As discussed in Parts 1 and 2 of our advisory series, Washington State's Long-Term Services and Supports Trust Program ("WA Cares") will require employers to withhold a payroll tax equal to .58 percent of employee wages beginning July 1, 2023, unless the employee provides a state-issued letter of exemption to their employer prior to July 1. Washington State maintains that this payment is a state excise tax on wages, not a fee, premium, or income tax. Thus, as of now and absent any court intervention, Washington employers must be prepared to collect the payroll tax as of July 1.

A recent Washington Supreme Court decision may open the door to a new legal challenge to the WA Cares program. In March, in Quinn v. State, 100769-8, the Washington Supreme Court upheld the State's capital gains tax and defined the requirements of an excise tax. Under Quinn, WA Cares is arguably an unconstitutional income tax rather than an excise tax.

The Constitutional Issue

Under established Washington Supreme Court precedent, the Washington Constitution defines income as property. If WA Cares is an income tax, it would be subject to the uniformity and levy limitations imposed by Article VII, Sections 1 & 2 of the Washington Constitution. As set forth in more detail below, it is doubtful that WA Cares would meet these requirements. Because the uniformity and levy limitations are only imposed on property taxes and not on excise taxes, it is necessary to determine if WA Cares is a property tax or an excise tax, as defined by Washington law.

WA Cares states on its web page that it is "a universal long-term care program that works like Social Security."[1] However, under the Social Security Act, the tax paid by employees pursuant to section 3101 of the Federal Insurance Contributions Act is classified as an income tax. Only the tax paid by employers under section 3111 of the Federal Insurance Contributions Act, with respect to having individuals in their employment, is characterized as an excise tax. An analysis of the Quinn decision is likely to lead to classifying WA Cares as an income tax like the employee tax under the Social Security Act.

WA Cares and the Quinn Decision

Quinn indicates that the key distinction between an income tax and an excise tax is that an excise tax involves a tax on the exercise of a privilege, transaction or right with respect to the property, while an income tax involves the mere receipt of income untethered to any specific taxable activity. Thus, personal income taxes and corporate taxes are void, Culliton v. Chase, but sales, use and excise taxes are upheld, Stiner v. Yelle. In Jensen v. Henneford, the Washington Supreme Court held that a tax imposed on residents for the "privilege of receiving income in the state" was not an excise tax, as advocated by the state, but instead an income tax. The same court has held that the right to earn a living by wages is not a "substantive privilege granted or permitted by the state" in Cary v. City of Bellingham. Hence, wage income would be viewed as property under the prior cases. The Jensen and Cary decisions should be determinative of this issue as their reasoning is consistent with Quinn.

The Uniformity and Levy Limitations

The Washington Constitution does not prohibit property taxes (including tax on income), but subjects property taxes to uniformity and levy limitations. In Kunath v. City of Seattle the court of appeals found that a corporate income tax was not uniform because it was applied to corporations but was not applied to other forms of business such as LLCs and sole proprietorships. Similarly, WA Cares should fail the uniformity requirement as WA Cares is not mandatory for other forms of personal income, such as LLC distributions, income of the self-employed, or wages earned in the state by nonresidents. Arguably the "voluntary" exemption for the 500,000 employees who opted out of the statute due to the fact that they had private insurance does not meet the uniformity requirement nor is it a proper tax exemption.

In addition to the uniformity requirement, the tax cannot exceed 1% of the value of the property. This rate is further limited by an inflationary factor, which provides that property growth is limited to the lesser of inflation, or one percent (i.e. 101% of the prior year's tax revenue). These limitations are taken into account in the aggregate, meaning that if a new tax causes the limits to be violated, then all property taxes are proportionately reduced.

If WA Cares is treated as a property tax, the tax rate of .58% is below the 1% constitutional limitation. However, all property taxes are considered in the aggregate for purposes of this limitation. Once WA Cares is considered with Washington state's real property tax, the 1% limitation would be violated. As a result, all the taxes must be proportionately reduced until the limitation is not exceeded. The reduction would cause the funding of WA Cares to again be called into question. The tax would also cause disruption for the limitation on property tax growth, because arguably WA Cares would need to be factored in, at the appropriate jurisdictional level, to the 101% limitation on annual property tax levies with respect to the prior year's total levy. This would affect the funding of projects that depend on the property tax.

Thus, if WA Cares is an income tax, WA Cares would either be void in its entirety as it is not uniform or, at a minimum, would cause a proportionate reduction to all property taxes to meet the 1% limitation. This reduction would likely cause WA Cares to be underfunded and would also cause funding issues for other programs that are dependent on Washington's real estate property tax.

Reasons to Consider a State Court Challenge

If the state is permitted to tax income by simply labeling any tax an excise tax, there is no limit on the taxes that can be imposed on the employee. Employees are subject to the .58% WA Cares tax as well as a similar tax under the Paid Family Medical Leave program. Employees may wish to bring a state court action challenging WA Cares as an unconstitutional income tax to establish a right to receive a refund of WA Cares taxes previously paid and/or a refund and a reduction in any property tax that exceeds the 1% limit on property taxes. Such a lawsuit would test the state's ability to simply end run the constitutional limitations on property taxes in Washington and effectively subject all employees in Washington to an income tax on gross wages. Employers may wish to challenge WA Cares as the process of imposing multiple excise taxes on different definitions of "wages" and different recordkeeping and claim procedures increases the expense and administrative burdens of doing business in the state. In addition, if WA Cares is an income tax, employers are likely entitled to a return of property taxes because such taxes were in excess of the limitations on property taxes imposed by state law.

For these reasons, employers and employees may wish to consider a challenge to WA Cares. Please contact the authors of this advisory with any questions.

[1] Frequently Asked Questions, (accessed 4/3/2023)