Myths and Facts About An Income Tax in Washington State
Pro vs. anti-tax hysteria has poisoned the debate over an income tax. Here is a list of the most common myths about the income tax in Washington state, debunked for those who feel like having a real argument instead of a shouting match.
Myth: The income tax is illegal In Washington state
Fact: There is no specific prohibition against an income tax in Washington state’s constitution
The Washington state constitution prohibits taxing property in unequal ways. From 1932 to the 1951, the Washington State Supreme Court ruled that income is a form of property, and therefore ruled that graduated personal and corporate income tax proposals violated the state’s constitution.
But the last time that the state Supreme Court ruled the corporate income tax unconstitutional in Washington was 59 years ago, and the last time it ruled a personal income tax unconstitutional was 74 years ago. No one knows for sure how the Court would rule today. But three generations of new laws and court precedents provide some basis for optimism for income tax advocates.
According to the Washington state Tax Structure Committee’s report from 2002, “there is a reasonable likelihood that if the Washington State Legislature or voters enacted an income tax today, Washington’s courts would approach the issue with a fresh view and might very well decide the matter in a manner consistent with the dominant view in other states with similar constitutional provisions.”
For more information, see: “Appendix B, Washington State Tax Structure Committee Study,” 2002.
Myth: Current Washington state voters are deeply opposed to the income tax
Fact: It’s been 30 years since Washington voters had the chance to vote on an income tax, and polling over the last 10 years suggests 47-53 percent support for a high-earners income tax prior to any campaign on its behalf.
Washington state voters supported an income tax in 1932, but voted against it in 1934, 1936, 1938, 1942, 1970, and 1973. Voters also rejected corporate income tax proposals in 1975 and 1982.
But it would be a logical fallacy to compare voting patterns from 30-40 years ago with contemporary voting patterns. Washington state has changed dramatically since 1982, and its population has grown from a little over 4 million to over 6.5 million, with many of those new residents migrating from states that have income taxes.
In 2002, Evans McDonough found that 51 percent of Washington state voters would support an income tax on people making over $100,000 per year.
In 2009 a group of liberal tax advocates found that the income tax polled 47 percent (7 points higher than a sales tax increase), even though there has not been an organized campaign for an income tax in Washington state in 40 years, and neither political party has made it an issue during elections since the 1980s.
And just yesterday, SurveyUSA polled Washington state voters on the idea of 4.5 percent tax on the incomes of those who make more than $200,000, and found 53 percent saying it would be a “good idea.”
For more information, see: Washington state databook on population changes; citation of Evans McDonough poll; polling data cited on Horse’s Ass; SurveyUSA poll.
Myth: A tax on personal income would hurt most Washington state residents
Fact: Every proposal for a personal income tax during the last 40 years has been accompanied by a tax relief plan for the majority of Washington residents
Both of the current income tax proposals in play—the state Senate’s current proposal for an income tax (SB 6250) and Initiative 1070— only tax individuals who make more than $200,000 per year, and include significant tax relief for other Washington state residents.
SB 6250 would reduce the state’s general sales tax by one percent. This doesn’t sound like much, but for residents who spend more than $10,000 on taxable goods and services, that’s $100+ per year that stays in their pockets. It would also encourage consumer spending and allow Washington state business to provide more competitive pricing with out-of-state businesses.
I-1070’s effects would benefit fewer poor people, but would have a greater benefit for middle class residents of Washington state. It would provide a 20 percent decrease in the property tax.
An income tax would make taxation more “fair,” or less “regressive.” Washington state has the most regressive tax system in the country. Wealthy individuals currently pay 3 percent of their income in taxes to Washington state government, while lower-middle income individuals pay 11 percent and poor individuals pay 18 percent. An income tax, coupled with tax relief, would bring greater equivalency.
For more information, see: the Institute on Taxation and Economic Policy’s report, “Washington’s Tax System is the Most Regressive in the Nation.”
Myth: A tax on corporate income would drive business out of Washington state
Fact: 43 out of 50 U.S. states tax corporate income, and taxing corporate profits has less adverse impact on business than Washington state’s current tax of gross revenue
Taxing corporate income—i.e. business profits—is more fair than taxing gross revenue because many businesses have high revenue but also have high expenses and low profits. The difficulty with taxing corporate income is that many if not most corporations will cheat, or grossly exaggerate their expenses, in order to reduce their tax burden. But by learning from the experience of 86 percent of the states (including South Carolina, the state Boeing recently decided to locate thousands of jobs in, despite its having an income tax), Washington state could address this problem effectively.
