Seattle investor questions city plan to spend up to $250K defending income tax on the rich

Matt McIlwain is committed to fighting Seattle’s income tax. (Madrona Photo)

Matt McIlwain believes Seattle is wasting resources defending an income tax ordinance passed by the City Council in July.

The Madrona Venture Group managing director, who is leading a legal challenge against the tax, raised questions Thursday about the city’s plan to spend up to $250,000 in outside legal fees defending a new municipal income tax on high-earners.

The City Attorney’s Office is enlisting Pacifica Law Group to help defend against the handful of legal challenges to the income tax, according to a letter uncovered by The Seattle Times. In it, the City agrees to pay the outside law firm up to $250,000 for the project.

The ordinance in question would levy a 2.25 percent tax on any income that is above $250,000 for individuals and $500,000 for joint filers. City lawmakers passed the ordinance knowing that it would be challenged in court, as state law prohibits local jurisdictions from levying their own taxes on income.

We asked McIlwain to expand on his tweet, calling out the city for enlisting outside counsel. He sent the following statement via email:

The broader issue here is: why is the Seattle city government spending hundreds of thousands of dollars and countless hours defending a tax they know was illegal when they passed it? The city has important challenges to focus on like affordable housing, transportation and homelessness. Paying consultants and lawyers to defend an illegal tax is not a good use of taxpayer dollars or city council time.

McIlwain launched a nonprofit earlier this month to fund legal challenges to the income tax, which he says is “illegal” and “unnecessary.” Unsurprisingly, he thinks using tax dollars to defend the income tax is a waste.

The City Attorney’s Office doesn’t have the bandwidth to defend against the income tax lawsuits on its own, according to The Seattle Times. Seattle’s legal arm is dealing with an unusually high number of lawsuits over other city ordinances, like a law allowing Uber drivers to unionize. 

Kimberly Mills, communications director at the City Attorney’s Office, responded to McIlwain’s comments with the following statement, sent to GeekWire via email:

First of all, please know that it is the City Attorney’s statutory duty to defend the City against any and all legal challenges. The income tax ordinance approved by the City Council is not illegal, as Mr. McIlwain prematurely describes it, until and if the courts rule it so. Testing the conventional and, we hope, outdated wisdom that a tax such as this is not permissible is a justifiable use of tax money. Our office regularly relies on help from outside counsel in significant cases, though City Attorney Holmes and his deputies retain supervisory control of the litigation.

McIlwain’s non-profit, the Opportunity for All Coalition is one of the organizations suing the city over the tax ordinance. McIlwain has been an outspoken critic of a Seattle income tax for years and is a fixture in the Seattle tech community. As Madrona’s managing director, McIlwain invests in a wide range of software-focused companies and he sits on the board of the Fred Hutchinson Cancer Research Center and libertarian-leaning Washington Policy Center (WPC).

“I believe there are times when you need to serve your community,” McIlwain told GeekWire when the Opportunity for All Coalition launched. “In defeating the city income tax, we can help maintain a system of opportunity and job creation for innovators and workers.”

McIlwain’s anti-income tax advocacy reflects a growing rift between members of Seattle’s tech and business community and residents who feel pushed out by the rising cost of living associated with so many high-earners living in the city.