While our state is a bastion of progressive politics and liberal activism (for better or worse), it also has the most regressive tax system in the country. In other words, poor people in Washington pay a disproportionate amount of taxes.
Last year, a report from the Institute on Taxation and Economic Policy determined that the lowest 20 percent of earners pay 17.8 percent of their earnings in local and state taxes, while the top earners pay 3 percent. That is because Washington does not have a personal income tax or a capital gains tax and is heavily reliant upon sales tax to generate revenue.
As the report says: “Washington has the most unfair state and local tax system in the country. Incomes are more unequal in Washington after state and local taxes are collected than before.”
This is not revelatory. Nor is it self-defeating. Washington’s economy has given rise to Amazon, Microsoft, Starbucks and other billionaire-making ventures. Heck, the two richest people in the world live here, and they achieved that status thanks to companies born and nurtured in the state.
Plus, there is no evident desire to change the system. In 2010, a statewide ballot measure that would have placed an income tax on only extremely high-earners was crushed by 65 percent of the electorate. “Why mess with a good thing,” voters seemed to be saying.
But as the Legislature begins hammering out a state operating budget for the 2019-21 biennium, it is reasonable to ask whether Washington’s tax system really is a good thing. That is because Democrats in Olympia again have come forward with a capital gains tax proposal, and conservatives and libertarians throughout the state again have set up their defenses.
The first line of defense is to argue that a capital gains tax is an income tax in sheep’s clothing. This is an important distinction because income tax is not only nonexistent in Washington, but is unconstitutional. That is what the state Supreme Court ruled in 1933, after voters had approved a state income tax to help those suffering from the Great Depression. At the same time, the court approved a Business & Occupation Tax, writing, “It may be that we have, in some prior case, used language not wholly consistent with our present views. This is an emergency measure … it will be but temporary.”
As anybody who pays the B&O tax can attest, there is no such thing as a “temporary” tax. The claws of government are not easily retracted once they sink into the fabric.
The aversion of Washingtonians to an income tax undoubtedly can be traced to the permanence that is inherent with a “temporary” tax. The same can be said of Oregonians and a sales tax.
But while opponents of a capital gains tax in this state have a good argument regarding its true nature as an income tax and a good argument that an income tax is unconstitutional, it is difficult to believe that the state’s tax system is not in need of improvement. When Washington’s lowest earners spend 13.3 percent of their income on sales and excise tax and the highest earners spend 1.7 percent — according to the Institute on Taxation and Economic Policy — something is out of whack.
There are some roadblocks to fixing that. One is the misnomer that correlation is the same as causation. California is assessed as having the most equitable tax system in the country, and its economy is routinely ranked among the best. There is nothing magical about Washington taxes that boost the economy.
Another roadblock is the fact that Democrats in Olympia are pursuing a capital gains tax while trying to sell the notion that the state needs more revenue. It’s a hard sell. Instead, a capital gains tax should be viewed as simply the right thing to do — taxing people’s investments rather than their sweat — and it should be accompanied by cuts elsewhere to make it budget neutral.
That, of course, would still leave the constitutional questions. But nobody said solving a paradox is easy.
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