes of technology, and work for anywhere he chooses. With 25 aspirations to found his own technology company eventually, Seattle 26 would have been at the top of Devin’s list, until the City Income Tax. The 27 Seattle area has nurtured a many of the world’s leading companies, in part 28 because Washington has no income tax, but Devin thinks the City has COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 2 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 turned inhospitable to new entrepreneurs and is focusing his search on 2 emerging technology centers in income tax-free cities like Austin, Texas. 3 d. Levon and Madison live on the Eastside but work in Seattle, commuting 4 across I-90 in separate cars. Concerned about traffic and climate change, 5 they began searching for a house in the City with access to light rail. After 6 the City imposed its 2.25% income tax they canceled the search and 7 resigned themselves to their commute. Levon and Madison will not be 8 doing their part to alleviate traffic congestion or climate change. 9 e. Anna, a recently divorced parent, is selling her house in 2017 to move to 10 the Eastside to avoid the new City Income Tax. Anna’s not alone. Some 11 of her neighbors who have lived in their neighborhood for several decades 12 are accelerating plans to sell before the City tax becomes effective in 2018. 13 The neighborhood will be different after losing some of its longtime 14 residents. 15 3. Contrary to its billing, the Seattle Income Tax is not a tax solely on “the wealthiest 16 citizens,” but reaches well into Seattle’s middle class in unexpected ways, upending longstanding 17 expectations of families, homeowners, property owners and business owners. Seattle has enjoyed 18 remarkable revenue growth—more than $1.4 billion in just the last four years—so the Tax is not 19 needed. And in many cases—particularly with traffic congestion, affordable housing, and 20 climate change—the Income Tax will directly undermine the very objectives its proponents claim 21 it will solve. In short, as this lawsuit will prove, the Seattle Income Tax does not just tax “the 22 wealthiest citizens,” it is not necessary, and it is illegal. 23 24 II. 4. PARTIES Plaintiff Dena Levine moved to Seattle in 1989 to be part of a great community 25 that values entrepreneurial spirit. A Seattle resident, homeowner, small business owner and 26 member of the Greater Seattle Business Alliance, Ms. Levine is the chief executive officer of an 27 independent insurance brokerage firm. She reports the net income from her S Corp as personal 28 income on the federal income tax return she files jointly with her spouse. Her small business COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 3 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 with four employees already pays business license fees and business and occupation taxes to the 2 City, and Ms. Levine is concerned about double taxation on her business income in the future. 3 Ms. Levine has planned to use the proceeds from the sale of her business to help fund her 4 retirement, but a 2.25% tax on net proceeds over $500,000 will force her to consider leaving 5 Seattle when she sells. Moreover, Ms. Levine purchased her current home in 1993 for $116,000, 6 and having paid City property taxes every year, is opposed to an additional City income tax her 7 middle income family would have to pay when they eventually sell. Although Ms. Levine 8 considers herself solidly middle class, she is generally concerned that Seattle’s Income Tax will 9 push some wealthy citizens out of the City and deter others from moving into the City, which 10 means they will not be spending and contributing locally as they have, injuring the local 11 economy. Ms. Levine has an interest in fighting bad tax policy and preventing illegal tax 12 liabilities. Ms. Levine pays sales and property taxes in Seattle. 13 5. Plaintiff Christopher Rufo is a Seattle resident, homeowner, documentary 14 filmmaker and executive director of the Documentary Foundation. Mr. Rufo is producing a film 15 for the Public Broadcast System about the struggles of families in three “forgotten American 16 cities.” A former California resident, Mr. Rufo moved to Seattle with his family and business to 17 take advantage of the dynamic economy, lower taxes, and a cheaper cost of living. Since moving 18 to Seattle he has saved hundreds of dollars a month in taxes, started building savings for the 19 future, and was able to purchase his first home. As the executive director of the Documentary 20 Foundation, he hires many freelancers in the Seattle area for his films. Mr. Rufo opposes the 21 Seattle Income Tax because it undermines Seattle’s simple and successful formula of economic 22 growth. Mr. Rufo pays sales and real property taxes in the City. 23 6. Plaintiff Martin Tobias is a Seattle resident, entrepreneur, business owner and 24 venture capital investor who has invested in approximately 75 companies. Mr. Tobias has been 25 the chief executive officer of