An income tax for Washington? It’s closer than you think
Updated May 23, 2018
An income tax for Washington is a longtime dream for many in state politics. Washington is one of just seven states that does not impose its own income tax, and many see that as money on the table. If Washington had an income tax, state tax collections would rocket upward every year, faster than they do today, fueling the growth of state government programs and employment, and rewarding every special interest dependent on state spending.
But here’s the funny thing – the people who actually pay the taxes have never shared this dream. For more than 80 years, Washington voters have said no to an income tax every time they have been asked. The last time, in 2010, the rejection was so overwhelming – 64-36 percent – that advocates of higher taxes and spending realized at long last it was time to change their approach. Instead of proposing an income tax in a straightforward way, they are advocating small steps that would lead inexorably to the same result. Some admit an income tax is their goal. Others deny it, or avoid answering the question. Many conceal their support for an income tax by trying to call it something else.
Today the effort to impose an income tax on an unwilling state is stronger than ever. On this page you will find resources that describe how the state is being set up for an income tax, one step at a time.
What’s the matter with an income tax?
No matter how many times decision-makers and opinion leaders try telling the people of Washington that an income tax is good for them, the people just won’t buy it. Nine times an income tax has appeared on the ballot since 1934. Nine times voters have said no. What do the people know that income-tax advocates do not?
“It doesn’t matter what they say.” No matter what promises are made today, the people understand an income tax will never end with the rich. During the next downturn or fiscal emergency, with great regret, the taxes will be extended to the rest of us. In fact, dependence on a soak-the-rich tax increases the chance of a financial crisis.
It’s about the money – it’s not about tax reform. Income-tax advocates say an income tax would redistribute the tax burden, and reduce the share of taxes paid by those with low incomes. The real goal is to increase the size of the pie.
More money means less discipline. Every year the Legislature sharpens its pencil and considers its priorities – or at least it should. Washington’s lack of an income tax has forced greater fiscal discipline, reducing the temptation for budget-busting spending that cannot be sustained during economic downturns – a major problem for other states.
Our current tax system gives Washington a competitive advantage. Forty-three other states have income taxes, and that’s a good reason for Washington to avoid joining the club. Our unique tax code, developed over the last 83 years, gives Washington a competitive advantage over other states in attracting and retaining certain industries. It is one of the biggest reasons the central Puget Sound proved so attractive to the tech industry, which has become the engine of the region’s prosperity. Our booming economy demonstrates the truth of the adage, ‘If it ain’t broke, don’t fix it.’
Creating a test case
Any income tax in Washington state faces an enormous obstacle – the people of the state of Washington. They just keep voting no. So job number one for income-tax advocates 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.
Tax advocates are counting on today’s more-liberal and activist court to overturn that decision the next chance it gets. The current strategy is to convince a city to adopt a municipal income tax, even though such a tax is expressly prohibited by state law, and place the matter before the Supreme Court. Voters in the city of Olympia rejected one such proposal in November 2016, but the Seattle City Council adopted an income tax without voter approval in July 2017. Councilwoman Sally Bagshaw explained the council’s rationale: “Clearly we need a statewide income tax, but our Legislature isn’t going to do that,” she said. “If we get past the constitutional muster, other cities are going to jump on this.”
A King County judge ruled in November 2017 that the city’s effort was clearly illegal, but Seattle officials have appealed directly to the state Supreme Court. If this strategy is successful, and the court rules as tax advocates expect, the Legislature would be able to adopt an income tax without giving taxpayers a chance to weigh in.
Enacting an income tax in the Legislature
Many political activists, the governor, and members of the House and Senate Democratic caucuses are urging the Legislature to enact an income tax. But you wouldn’t know it from the way they talk. Often they claim they oppose an income tax but say they favor “progressive tax solutions.” Yet what they are talking about is a tax on capital gains income – an income tax with a narrow base. If that isn’t confusing enough, many insist this income tax is something else — an “excise tax.” At best this is a misuse of the term. The tax would not apply to gross sales but rather the profits on the sale of stocks and other financial assets – in other words, income. At worst this word game is an attempt to obscure support for an income tax.
