Income Taxation in Washington: in a Class by Itself

• Publication year: 1978

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 1, No.1FALL 1977

Income Taxation in Washington: In a Class by Itself

J. Thomas Carrato (fn*) and Richard W. Hemstad (fn**)

Over the past half-century the desirability of a state net income tax has dominated public tax policy debate in the State of Washington. Severely constrained by our supreme court's restrictive interpretations of amendment 14 to the state constitution, the legislature has been unable to fashion a coherent tax policy for the state. As a result, we today have an extraordinarily regressive tax system(fn1) that does not effectively meet basic needs(fn2) and simultaneously reinforces public skepticism concerning the effectiveness and responsiveness of our institutions of government.

While there can be extended debate regarding the desirability of a net income tax and its form,(fn3) there is general agreement that such a tax would result in a state tax structure substantially less regressive, would provide greater elasticity in revenue growth, and would lessen the distorting effect our heavy reliance on excise taxes has on economic decisions.(fn4)

Rather surprisingly, the state constitution does not explicitly deny the legislature power to tax net income. The prohibition is the result of a series of Washington Supreme Court decisions severely restricting the legislative authority to define classifications of property for taxation. The purposes of this article are to demonstrate that the Washington Supreme Court interpretations of the relevant constitutional provisions are erroneous, and to present our views of a proper analysis of the legislature's power to classify for purposes of taxation.

I. The Issue

In a series of decisions beginning with the 1933 landmark Culliton v. Chase,(fn5) the Washington Supreme Court thwarted popular and legislative attempts to levy a net income tax. In the process, and to achieve that result, the court(fn6) molded its interpretation of the "uniformity clause" of amendment 14 to the constitution: "All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax . . . ."(fn7) Amendment 14, adopted in 1930, dramatically changed the original constitutional article governing taxation. Three years after its adoption, however, the court decided Culliton and transformed the uniformity clause into a virtual prohibition against legislative classification of property for tax purposes, thereby, as will be seen, emasculating one of the major purposes of amendment 14.

Although the court's improper interpretation of the uniformity clause is generally applicable to all property taxation, the court established and embellished its uniformity criteria only in cases invalidating net income taxes. And though property is taxed despite the court's restrictive interpretations of the uniformity clause, net income is still not taxed in this state because of those restrictions. While the court was developing its strict limitations on legislative discretion to classify for property taxes under the uniformity clause, other taxes, characterized as excise taxes, it analyzed quite differently. Classifications made for excise taxes were subjected to the more permissive standards of the equal protection clause of the United States Constitution and its practical equivalent, the privileges and immunities clause of the state constitution.(fn8) Thus, the court singled out income taxation for uniquely severe constitutional restrictions.

The reasoning in Culliton and its progeny was syllogistic: (1) income is property and a tax on income is a tax on property; (2) taxes on property must be uniform; and (3) a net income tax is not uniform.(fn9) The first premise in this reasoning has drawn the most criticism(fn10) and concern.(fn11) Those disputing the supreme court's decisions or attempting to avoid them have attacked the notion that income is property, arguing instead that an income tax is an excise tax. This approach, however, must overcome the definition of "property" in the Washington Constitution which provides: "The word 'property' as used herein shall mean and include everything, whether tangible or intangible, subject to ownership."(fn12) This definition is as comprehensive as could be devised, is sui generis among state constitutions, and has consistently been judicially construed to include "income."(fn13)

In this article we do not attack the first premise of the Culliton rationale. We simply accept the proposition that income is property, and examine the court's holdings to that effect only to discern and explain the relationship of that step to the remaining two premises.

The fundamental error in the court's three-step analysis lies in its confusion of the issues of uniformity of taxation and the legislative power to classify property for taxation. To understand the court's error requires a detailed analysis of amendment 14 to the Washington Constitution. In brief, the logic demonstrating the court's confusion can be stated as follows: The court dichotomized the treatment of property taxes and excise taxes, holding that property taxes are subject to the uniformity clause and excise taxes are not. The court reasoned that the income tax, as a property tax, does not satisfy the requisites of the uniformity clause because of the necessary legislative classifications of income inherent in any net income tax scheme. Therefore, the court interpreted the concept of "uniformity" to restrict the power of the legislature to classify "property" in any significant way for the purposes of taxation.

Uniformity, as we will demonstrate, is a distinct issue which should neither be confused with nor allowed to encroach upon the analysis of the legislature's power to classify for tax purposes. The proper analysis of any tax measure under amendment 14, which requires that "all taxes shall be uniform upon the same class of property," should entail: (1) ascertaining what legislative classifications are made; (2) scrutinizing the classifications under equal protection criteria; and (3) if any classifications of property are made, determining if the tax is uniform within each class of property. That analysis should be applied to any tax measure, whether property (including income) or excise. If a net income tax were properly so analyzed under amendment 14, it would be valid under equal protection and uniformity criteria even if characterized as a property tax.(fn14)

This article is organized chronologically. Starting with an examination of the original constitutional provisions, we then analyze the adoption and wording of amendment 14. We follow with a description and analysis of the court's interpretation of amendment 14, the uniformity clause in particular, juxtaposing the court's progressive analysis of legislative tax classification in areas other than property taxation. We conclude that the time is at hand for the Washington Supreme Court to adopt a single consistent analysis of legislative tax classification, and to articulate the conceptually distinct requirements necessary to achieve uniform taxation of legislatively selected classes of property.

II. The Historical Context: The Original Article 7 and its Interpretation

Prior to the adoption of amendment 14 to the Washington Constitution, it made no mention of the power to classify for taxation. Article 7, entitled "Revenue and Taxation," originally read, in pertinent part, as follows:Section 1 ANNUAL STATE TAX - All property in the state, not exempt under the laws of the United States, or under this Constitution, shall be taxed in proportion to its value, to be ascertained as provided by law . . . . Section 2 TAXATION - UNIFORMITY AND EQUALITY - EXEMPTION - The legislature shall provide by law a uniform and equal rate of assessment and taxation on all property in the state, according to its value in money, and shall prescribe such regulations by general law as shall secure a just valuation for taxation, of all property, so that every person and corporation shall pay a tax in proportion to the value of his, her or its property; Provided, that a deduction of debts from credit may be authorized; Provided further, that property of the United States and of the state, counties, school districts, and other municipal corporations, and such other property as the legislature may by general law provide, shall be exempt from taxation; And provided further(fn15) that the legislature shall have power, by appropriate legislation, to exempt personal property to the amount of [three hundred dollars] $300 for each head of a family liable to assessment and taxation under the provisions of the laws of this state of which the individual is the actual and bona fide owner. Section 3 ASSESSMENT OF CORPORATE PROPERTY - The legislature shall provide by general law for the assessing and levying of taxes on all corporation property as near as may be by the same methods as are provided for the assessing and levying of taxes on individual property. Section 4 NO SURRENDER OF POWER OR SUSPENSION OF TAX ON CORPORATE PROPERTY. . . . (fn16)

The cited sections expressly applied to and imposed limitations on the power to tax property. Taken together they show that the framers considered property the principal source of the state's revenue.(fn17)

The journal of the state's constitutional convention casts no authoritative light on the desires or intentions of the...