three high-growth companies that hired over 2,500 employees and 26 raised over $500 million in the Seattle area, contributing directly and indirectly to Seattle’s 27 thriving economy. Mr. Tobias has observed the significant economic benefits of having no 28 income tax. He believes the Seattle Income Tax will cause current residents of Seattle to become COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 4 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 resident in jurisdictions without an income tax, harming the City. As an investor and CEO, 2 Mr. Tobias has observed that the Seattle Income Tax has already negatively impacted investment 3 and business expansion. Mr. Tobias believes that the Seattle Income Tax will decrease the pool 4 of highly talented people willing to live and work in Seattle and contribute to local communities. 5 He wishes to preserve the benefits of Seattle’s unique business and economic climate for current 6 and future residents. Mr. Tobias pays sales and property taxes in Seattle. 7 7. Plaintiff Nicholas Kerr is a Seattle resident and homeowner who manages a team 8 of contractors providing marketing services to a Washington-based technology company. After 9 receiving his undergraduate education in New Zealand, Mr. Kerr obtained his MBA in the United 10 States. He was recruited to Seattle in 2005 by a Washington-based telecommunications 11 company. Mr. Kerr opposes the City Income Tax because it will make it harder for him and 12 others to hire highly talented people. Mr. Kerr is concerned that the Seattle Income Tax will 13 make Seattle less affordable for low and middle income workers, and that an additional tax on 14 gains from sales of real estate will make Seattle housing even less affordable. He and his wife 15 file jointly and their income combined with the capital gains on their house will subject them to 16 the Income Tax when they decide to sell. Nicholas pays property taxes on his family residence 17 and sales tax on purchases within the City. 18 8. Chris McKenzie is a Seattle resident, homeowner and software engineer. 19 Mr. McKenzie moved to Seattle six years ago to be in a city attractive to innovative technology 20 companies and world-class talent. Mr. McKenzie opposes the Seattle Income Tax because it 21 hurts Seattle’s ability to compete for the best companies and talent, and because he is concerned 22 that the City of Seattle will tax the personal income of middle income residents. Mr. McKenzie 23 pays sales and property taxes in Seattle. 24 9. Each of the Plaintiffs has an interest in invalidating the Seattle Income Tax and 25 preserving substantial reliance interests in Washington’s long-standing prohibition on graduated 26 personal income taxes. 27 28 COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 5 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 10. Defendant City of Seattle is a municipal corporation chartered under authority 2 conferred by the Constitution of the state of Washington, with powers to levy taxes as granted 3 and limited by the Legislature. 4 5 6 7 III. 11. STANDING Plaintiffs have standing to challenge the Seattle Income Tax’s legality because each plaintiff is a taxpayer who resides in Seattle, Washington. 12. On July 21, 2017, certain Plaintiffs made a demand upon Attorney General Bob 8 Ferguson to investigate the Tax’s illegality, and to file suit on behalf of all Seattle taxpayers 9 specifically and Washington taxpayers generally to enjoin the imposition of the Tax and to obtain 10 a judgment declaring it to be unlawful under state statute and the Washington Constitution. A 11 copy of this demand is attached as Appendix A. 12 13. On August 3, 2017, Attorney General Ferguson declined to investigate the Tax 13 and challenge its legality in court. A copy of Attorney General Ferguson’s declination letter is 14 attached as Appendix B. 15 14. The Court may also hear this action, because it involves a controversy (1) of 16 substantial public importance concerning the authority of cities to levy taxes on the personal 17 income of individuals within their jurisdiction, (2) that immediately affects significant segments 18 of the population, including income earners and small business owners who live in the most 19 populous city in Washington, and (3) that has a direct bearing on commerce, finance, labor, 20 industry, or agriculture, because a personal income tax directly or indirectly affects each of these 21 areas of the economy. 22 23 IV. 15. JURISDICTION AND VENUE This Court has jurisdiction over this matter pursuant to RCW 2.08.010 (original 24 jurisdiction over, among other things, suits in equity); Ch. 7.24 (authority to render declaratory 25 judgments); and Ch. 7.40 (superior court authority to grant injunctions). 26 27 16. Venue is proper in King County Superior Court pursuant to RCW 4.12.025, because the plaintiffs and the defendant reside in King County. 