I-1070 would eliminate the B&O tax on the smallest 85 percent of all businesses in the state, thereby making it easier to start or run a small business.
Myth: The income tax is the cause of the state of California’s budget crisis
Fact: The budget crisis in California is caused by political gridlock: voters in California want the state to spend money on all sorts of services but don’t want to pay for them.
California requires that tax increases at the local and state level be passed by a 2/3 vote. This super-majority requirement makes it exceptionally difficult to raise revenue. At the same time, more than 50 percent of California’s voters support public funding for schools, social services, and environmental protection. The contradictions in these positions were papered over the last 30 years by relying upon California’s enormous real estate bubble to subsidize the state’s spending. But the bursting of that bubble in 2008 has made it impossible for California to stay the course, and its voters are deeply divided over how to continue, leaving the state completely gridlocked.
For more information, see Robert Cruickshank’s op-ed for the Newswire, “View from California: Why Washington State Should Repeal I-960.“
Myth: An income tax would solve Washington state’s budget crisis
Fact: Most other states in the country are going through a similar crisis to Washington’s, and most of those states have income taxes
The structural crisis currently facing most state governments in the United States is not an effect of whether they have an income tax.
However, an income tax would make Washington state less dependent upon consumer demand—particularly home and car purchases— for its revenue. About 65 percent of Washington state’s revenue comes from the sales tax. Supplementing that with an income tax would make Washington state’s revenue stream less variable, but not enough to avoid today’s economic crisis.
For more information about the tax systems of other states as they compare to Washington state’s, see: “Washington’s Tax System”, by the state Department of Revenue.
So if an income tax won’t solve the state’s budget crisis, but would provide tax relief to most Washington residents, what is the income tax debate all about?
It’s mainly about trust of government. Many Washington state residents, past and present, distrust government so much that they believe that an income tax at first applied to the wealthy will inevitably be applied to middle class, working class, and poor people.
Are enough people so distrustful of government that they would sacrifice tax relief for themselves in the present to prevent hypothetical taxation in the future? Possibly. We won’t know for sure until the issue goes to the ballot.
Comments
By Kathy on March 6th, 2010 at 6:24 pm
“Are enough people so distrustful of government that they would sacrifice tax relief for themselves in the present to prevent hypothetical taxation in the future? Possibly. We won’t know for sure until the issue goes to the ballot.” ANSWER: YES, YES,YES,YES, YES!!!!!!!!! This state government can NOT be trusted. Even if this would provide tax relief to me based on my current income level, I would hate to think that those working hard and making more money than me would have to pull my weight. A state income tax would be highly unfair. It is insane. Cut the budget, don’t increase taxes. It is simple in my opinion!
I think this guy was smoking something when he wrote these myths ~ he must be living in a myth fairlyland.
By Trevor Griffey on March 6th, 2010 at 6:52 pm
Kathy: by fair, I didn’t mean “better.” I meant that an income tax on high earners would reduce the regressive quality of the current tax system, whereby the poorest pay 17 percent of their income in taxes and the wealthiest pay 3 percent. Budget cuts won’t reduce the regressive nature of Washington’s tax system.
Whether we SHOULD reduce the regressive nature of the tax system is a question of values that voters can and should debate. But it is a fact, and not an opinion, that Washington has the most regressive tax system in the country.
By Michelle on March 6th, 2010 at 7:29 pm
@Kathy: First of all, I’d like to ask you this: what part of the budget you think should be cut?
Secondly, what exactly IS fair about Washington’s regressive tax system?
Lastly, how sad is it that someone like yourself who would benefit from an income tax, “hate” the idea of wealthier individuals paying a little bit more of their share?
Shame on you for thinking that a person who makes more money does so by “working harder”. It is this kind of toxic mentality that has put this country where it is today.
By Matt on March 7th, 2010 at 12:07 pm
This is hilarious. Thank you Trevor, for labeling Washington state’s current tax structure as “regressive,” suggesting your progressive-Marxist tendencies. Simple math: In a state where there exists only an (extremely high) sales tax, tax revenues per-capita are based on rates of consumption. This is essentially PERFECTLY fair. The more you buy, the more you use and consume, the more you are taxed. However, this causes certain calculations to seem unfair: namely the tax as a share of income. Those who make more spend less of a share of their income on consumables. This system is widely regarded as the least “visible” to the market at large. An income tax, however, effectively punishes growth and success. What do you think those affluent are spending their “excess” funds on? Their personal drive for even greater return diverts the funds into business costs, and investments in every kind. These aren’t just physical or technological capital investments, but human capital as well (aka JOBS).
