Another study points out Washington's terrible tax system. But this supposedly blue state is in no hurry to change things.
Washington is at the top of “the terrible 10” states with the most regressive state and local tax systems, according to a report released this month by the Institute on Taxation and Economic Policy.
“These states ask far more of their lower- and middle-income residents than of their wealthiest taxpayers,” according to the institute.
This isn’t new news. My colleague Gene Balk wrote about the subject in April, highlighting a report from the Seattle-based Economic Opportunity Institute. That report found Washington taxation hardest on the poor, with Seattle the worst offender.
It’s a striking paradox for a state that is known for its progressive politics and liberal activism.
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Yet this is the outcome of a wealthy state with no income tax, with property taxes inflated by the real-estate boom and sales taxes disproportionately falling on lower earners. Washington is one of seven states without a personal income tax.
One important question is how it affects the economy.
Washington, and especially metropolitan Seattle, are consistently ranked among the most economically vibrant places in the country.
In addition to the Big Tech headquarters of Amazon and Microsoft, we benefit from high-end jobs and research centers from Silicon Valley, plus “legacy” sectors and companies ranging from Boeing and aerospace to Starbucks, Nordstrom, Paccar, Costco, major ports, logistics centers and railroad operations.
Median household income in Washington was $62,848 in 2016, compared with $55,342 nationally. In Seattle, it was $74,458.
According to the Hamilton Project of the Brookings Institution, median earnings in the state are higher than the national average adjusted for cost of living and taxes. The same is true for the Seattle-Tacoma-Bellevue metropolitan area.
But correlation does not imply causation, as every social science student knows.
For example, the Institute on Taxation and Economic Policy report singles out three populous states — California, Minnesota and New Jersey — that have more equitable tax structures. They also have strong, diverse economies and high incomes.
“To varying degrees, these states have used their tax codes to promote opportunity and lessen inequality — or at the very least, not make it worse,” the report says.
Each one has a personal income tax with the highest rates on the wealthiest (i.e. progressive).
With no income tax here, the lowest 20 percent of earners pay 17.8 percent of their earnings in local and state taxes. That compares with 3 percent paid by the wealthiest 1 percent.
Washington gets props in only two areas: No sales tax on groceries and levying an estate tax. But it’s dinged for imposing a gross receipts tax instead of a corporate income tax; high reliance on sales tax; comparatively high overall tax rates; lack of a “circuit breaker” on property taxes to help lower-income people; and no funding for an earned income tax credit. Plus there’s no income tax.
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.”
Some might argue that having no personal income tax gives Washington an economic advantage. Would Jeff Bezos or Bill Gates and Paul Allen have come here to grow their companies if the state levied one? It’s impossible to prove that hypothetical.
Alaska, Florida, Nevada, South Dakota, Texas and Wyoming also lack a personal income tax. New Hampshire and Tennessee don’t tax wages and salaries. But none provide strong evidence that this gives them a competitive advantage (and most are members of the “terrible 10”).
Texas, the closest to Washington as a diverse economic powerhouse, has benefited from decades of oil revenue, outsized federal investments and massive population growth. Those benefits add up to big revenue, at least partly offsetting lack of an income tax. Yet the Lone Star State is hard on the poor.
Meanwhile, a 2014 study by the Center on Budget and Policy Priorities found that state taxes had little effect on interstate moves. It’s doubtful if Washington would see a sudden brain drain if a state income tax were imposed.
Even so, Washingtonians have repeatedly voted down initiatives to levy such a tax. A 2010 measure to tax only the top 1 percent was defeated soundly.
Why mess with “success,” voters seem to be saying.
But “success” means a distorted state tax code. For example, Washington is more dependent on charges for services than most states. The Business and Occupation tax, unique to Washington, is highly complex and vulnerable to recessions. It’s the legacy of a state economy with much more manufacturing than today (and aerospace and Boeing get enormous tax breaks).
The system also imposes what we might call an opportunity tax on low-income people by placing on them such a relatively high burden, thus hurting their upward mobility. I can’t prove this but it’s worth study.
Seattle’s efforts, such as the misbegotten jobs tax, might seem noble on the surface. But that particular tax would have affected hiring at nearly 600 companies in the city. No wonder once people understood the ramifications, it became so unpopular that City Council quickly repealed it. No, only a progressive, statewide personal income tax would do.
Still, change seems unlikely. So expect Washington to rank “terrible” by at least one metric in the years to come.