28 COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 6 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 2 3 V. ALLEGATIONS OF FACTS Washington Voters Have Overwhelmingly Rejected an Income Tax Nine Times 17. In 1932, the voters of Washington passed an initiative instituting the payment of a 4 graduated income tax for the purpose of funding public schools, and reducing or eliminating 5 annual taxes on general property which were believed to impose disproportionate tax burdens on 6 farmers to the benefit of citizens whose wealth was derived from non-agricultural sources like 7 investments. 8 9 18. That initiative was ruled unconstitutional in 1933, and similar legislative efforts were ruled unconstitutional in 1935 and 1936, as the Washington Supreme Court reiterated with 10 no uncertainty that any graduated tax on personal or corporate net income taxes violates the 11 “uniformity” clause of the Washington Constitution. Article VII, Section 1 (Amendment 14) 12 requires that “all taxes shall be uniform upon the same class or property.” The Constitution goes 13 on to define “property” in the broadest possible terms “to mean and include . . . everything, 14 whether tangible or intangible, subject to ownership.” By reason of this definition, the 15 Washington Supreme Court has on every occasion declared both individual and corporate income 16 to constitute a class of property subject to this constitutional requirement of uniformity. See, 17 Power Inc. v. Huntley, 39 Wn.2d 191, 235 P.2d 173 (1951); Jensen v. Henneford, 185 Wash. 209, 18 53 P.2d 607 (1936); and Culliton v. Chase, 174 Wash. 363, 25 P.2d 81 (1933). In consequence, 19 the court in each of these cases struck down as unconstitutional the laws seeking to impose 20 graduated (“progressive”) income tax laws. 21 19. Since then, Washington voters have been asked at least nine times to approve the 22 imposition of a statewide income tax, and each time, the voters have resoundingly voted “no,” 23 including most recently in 2010 when 64% of voters rejected I-1098, a measure to levy a tax on 24 “adjusted gross incomes” above $200,000 for individuals and $400,000 for joint filers. The 25 citizens of Washington have consistently recognized the substantial economic benefits of living 26 in a state that does not tax individual income, and have without fail voted against each and every 27 attempt to change this fundamental feature of Washington’s tax structure. 28 COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 7 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 2 Tax Advocates Seek to Use Cities to End-Run Popular Opposition 20. Faced with unwavering opposition at the voting polls, a small group of income tax 3 advocates recently shifted to a strategy of using local politics to circumvent the will of 4 Washington voters that their State not levy a graduated income tax. In 2016, they succeeded in 5 placing a proposal to tax household incomes over $200,000 on the ballot in the City of Olympia, 6 with the goal of creating a test case to see if the state Supreme Court will overturn more than 80 7 years of case law banning graduated income taxes in Washington. Jason Mercier, History of 8 Income Tax Votes in Washington, Washington Policy Center (Oct. 17, 2016). The voters of 9 Olympia rejected that income tax measure. Andy Hobbs, Tax-friendly Olympia votes defy 10 11 expectations by rejecting initiative, The Olympian (Dec. 20, 2016). 21. Having been defeated in Olympia, advocates for a statewide income tax concluded 12 they would “need to pass an income tax somewhere” as a basis to have the Supreme Court 13 reconsider its precedent that such taxes violate the state constitution, “[a]nd that somewhere,” 14 according to advocates, was Seattle. Goldy, The Road to a State Income Tax Runs Through 15 Seattle, the Stranger (Nov. 5, 2013). Specifically, “progressive” Seattle, in income tax advocates’ 16 minds, would again need to “drag the rest of the state with it. . . .” Id. The Seattle City Council 17 willingly adopted this political strategy as City policy, resolving to pursue a city income tax on 18 Seattle’s so-called “wealthiest citizens” so that “the City of Seattle can pioneer a legal pathway 19 and build political momentum to enable the State of Washington and other local municipalities to 20 put in place progressive tax systems [i.e., income taxes].”). City of Seattle Resolution No. 31747. 21 In other words, without seeking authority from the Legislature to levy a graduated tax on personal 22 income, or an amendment to the City Charter to ask the citizens of Seattle to grant it the power to 23 tax personal income, the City Council resolved to create a test case to change tax policy 24 throughout the State of Washington. 