But it really doesn’t matter what its supporters call it. What matters is how the tax functions – a point made time and again by rulings from the Washington Supreme Court during its earlier, less-activist period. Every other state that imposes a tax on capital gains regards it as a component of their state income tax. The federal government sees it that way, too. Semantics can’t change the fact that an income tax is an income tax.
Tax advocates insist the capital gains income tax would hurt only the wealthy and that it would never be expanded. But what happens if the Legislature passes this new income tax? In short order, we can expect the Legislature to broaden it into an income tax that affects all Washington taxpayers. There are two big reasons:
Volatile tax revenues will back the state into a corner. The experience of other states shows that if Washington imposes stiff taxes on the wealthy, it can count on financial trouble. In times of recession, few will cash in stock options or sell major assets, and tax collections will plummet. California has the highest capital gains income tax rate in the country, and its shortfall during the last recession was the nation’s largest. Financial woes for the state of Connecticut in 2017 were the direct result of its dependence on a capital gains income tax that is skewed toward the wealthy.
If a capital gains income tax is enacted in Washington, we can expect tax collections to 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.
A capital gains income tax sets up a test case for the Supreme Court. If the Legislature passes a capital gains income tax, a legal challenge is inevitable. This offers the clearest path for the Supreme Court to overturn its 1933 decision, and establish that an income tax can be passed by the Legislature without a vote of the people.
Technically speaking, the court’s 1933 decision held that income is property, subject to the same restrictions as other property taxes. The constitution requires that property be taxed at the same rate and imposes a 1 percent cap on property taxes. This is why the court ruled in 1933 that a graduated-rate income tax is unconstitutional. The most recent legislative proposals for a capital gains income tax impose a flat rate of 7 percent. So these proposals may meet the constitution’s “uniformity” requirement, but they violate the cap. This would give the court a “justiciable” issue and an opportunity to rule.
An income tax on capital gains would allow the court to revisit the question of whether an income tax is a tax on property. A reversal on this point would open the door to an income tax without a public vote.
Current status: In 2018, the House Democratic Caucus passed a budget that assumed passage of a capital gains income tax. Unfortunately, House Democratic leaders neglected to advance the tax bill to the House floor, denying their members an opportunity to take a recorded vote for an income tax. Ultimately the Legislature passed a budget that did not require the tax, though the issue remains a matter for debate in the 2019 session.
Strong support for an income tax among legislative Democrats
Legislative Democrats used to say that only Republicans are talking about an income tax. All through the early months of 2017, Democratic leaders insisted they opposed an income tax and claimed the issue had been invented by Republicans. We don’t hear this claim anymore, now that Seattle’s liberal city council is carrying the fight for an income tax to the Supreme Court. Not a single Republican is among them. But this claim was never true. An income tax has always been a goal for legislative Democrats. In fact, Gov. Jay Inslee proposed an income tax on capital gains in 2014 and 2016, and House Democratic budget proposals assumed passage of a capital gains income tax in 2015, 2017 and 2018.
Fun fact: In 2017, Senate Republicans gave Democrats a chance to demonstrate they truly oppose an income tax, as they claim. Sen. Phil Fortunato, R-Auburn, introduced a constitutional amendment that would have banned state and local income taxes for all time. All Senate Republicans voted for it, but most Democrats voted against it. Senate Joint Resolution 8204 failed 27-22 because a two-thirds majority was required.
Addressing the tax-fairness argument
When advocates of higher taxes and spending argue for an income tax, elaborate claims of social justice are sure to follow. They say our state’s tax system is “unfair,” and many accept this claim as truth – without questioning the curious notions behind it. In fact, tax advocates are arguing for a system that is unequal, and allows government to single out certain groups of taxpayers for punishing tax rates.
