Lawsuit challenges Washington's week-old 'millionaires tax'

Orrick, Herrington & Sutcliffe

A lawsuit to overturn Washington state's brand new "millionaires tax" has been filed by former State Attorney General Rob McKenna.

McKenna, a Republican, was hired by the Citizen's Action Defense Fund, a conservative non-profit law firm that has historically challenged Democratic Party-led legislation, to lead the charge to overturn the bill signed into law by Gov. Bob Ferguson on March 30.

The law, which institutes a 9.9% income tax on annual household earnings exceeding $1 million, takes effect on Jan. 1, 2028, with collections starting during the 2029 tax season.

Opponents of the tax argue in the lawsuit filed in Klickitat County Superior Court Thursday that the state constitution dictates property taxes must be applied uniformly and can't exceed 1%. A state Supreme Court ruling in 1933 held income is property, according to the lawsuit.

"Washington's constitution is clear, and the courts have been equally clear for nearly a century — income is property, and progressive income taxes are unconstitutional under existing law," said McKenna, a partner in the Seattle office of Orrick, Herrington & Sutcliffe. "If the state proceeds with the new income tax, it will create a direct conflict with binding precedent and the constitutional protections that safeguard taxpayers."

McKenna was state attorney general from 2005 to 2013.

The lead plaintiffs in the case are Ben and Lauren Petter. Ben Petter, a builder, and Lauren Petter, who owns a marketing business, will earn more than $1 million in combined income when the law takes effect and would be subject to the tax, the lawsuit says.

CADF Executive Director Jackson Maynard said the "lawsuit is about upholding the rule of law and ensuring that Washingtonians are not subjected to an unconstitutional tax scheme."

McKenna, former state Supreme Court justice Phil Talmadge and Maynard, executive director of the Citizen Action Defense Fund, are the lead attorneys on the case.

The tax, if it survives legal challenges, is expected to provide a bit of a boost to the state's municipal bonds by giving the state's high net earners an additional reason to seek out in-state tax-exempt investments. The bill stipulates that interest on Washington-issued state and local bonds will be exempt from the levy.