25 22. Income tax advocates found their justification for an income tax following the 26 Trump inauguration in January 2017. Activists calling themselves “Trump-Proof Seattle” took 27 full advantage of the strong local sentiment against President Trump. They proposed to 28 safeguard Seattle against a possible future decrease in federal funds (that has never materialized) COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 8 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 by enacting a 2.5% tax on unearned income (i.e., income from capital gains, interest, and 2 dividends) for households with adjusted gross income exceeding $250,000. See Daniel Beekman, 3 “Trump Proof” Seattle with income tax, Seattle Times (Feb. 28, 2017). The political movement 4 to “Trump-Proof” Seattle and to “Tax the Rich” then quickly took hold among Seattle’s elected 5 politicians. 6 23. In April 2017, Mayor Ed Murray announced that he would propose a city income 7 tax on the wealthy. Shortly thereafter, on May 1 the City Council passed a resolution of intent 8 “to adopt a progressive income tax targeting high-income households.” Seattle City Res. 31747, 9 at 1 (May 1, 2017). 10 24. The City Budget Office projected that the Income Tax will raise $125 million 11 annually. CBO Fiscal Note. The City’s projected 2017 annual budget already stands at $5.4 12 billion, an increase of more than $1.4 billion just in the last four years, so the projected tax 13 revenue represents an increase of less than 3% in annual revenues. Nevertheless, reflecting the 14 political nature of their action, the City Council touted in its summary of the ordinance that the 15 relatively small increase in its annual revenues of $5.4 billion from “an income tax on high- 16 income residents” would “provid[e] solutions” for a panoply of politically popular issues, 17 including “lowering the property tax burden and the impact of other regressive taxes, replacing 18 federal funding potentially lost through federal budget cuts, providing public services, including 19 housing, education, and transit, and creating green jobs and meeting carbon reduction goals.” 20 The City Enacts a Graduated Income Tax 21 25. The City accomplished its goal of “imposing an income tax on high-income 22 residents” a little more than two months after the first “Tax the Rich” rallies were organized by 23 the Trump-Proof Seattle coalition following the inauguration. Mindful of the uniform history of 24 defeats over the last 80 years, including the statewide defeat in 2010 and the 2016 defeat in 25 Olympia, the City Council did not take the risk of putting the income tax to a popular referendum 26 before Seattle voters, or seeking a Charter Amendment to obtain the power to tax income from its 27 citizens. On July 10, 2017, the City Council passed City of Seattle CB 119002 to create and 28 direct the implementation of a city-wide income tax. COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 9 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 26. Immediately before the vote, City Council member Kshama Sawant convened a 2 rally of supporters outside City Hall. Acknowledging the inevitability of legal challenges in the 3 courts to the income tax levy, she said more public pressure may be needed, and asked her 4 supporters, “If we need to pack the courts, will you be there with me?” Beekman, City Income 5 Tax on Wealthy, Seattle Times A1 (July 11, 2017). 6 27. Mayor Ed Murray signed City of Seattle Ordinance 125339 into law on July 14, 7 2017. 8 Key Provisions of Seattle Income Tax, Ordinance 125339 9 28. At the Seattle Income Tax’s core, it imposes a graduated tax on personal income at 10 non-uniform rates. Ordinance 125339 taxes the “total income” of every “resident taxpayer” in 11 excess of $250,000 at 2.25%. SMC 5.65.030. The Ordinance taxes the “total income” in excess 12 of $500,000 at 2.25% if a resident taxpayer’s federal filing status for a tax year is “married filing 13 jointly.” Id. Any resident with a “total income” amount at or below the Ordinance’s income 14 thresholds is taxed at 0%. Id. These thresholds are to adjust annually for inflation based on 15 certain measures of the Consumer Price Index. Id. 16 29. “Total income” is defined as income before any adjustments, deductions, or 17 credits on a resident taxpayer’s United States individual income tax return for the tax year, listed 18 as “total income” on line 22 of Internal Revenue Service Form 1040, “total income” on line 15 of 19 Internal Revenue Service Form 1040A, “total income” on line 9 of Internal Revenue Service 20 Form 1041, or the equivalent on any form issued by the Internal Revenue Service that is not 21 reported on Schedule K-1 for a beneficiary. 22 30. Seattle’s Income Tax applies to all persons who reside in Seattle for at least half of 23 the year. SMC 5.65.020. The total tax due is the resident(s)’s total income multiplied by the 24 applicable tax rate, less certain credits for any income tax paid to another state or local 25 government. SMC 5.65.020, 5.65.030, 5.65.060. 26 31. Seattle residents subject to the 2.25% tax rate must file a tax return with the City 27 on or before April 15 each year. SMC 5.65.070. Failure to file a tax return, or filing a tax return 28 with incomplete or incorrect information, is grounds for a penalty of at least $500 and up to COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 10 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 $1,250. SMC 5.65.130. Seattle may determine the tax amount due for any resident who fails to 2 file a return and notify the resident of the tax amount, along with penalty and interest, which is 3 then immediately due and payable. SMC 5.65.070. 