This crusade for a graduated-rate income tax runs counter to a fundamental principle of our state constitution – equal taxation for everyone, rich and poor, regardless of social status or political influence. All classes of taxpayers pay the same rate. This enlightened vision of fairness ensures Washington taxes are fair to every individual. Tax advocates have a different theory. They say Washington’s tax system is “unfair” to large classes of people, because people of lower incomes pay a higher percentage of their income in taxes than people at the top of the scale. They say the solution is to create an unequal system that taxes some people more than others – in other words, a graduated-rate income tax.
Like most arguments based in theory, this one falls apart when it is applied to the real world. First it assumes there is a significant problem – yet the distribution of Washington’s tax burden is pretty much in line with the national average, even compared to states that have income taxes. It ignores the fact that everyone benefits from the thriving economy our tax code has created. If the burden on the poor is a genuine concern, why do tax advocates also support a carbon tax? This carbon tax, another current favorite, is one of the most regressive taxes ever proposed in the state of Washington. The goal is to increase the price of gasoline and electricity, to force people to change their behavior, and it would hurt hardest the working families who can least afford it. In the campaign for higher taxes, tax relief for the poor is a slogan and not much more.
“Most regressive in the nation?” Tax advocates frequently cite the January 2015 report of the Institute on Taxation and Economic Policy, which calls Washington’s tax system the most regressive in the nation. This report makes a circular argument. It gives the worst scores to states that do not have an income tax. It gives the best scores to the ones that do. But the rankings are meaningless because the study does not demonstrate actual harm – or any other problem for that matter.
Washington’s tax burden mirrors national norms. The ITEP report actually shows Washington’s unique tax system distributes the tax burden pretty much the same way as other states. Differences from national averages are so small as to be insignificant – about 1 percent, depending on the level of income. An income tax might change the distribution slightly, but most people would not notice a difference.
A. The vast majority of Washington taxpayers, with income 40 to 60 percent of the average, pay 10.1 percent of their income in taxes, versus 9.4 percent nationally.
B. Those in the 60-to-80 percent bracket pay 8.5 percent, versus 8.7 percent nationally.
C. Even Washington households making an average $30,000 a year (the lowest 20 to 40 percent of households in Washington) pay 11.7 percent of their income in taxes, vs. 9.9 percent nationally.
D. On the upper end, those in the 80-95 percent bracket pay 6.6 percent in taxes, vs. 7.7 percent nationally.
Other factors responsible for regressivity claim. Washington’s tax system is based on three big taxes – the sales tax, property taxes, and the state’s unique gross-profits tax on business (the business and occupations tax). But these taxes are not the reason Washington ranks lower than other non-income-tax states in the ITEP study. It’s Washington’s other taxes that push us to the bottom of the rankings – our high gas tax, cigarette tax, alcohol and cell phone taxes. No income tax proposal has offered reductions in these taxes, nor are they likely to do so.
The argument fails to consider the whole picture. Lower-income residents benefit from the general prosperity that is the result of our tax code. The stronger the economy, the more jobs that are created. In Seattle, the booming tech industry has lifted the fortunes of the entire region. Economists say that for every tech job, five other jobs have been created in the local economy. We can see the evidence with our own eyes, as the general prosperity of the central Puget Sound area fuels new construction and business growth.
Washington’s system is fair – because it taxes everyone equally. The framers of the Washington constitution had a different vision of fairness. They said all classes of taxpayers should be taxed at the same rate. Equal taxation for everyone is the fairest way. The Legislature should not be able to rig the system to favor one group over another. Its decisions will always be subjective, and will be influenced by special-interest groups. The framers were wise. So are Washington voters.
Voters should decide whether Washington’s system is fair. And they have, nine times since 1934. They have rejected an income tax every time it has appeared on the ballot. If the people think an income tax would be more fair, they have had ample opportunity to vote for one. Decision-makers can trust the people to make the right choice in the future, and should respect their opinion.