Its always nice to gang up on the successful guy, you never feel the pinch. What you effectively do is tell someone else that you want something that they must pay for or go to jail. If the government weren’t the culprit, this would be known as STEALING. However, as our teachers so eloquently quote: “From each according to his ability, to each according to his need.”
I don’t understand how people can be so obtuse as to the reason for the “jobless recovery.” When investors are looking at a doubling of energy costs, oppressive healthcare mandates, and a 40% increase in taxes, they see future returns less likely, or at least likely at a reduced rate. Investments in physical or technological capital can be made incrementally, and usually with a higher stability of return. Investing in people, however, cannot. The cost of initial bureaucracy, training, and seasoning of personnel is very expensive. Except in the case of employee replacement, this is usually part of corporate. business, or manufacturing expansion requiring further investments in other areas.
State tax revenues will rise again without tax hikes due to a return of consumption. What you need is to spur job creation. The self interest (or greed if you prefer) of the (evil) rich WILL lead to growth of business and jobs.
And before you accuse me of being a greedy corporate hack, I am a recent (2009) grad of Washington State University, with a BS in Engineering. I am new to the job force, and rely on investments for my job security. I fully intend to become just another rich guy who (God willing) will employ hundreds of people. I DO NOT indent on doing so in Washington State. You will have an income tax by 2012.
By Andy on March 7th, 2010 at 12:49 pm
Don’t let the door hit you on your way out, Matt. A flat sales tax is regressive. Maybe you don’t know what that means.
http://en.wikipedia.org/wiki/Regressive_tax
By Trevor Griffey on March 7th, 2010 at 1:02 pm
Matt: I think you might be confused. When I use the term “regressive”, I’m using a value-neutral descriptor from economics to describe a tax system in which low-income people pay a higher percentage of their income in taxes than high-income people do. Progressive taxation, for instance, increases the rate of taxation in relation to one’s earnings. Flat taxes like the sales tax are comparatively less progressive, which is why people refer to them as regressive. Economists and policy analysts use these words descriptively, not prescriptively.
But I understand that people also use the words “progressive” and “regressive” outside of economic policy contexts, as positive and negative value judgments about whether or not something is supposedly “backward.” That’s not how I was writing.
Thanks for your points. It’s true that this debate isn’t just a debate over government trust as I wrote above, but also over whether government spending is as productive as private investment, and whether we are all better off by having the wealthy pay less of their income in taxes than those less well-off.
By Debra Morrison on March 7th, 2010 at 3:39 pm
Trevor, thanks for a factual piece and factual responses. Thanks also for acknowledging the confusing use of words that can be used either as economic terms or judgments of the supposed “rightness or wrongness” of an idea. And for enlarging your statement about what the crux of the debate really is. I’ll be posting this at work to help my co-workers understand the debate better.
By Steve on March 7th, 2010 at 3:59 pm
The decision in your first point that income is property by the Washington Supreme court is outrageous. The Supreme court just overruled the intent of the constitution.
By John on March 8th, 2010 at 7:28 am
First of all it would be easier to count the number of people that trust the government since that number would be lower anyway. The current government is driven by nothing more then greed and power.
I have one question. when they talk about cuts in services why is education always at the top? It is as though they say we can get out of debt but will have to cut EDUCATION. Oh no “I guess the debt is okay then.” Basically education is the only option they speak about to get everyone onboard. We are manipulated by the government.
Why don’t they cut the government? They are all overpaid. They play with our money like it is an cornacopia of income. When they talk about raising taxes they say revenue. Cut back on government aid. Cut back on military weaponry. Our old stuff kills just as good. I think if a representative doesn’t represent they should step down. I think if the government pention does poorly it should not be made up in taxes. If my retirement does poorly I am not backed by taxes. So much wasted money being spent such as war on drugs give me a fricken break and why are we paying out of our pocket to have our troops all over the world?
Bottom line is the government looks at us peasants as revenue. You want to live you give us money.
By Jennifer on March 8th, 2010 at 8:34 am
You say that no political party has made the income tax an issue since the 1980s, but wasn’t Ron Sims’s platform in the 2004 gubernatorial primary to abolish the state sales tax and institute a graduated income tax? I suppose Ron Sims is not a political party.
What I would like to see is the institution of a graduated income tax combined with some sort of measure to make it much more difficult to raise the sales tax.
Last week I heard that the WA legislature was discussing taking up an income tax. Has anything come of this?