4 32. An intentional deficiency is subject to a penalty of 1% per month, plus up to 10% 5 of the deficiency, where the deficiency was without intent to defraud, or 100% of the deficiency, 6 if the deficiency was fraudulent. SMC 5.65.130. 7 33. Citizens who violate provisions of the Ordinance may be subject to criminal 8 penalties. SMC 5.65.250. Willful violations constitute gross misdemeanors, SMC 5.65.250, 9 which are punishable by a fine not to exceed $5,000, or by imprisonment of less than a year, or 10 both, SMC 12A.02.070. 11 The Current Favorable Tax Environment Promotes Opportunity for All in Seattle 12 34. As the Ordinance states, “Seattle is a growing and prosperous city that can offer 13 great schools, good jobs, and healthy communities for all.” Ordinance 125339, at 1. Seattle’s 14 unique combination of dynamic companies that are among the handful of global leaders, a vibrant 15 entrepreneurial environment, unparalleled access to a stunning natural environment, world-class 16 educational and health institutions, and quality of life have made it the fastest growing city in the 17 United States. As the Seattle Times remarked in May 2017, “For the first time, Seattle is adding 18 more people on average each year than during the post-Gold-Rush boom years. We’ve never 19 grown this fast, and we’ve never been this populous.” Gene Balk, Seattle once again nation’s 20 fastest-growing big city; population exceeds 700,000, Seattle Times (May 25, 2017). 21 35. The robust economic environment has created opportunities for all citizens in 22 Seattle. The Ordinance recognizes that, “Seattle’s robust economic growth has created 23 significant opportunity and wealth.” It is no accident that the founders of a disproportionate share 24 of the world’s greatest companies—Boeing, Nordstrom, Microsoft, Costco, Starbucks, Amazon, 25 just to name several of the dozens that are headquartered in the Puget Sound region—have 26 located to and found the talented employees to flourish in a region that, until now, has been free 27 of state and local taxes on personal income. The presence of so many thriving industries and 28 businesses in this region has, undeniably, been the most important factor in the “robust economic COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 11 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 growth [that] has created significant opportunity and wealth.” These businesses and their well- 2 paid employees have made immense direct financial contributions to state and local government, 3 through property taxes, Business and Occupation taxes, business licenses and fees, sales taxes, 4 and numerous other fees and taxes by which they fund the operations of government. 5 36. The Washington State Department of Commerce has touted the fact that 6 Washington has no income taxes as a significant competitive advantage in its promotional 7 materials to attract businesses and citizens to locate in Washington. 8 http://choosewashingtonstate.com/selectusa/ (“Washington State does not have a personal or 9 corporate income tax.”; http://choosewashingtonstate.com/i-need-help-with/foreign-domestic- 10 investment/taxes/ (“Washington State offers business many tax advantages, including no personal 11 or corporate income tax . . . .”); http://choosewashingtonstate.com/why-washington/our- 12 strengths/pro-business/ (“We offer businesses some competitive advantages found in few other 13 states. This includes no personal or corporate income tax.”). Businesses and institutions in 14 Seattle recruit talent from other parts of the country and the world, and they have been highly 15 successful in attracting the nation’s finest talent as they flee states with income taxes like New 16 York, Oregon, California and Massachusetts. The Income Tax would undermine this significant 17 local advantage, and erode the exceptional economic benefits it has helped realize. In other 18 words, in direct refutation of the false claim that Washington’s current income tax policies create 19 inequality and benefit only the wealthy, these statistics demonstrate the opposite—that the 20 absence of an income tax in Seattle and Washington has led to broadly shared financial benefits 21 for the entire community of citizens. 