No Income Tax in Washington State

An income tax for Washington? It’s closer than you think

An income tax for Washington is a longtime dream for many in state politics. But after years of rejection from Washington state voters, they are taking a different tack. Rather than proposing an income tax directly – and facing defeat again – they are advocating small steps that would lead inexorably to the same result.

Washington is one of just seven states that do not impose an income tax. It is one of the reasons for the prosperity of the greater Puget Sound area, which has been able to attract and retain the tech industry because of a favorable tax climate. At the same time, the lack of an income tax has forced greater fiscal discipline on the Legislature. This has helped reduce the temptation for budget-busting spending that cannot be sustained during economic downturns – a major problem for other states.

On this page you will find resources that describe how Washington is being set up for an income tax, one step at a time.

 

Creating a test case

The Temple of Justice, home to Washington’s state Supreme Court.

Advocates of a state income tax face an enormous obstacle – the people of the state of Washington. Nine times an income tax has appeared on the ballot since 1934, and every time the people have said no. So job number one is to eliminate the requirement of a public vote. The requirement stems from a 1933 state Supreme Court decision (reaffirmed in 1935) that declared a graduated-rate income tax to be unconstitutional – hence a vote on a constitutional amendment is needed.

Now activists are working to put a test case before the state Supreme Court in hopes of overturning the decision. The strategy is to convince a city to adopt a municipal income tax, even though such a tax is expressly prohibited by state law, and allow challenges to proceed to the Supreme Court. Though voters in the city of Olympia rejected one such proposal last proposal last fall, on May 1, the Seattle City Council agreed to pursue a city-wide income tax. If this strategy is successful, the Legislature could adopt an income tax without giving taxpayers a chance to weigh in.

 

Enacting an income tax at the state level

Many activists, the governor, and members of the House and Senate Democratic caucuses are urging the state to enact an income tax on capital gains. They call their proposal an “excise tax,” and claim that it is not an income tax, yet in form and function it is really an income tax with a narrow base. Experience in other states has shown such taxes to be highly volatile. California experienced major problems in the last recession, and a newly disclosed budget disaster in the state of Connecticut has been directly linked to its income tax on capital gains.

If a capital gains income tax is enacted in Washington, revenues will plummet during the next downturn. Replacing the hundreds of millions of dollars in lost revenue would become a convenient excuse for tax advocates to broaden the base from a capital-gains-only income tax to a general income tax affecting all taxpayers. And because the capital gains income tax also would be certain to face legal challenge, if the Legislature were to adopt one, it might also serve as a test case for the state Supreme Court.

 

McCleary fuels income tax campaign

The state Supreme Court’s 2012 McCleary decision, requiring the state to pick up full funding for basic education, has provided an excuse for tax advocates to urge baby steps toward an income tax — particularly the income tax on capital gains. Yet Democrats who are leading the charge for a capital gains income tax maintain that it is unfair to say they support an income tax. In an appearance before the Tacoma City Club last November, Gov. Jay Inslee said: “The only ones talking about it are the Republicans.” In fact:

  • Sixteen of 24 Senate Democrats have sponsored or co-sponsored bills that would create an income tax.
  • Five out of five consecutive Democratic governors have endorsed an income tax or co-sponsored legislation to create one.
  • Seventy-nine of 89 income tax bills introduced since 1985 have been sponsored by Democrats.

Does the proposed capital gains income tax address the McCleary ruling? That’s up to the court, but the highly volatile tax doesn’t appear to meet its criteria. The court directed the Legislature to find a new way to finance basic education using “dependable and regular tax sources.”

McCleary and the income tax

Published on May 03, 2017
Published opinion pieces from members of the Majority Coalition Caucus draw the connections between McCleary and the long-running effort to impose an income tax.   Senate Majority Leader Mark Schoesler, in The (Spokane) Spokesman-Review, Jan. 8, 2017: Income tax is the real issue, not schools “This is the cleverest campaign for an income tax ever... Read More

A capital gains tax: First step toward a general income tax

Published on May 03, 2017
Whether a capital gains income tax is constitutional is one issue; whether it would end with that is another. Capital gains income tax revenue is highly volatile, as are other taxes aimed at the wealthy. When the economy goes into a downturn, lawmakers will be left to scramble for new sources of money, as has... Read More

Setting up a test case for an income tax

Published on May 03, 2017
Advocates of an income tax last year managed to collect signatures to place one proposal on the ballot in the city of Olympia. When voters rejected the idea, they took their campaign to the city of Seattle — where the council voted May 1 to direct staff to come up with a detailed proposal. Though... Read More

More resources regarding a state-level income tax

Published on May 02, 2017
Proposals for an income tax — even in the form of a narrowly based tax on capital gains income — are prompting dismay among those who recognize Washington’s unique economy is built around its unique tax structure. Consequences could be dramatic.   Matt McIlwain, Madrona Venture Capital, in Seattle Times, March 15, 2017: More taxation... Read More