John, you raise some interesting points. You’re absolutely right that if the federal government didn’t spend so much money bailing out big banks and occupying countries, it could help out the states, whose spending *is* largely on really essential services such as education and health care. But the federal government is in large part controlled by multinational corporations who stand to make big bucks off of invasions, occupations, and financial speculation (not to mention for-profit health care). I don’t trust the government either, but I trust corporations even less — to the extent that the two are distinguishable! This is why I support taxing the rich so that the poor and middle class can eat, get a place to live, go to the dentist, and gosh maybe even college without going bankrupt. And I think no one — including state employees, but everyone else as well — should lose their retirement income because of some rich greedy speculators on Wall Street!
By Rob on March 8th, 2010 at 8:57 am
There is no such thing as regressive or progressive taxes. All taxes are repressive – all of them.
Taxes inherently repress people who are forced to pay them. Taxes reduce income. So a better way to tax? That is simple.
1. Hide the taxes so people don’t know they are paying them. This is done to perfection by government in every product we buy not only with sales tax which is the most visible but all the added costs to business with not only the B&O taxes but every regulation that causes the product to become more expensive from start to finish. In the end it is the people that pay the tax period.
2. Create an evil group of people to tax that has no voice because of being a minority. Currently that is smokers and consumers of alcohol. Who is next when that has reached the maximum?
3. Cry about children. It is always the poor children and elderly but that is Never the truth.
4. If it isn’t taxed yet – tax it.
This is Your government at work doing what it does. Yes, even asking more than God Himself who only asked for 10% of what He already gives us – but now government is god in its own eyes.
wake up people and learn from history, you don’t have to read that far back even in this century to see the result of this fallacy.
By Brita Butler-Wall on March 8th, 2010 at 9:52 am
Trevor,
Thanks for laying out the myths and facts thoughtfully. I think most people could live comfortably on $200K a year so find income tax on the well-to-do makes sense. We get what we pay for. I’d like to see clean air and water, good schools, good healthcare, affordable housing and decent jobs–some of the hallmarks of a civilized society. If the other westernized nations can do this, we can, too.
By Mike Reitz on March 8th, 2010 at 10:55 am
I addressed the argument that the law has changed and Washington courts would approach an income tax proposal with a fresh view. I don’t think it’s that clean-cut. http://www.effwa.org/files/pdf/2009%20PH%209%20-%20Income%20Tax%20Constitutional%20Hurdles.pdf
By Keith Scott on March 8th, 2010 at 1:28 pm
The problem is that state spending is rising at a faster rate than growth. The state consumes about 25% of the state GDP now compared to about 20% since 1992. This in part is due to the slow growth of the state and national economy. We are not likely to resolve this imbalance with more taxes while still spending like the economy is humming.
With respect to the comment about CA problems, their tax system is unstable for two reasons: It relies on unstable forms of revenue (income taxes) and spends like a college student on his parents money. Meaning, CA has no spending discipline. Ditto the federal government.
If Washington enacts an income tax and does not raise it later and often, it will be the first state to ever have done so.
By Matt on March 8th, 2010 at 8:28 pm
Trevor, I understand that economists use the term “progressive” income tax. And yes, it is a dictionary definition, since it was coined during the Wilson administration back in 1913 to describe a tax theory put forward by “Progressives”. The two are linked. A “regressive” therefore became the antonym. ‘Whoever controls the language, controls the debate.” The problem with the term “Progressive” is that it implies a destination, or an end state. What is the end state?
Andy, make sure you say the same to Boeing. They are currently grandfathering out of Washington. And with Microsoft’s new and future facilities in Texas and Arizona, you may see them go as well.
By Mark on March 9th, 2010 at 5:25 pm
I have always found it interesting at those that are so willing to spend that, that is not theirs. Who decides what wealthy is? Why is 200K considered wealthy? Someone living in a rural area making 100K is probably better off than the person living downtown Seattle making 250K. History has proven that tax hikes do not fix budget issues. What works is spending cuts. Why not start there? I agree with the above responder about why is education the first to be talked about in cuts.. Why not look at the low hanging fruit for say. Combine service departments, look at getting rid of some of these ridiculous Union Deals and pay people on merit not longevity. Pay elected officials on there ability to actually get things done on time. But we always seem to look at the easy… Tax the rich. Well if the rich have less to spend the small Business closes.. Increased unemployment, increased demand on state service, increased budget problems….
I have enjoyed the reading, but lets get serious folks, an income tax will not fix anything and mark my words it will progress to all income levels over time. We need to concentrate on cuts and fixing what is broke before we keep throwing good money after bad decisions of the past. thanks