22 37. These thriving companies have continued to grow and prosper in large part 23 because these same attributes have made this region highly attractive to the most skilled human 24 talent in the world, coming from many different nations, states and cities. Here again, Seattle has 25 enjoyed a significant competitive advantage over other regions because it is free of state and local 26 income taxes. The absence of personal income taxes is often cited as a factor by highly skilled 27 individuals to move to Seattle from high-tax jurisdictions. In addition to major businesses 28 COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 12 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 located within the City, a large percentage of Seattle residents enjoy the quality of life in a vibrant 2 urban setting while commuting to their jobs outside the City. 3 38. Employment in Seattle has been soaring. Over the last year, the area’s 4 unemployment rate dropped 1.4 percentage points, from 5.3% in February 2016 to 3.9% in 5 February 2017. Seattle has been creating job opportunities at twice the national average. 6 39. The City’s robust economy has enabled employees in Seattle to enjoy significant 7 wage gains as well. Workers in a range of fields make more per hour than their national 8 counterparts, from computer programmers and human resources managers to cashiers and fast 9 food cooks. As of January 2017, according to the Bureau of Labor Statistics, Seattle’s 10 employment cost index, a measure of the cost to employers of total wages and benefits, was also 11 increasing at double the national rate, approximately 4% annually compared to approximately 2% 12 nationally. 13 40. Seattle’s vibrant economy has buoyed an exceptionally high standard of living 14 across the board and unusually strong growth in per capita household income. As wages have 15 increased, Seattle’s median household income—one of the most commonly used indicators of 16 general household wealth—has outpaced gains across the nation. According to the most recent 17 data from the U.S. Census, Seattle’s median household income increased by nearly $10,000 from 18 2014 to 2015, when it reached more than $80,000 per year. This was the largest increase of the 19 50 most populous cities in the country. The second largest increase in 2015, in San Francisco, 20 lagged behind Seattle by more than $2,000 per household. Over the ten years from 2006 to 2015, 21 a period renowned nationally for wage stagnation, the Washington Bureau of Economic Analysis 22 reported that per capita personal income in the Seattle metropolitan division had increase from 23 $52,000 to more than $65,800—an increase of more than 25%. 24 41. Seattle’s high incomes are not concentrated in a tiny minority of households— 25 more than one in five Seattle households enjoyed income greater than $150,000. The 2016 26 census also showed that median income has risen for whites, Asians, blacks and multiracial 27 people, with African Americans showing particularly strong gains in median income. The gender 28 pay gap has also decreased. Gene Balk, $80,000 median: Income gain in Seattle far outpaces COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 13 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 other cities, Seattle Times (Sept. 15, 2016). Seattle’s unique economy is distributing financial 2 benefits across its diverse population. 3 42. Rather than ease the high cost of housing in Seattle, the 2.25% tax will have the 4 directly opposite effect—buyers will pass a portion of the cost of the tax to prospective 5 purchasers in the form of a higher purchase price. Landlords will increase rents because the tax 6 directly impacts their costs of acquiring and selling rental housing and apartments, reducing their 7 profits. 8 9 43. And most destructive, a percentage of the talented individuals who would have moved to Seattle to contribute to local employers and the local economy will excuse themselves 10 from exposure to the annual 2.25% tax on annual incomes above the $250,000/$500,000 11 thresholds. 12 44. Particularly for many who contemplate selling a house they have owned for many 13 years, a family business, or an ownership stake in a business that would result in a significant 14 one-time gain, basic financial common sense will push many to move to a residence outside the 15 City before selling their home, business or ownership stake. 16 With Economic Prosperity, the City of Seattle Has Enjoyed Record Increases in Tax and General Revenues 17 18 45. As its businesses have flourished and its citizens have prospered, the City of 19 Seattle’s revenues have ballooned. Just in the last four years, the City’s total revenues have 20 grown more than 33%, from approximately $4.1 billion in 2013 to a projected $5.4 billion in 21 2017, an increase of more than $1.3 billion. The City’s General Fund revenues have nearly 22 matched this substantial growth, growing from $947 million in 2013 to a projected $1.19 billion 23 in 2017 adopted budget, a nearly 25% increase in General Fund revenues. 24 46. Seattle has benefitted directly and indirectly from its robust technology and 25 business communities, fueled by access to the world’s best talent. Seattle has grown and the 26 incomes of Seattle residents have increase at rates much faster than other major cities. With more 27 disposable income to spend, the City of Seattle benefits from higher sales tax revenues on goods 28 and services. COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 14 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 47. Of course, the increased sales tax revenues reflect the economic multiplier that 2 comes from spending of numerous high wage earners, and the increased indirect opportunities for 3 other residents to create and grow the businesses that provide goods and services, from waiters in 4 restaurants to carpenters in home remodels to ironworkers in new high rises, and the many 5 employees needed to manage and operate new hotels, offices, apartment and condo buildings. 6 See e.g., Can you believe it?! 40 more restaurant openings in Seattle and on the Eastside, Seattle 7 Times (July 31, 2017). Sustaining a thriving business and economic climate creates and enhances 8 opportunities for residents of all incomes and skill levels. 9 VI. 10 DECLARATORY JUDGMENT THAT CITY OF SEATTLE ORDINANCE 125339 IS INVALID 48. Plaintiffs rely on the allegations of Paragraphs 1 through 46. 49. There is an actual, present and justiciable controversy as to whether the City of 11 12 Seattle possesses the legal authority and power under the Washington Constitution, the laws of 13 Washington, and the City Charter, to levy a tax on the personal income of its residents in the form 14 of the Ordinance. A judicial determination on the illegality, invalidity, and enforceability of the 15 Ordinance will conclusively resolve these issues of substantial public concern and the parties’ 16 dispute. 17 50. Washington cities, including charter cities such as Seattle, are creatures of the 18 state, and are “subject to and controlled by general laws.” State ex rel. Bowen v. Kruegel, 67 19 Wn.2d 673, 676 (1965); see Wash. Const. art. 11 § 10. 20 51. Cities lack inherent taxing authority. Article 7, section 9 of the Washington State 21 Constitution provides that “municipal corporations may be vested with authority to assess and 22 collect taxes.” Further, Article 11, section 12 grants the Legislature authority “by general laws to 23 vest … the power to assess and collect taxes” in counties, cities, towns, or other municipal 24 corporations. These constitutional provisions that grant tax authority to cities are not self- 25 executing but require specific grants of legislative authority. Carkonen v. Williams, 76 Wn.2d 26 617 (1969). 27 28 COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 15 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 52. There exists no general plenary authority for a city to levy taxes it deems 2 desirable. Cities must receive express authority from the legislature to levy taxes, including 3 “specific legislative authority to levy a particular tax.” King Cty. v. City of Algona, 101 Wn.2d 4 789, 791-93 (1984); see also Hillis Homes, Inc. v. Snohomish Cty., 97 Wn.2d 804 (1982); City of 5 Seattle v. T-Mobile West Corp., Case No. 75423-8-I, — P.3d —, 2017 WL 2229926 (May 22, 6 2017) (reversing city’s tax assessments on interstate charges “in the absence of specific statutory 7 authority”). The legislature has not granted cities express and specific authority to tax any 8 measure of personal income. 9 53. The Legislature has not authorized cities to tax personal income, and has not 10 specifically authorized cities to tax “total income” in particular. Without an express and specific 11 grant of authority from the Legislature to cities to tax income, the City of Seattle lacks the 12 authority and power to impose the taxes on income under Ordinance 125339. 13 54. To the contrary, the Legislature prohibits cities from taxing personal income: “A 14 county, city, or city-county shall not levy a tax on net income.” RCW 36.65.030. The City 15 attempts to evade this prohibition simply by using different terminology, characterizing its tax as 16 a tax on “total income.” The City’s efforts to disguise its tax fail because, as defined in the 17 Ordinance, all “total income” is “net income.” In addition, “total income” is based on and 18 includes certain income expressly defined as net income under applicable law (i.e., net income as 19 calculated by subtracting allowable deductions and exclusions from total income revenues for S- 20 Corporations and any other business entities that pass net income through IRS Schedule D to line 21 22 of IRS Form 1040, which the City uses as the basis for its Income Tax for most taxpayers). In 22 consequence, Ordinance 125339 is a tax on “net income” that has been expressly prohibited by 23 the Legislature. 24 55. Seattle lacks the power to tax income under the City Charter, which does not 25 confer the power to tax personal income on the City. The City has not placed a Charter 26 amendment before the voters of Seattle that would empower it to tax income. 27 28 56. Applying principles of constitutional avoidance, and in the event that the Court does not first rule the statute to be invalid under Washington statutes and the City Charter, Article COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 16 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 VII, Section 1 (Amendment 14) of the Washington Constitution requires that “all taxes shall be 2 uniform upon the same class or property…” The Ordinance imposes a non-uniform tax on 3 personal income in violation of more than 80 years of Washington Supreme Court precedent 4 interpreting the “uniformity” clause of the Washington Constitution. 5 6 57. challenge the constitutionality, legality, validity or enforceability of the Ordinance. 7 8 9 10 Plaintiffs reserve the right to raise any and all legal bases under Washington law to VII. 1. PRAYER FOR RELIEF Declaratory Relief. For a declaratory judgment that Ordinance 125339 is illegal, invalid and unenforceable in its entirety. 2. Injunctive Relief. Plaintiff’s rights to be free of the burdens of an illegal tax is in 11 jeopardy of immediate invasion, which will cause Plaintiffs to suffer substantial injury. Plaintiffs 12 pray for preliminary and permanent injunctions staying and restraining the City from taking any 13 steps to implement, collect, or enforce collection of any tax purportedly authorized by Ordinance 14 125339. 15 16 17 3. Attorneys’ Fees and Cost of Suit. For attorneys’ fees and the costs of bringing this suit, to the extent permitted by law. 4. Other Relief. For such other and further relief as the Court deems just, proper, 18 and equitable. 19 DATED this 9th day of August, 2017. 20 ORRICK, HERRINGTON & SUTCLIFFE LLP 21 By: s/Robert M. McKenna Robert M. McKenna (WSBA# 18327) Daniel J. Dunne, Jr. (WSBA# 16999) Adam Tabor (WSBA# 50912) 701 Fifth Avenue, Suite 5600 Seattle, WA 98104 Telephone (206) 839-4300 Fax (206) 839-4301 rmckenna@orrick.com ddunne@orrick.com atabor@orrick.com 22 23 24 25 26 27 28 COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF 17 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 1 BEAN, GENTRY, WHEELER & PETERNELL, PLLC 2 5 By: s/Gerry L. Alexander Gerry L. Alexander (WSBA# 775) 910 Lakeridge Way SW Olympia, WA 98502 Telephone (360) 357-2852 Fax (360) 786-6943 galexander@bgwp.net 6 TALMADGE FITZPATRICK TRIBE PLLC 7 By: s/Phil Talmadge Phil Talmadge (WSBA# 6973) 2775 Harbor Ave. SW, Third Floor, Suite C Seattle, WA 98126 Telephone (206) 574-6661 phil@tal-fitzlaw.com 3 4 8 9 10 Attorneys for Plaintiffs 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 Orrick Herrington & Sutcliffe LLP 701 5th Avenue, Suite 5600 Seattle, Washington 98104-7097 tel+1-206-839-4300 APPENDIX A 0 orrick July 21, 2017 Orrick, Herrington & Sutcilife LIP 701 5th Avenue Suite 5600 Seattle, WA 98704-7097 +1 206 839 4300 The Honorable Bob Ferguson Attorney General of Washington 1125 Washington Street SE P.O. Box 40100 Olympia, WA 98504-0100 Re: orrick.com RobertM. McKenna E rmckenna@orrick.com D +1 2068394415 F +1 206 839 4301 Request for the Attorney General to challenge the constitutionality of the Seattle Income Tax, Seattle City Ord. 125339, signed into law on July 14, 2017 Dear Attorney General Ferguson: We represent a group of Washington taxpayers who are Seattle residents, including Ms. Dena Levine, Mr. Khoa Pham, Mr. Christopher Rufo, and Mr. Martin Tobias. We ask that your office investigate and challenge the legality of Seattle’s recently enacted city-wide income tax, specifically Seattle City Ord. 125339 (July 14, 2017) (the “Seattle Income Tax”).1 On May 1, 2017, the Seattle City Council passed a resolution of intent “to adopt a progressive income tax targeting high-income households.” Seattle City Res. 31747, at I (May 1, 2017). On July 10, 2017, the City Council passed an ordinance to create and direct the implementation of a city wide income tax. At the Seattle Income Tax’s core, it taxes that portion of the “total income” of every “resident taxpayer”2 in excess of $250,000 at 2.25%. The Ordinance taxes that portion of the “total income” of every “resident taxpayer” in excess of $500,000 at 2.25% if a resident taxpayer’s federal filing status for a tax year is “married filing jointly.”3 Any “total income” amount at or below the ordinance’s income thresholds is taxed at O%. Efforts to create and implement graduated personal income taxes in Washington are not new. See, e.g., 1935 Wash. Laws 178; 1933 Wash. Laws 5. Those taxes are, however, illegal, including the Seattle Income Tax. First, Washington cities including charter cities such as Seattle are creatures of the state, and are “subject to and controlled by general laws.” State ex tel. Bowen v. Kntegel, 67 Wn.2d 673, 676 (1965); see Wash. Const. art. 11 10. The Supreme Court has “consistently held that municipalities must have — — \Ve attach a copy of Ordinance No. 125339 for your convemence. The ordinance adds a new chapter to the Seattle Municipal Code (“SMC”) Chapter 5.65. 2 SMC 5.65.020.A, .C-.E, and .G define the Seattle Income Tax’s operative terms. 3 If a resident taxpayer is married to a non-resident of Seattle, “total income” can be calculated by treating both spouses as residents of Seattle — 0 or r i C k The Honorable Bob Ferguson General of Washington Attorney July 21, 2017 Page 2 express authority, either constitutional or legislative, to levy taxes.” Kin