A city income tax would face legal challenges and open the economy to risk. But it might push wider tax reform where it’s needed most, at the state level.
At a time when the Trump administration is promising what it calls the biggest tax cut in history, Seattle’s two most prominent candidates for mayor are pushing for a citywide income tax here.
Both Mayor Ed Murray and his predecessor and now challenger Mike McGinn have endorsed such a tax on the wealthy.
Some organizations such as the Transit Riders Union also want a city income tax to “Trump Proof Seattle” — cushion it against the severe, anti-city cuts in the administration’s proposed budget.
The details are important and, so far, unclear. Who would be considered “wealthy” or “high-end”? Would the tax be assessed on city residents or also people who commute to work here? Would Seattle in exchange ease its portion of the state’s regressive sales tax? How would the revenue be spent?
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And the important test: Could Seattle get it past the courts?
In 1932, Washingtonians overwhelmingly approved an income tax. But a year later, the state Supreme Court found the tax unconstitutional. The grounds of the finding remain controversial but it would be a big roadblock to Seattle’s making an income tax stick.
Get all that squared away, and a question remains. How would a personal income tax affect the Seattle economy?
This has been a time of historic prosperity for the city. Times have been so good for the overall economy that neither the mayor nor the City Council has had the worry common to most American cities: attracting jobs and capital investment.
As a result, city leaders have had the running room to embark on a host of left-leaning policies, including the $15 minimum wage, mandatory paid sick leave and a number of restrictions on landlords. All the while, the economy has kept expanding.
At the same time, Seattle’s homeless population has increased despite (or because of) heavy spending to “solve” it. Inequality and lack of housing affordability are especially hot issues, too.
So why not an income tax?
Veteran Seattle economist Dick Conway, a longtime critic of Washington’s lack of a state income tax, said he “heartily” supports a beginning in Seattle, where progressive voters would be more likely to support it.
“We’re shooting ourselves in the foot with our current tax structure,” he told me this past week. “This could be opening the door for an income tax more broadly.”
He sees little danger to the economy. The rates would likely not be very high, and if applied to the highest earners, “they have that much in their wallet.”
That an income tax would cause wealthy people to leave “has always been a threat,” Conway said. “But call them on it. This wouldn’t chase people out of here. Where are they going to go?”
Indeed, a Stanford University study last year found that few millionaires move from high-tax to low-tax states.
On the other hand, the evidence on city income taxes is mixed.
The classic examples come from troubled cities in the Midwest and Northeast, starting in the 1960s. As white flight and suburbanization eroded cities’ tax bases, they imposed or raised income taxes. That increased the loss of jobs, which relocated to lower-tax suburbs in the same metropolitan area.
This has reversed somewhat with the revival of many cities. Also, New York City benefited when New Jersey and Connecticut imposed tax rates that ended their competitive advantage. Jobs and people went back to the Big Apple.
Robert Inman, a professor at the Wharton School at the University of Pennsylvania who has extensively studied urban taxes, laid out a couple of guidelines for any city considering an income tax.
“A commuter tax must be avoided,” he told me. “It’s terrible.” Why? Because suburbanites working in the city would have an incentive to look for jobs in suburbs without income taxes, and employers would be tempted to relocate there, too.
“It can have devastating consequences for the job base of a city,” Inman said.
Also, “Spend the money in a way that the residents being taxed want to see. Spend it on things such as police and schools. They’ll say, ‘I’ll pay taxes if I get services in return.’ ”
Of course, the danger to Seattle’s jobs base might be minimal if the income tax were small. But coming atop continuing requests for more taxes, when will the economy suffer? Maybe never — such a dynamic works in thriving San Francisco. Other cities offer more cautionary experiences.
Yet the economics of taxes aren’t simple. Seattle’s situation is a lens that magnifies the underlying problem: lack of a state income tax.
Conway considers Washington’s state and local tax system dysfunctional even in good times. It is inadequate even to fund education, fluctuates wildly with the business cycle, and is among the most unfair in the nation. The heavy reliance on sales taxes means lower-income people pay more proportionately than those at higher incomes.
Conway also observes, rightly, that at the state level there’s no correlation between a state income tax and job creation. “High-tax” California has seen some of the best performance in the nation, while low-tax Kansas is an economic and fiscal disaster.
Oregon has an income tax (but no business and occupancy tax), yet its economy has grown at roughly the same rate as Washington’s.
“The fact of the matter is that for years, relative to personal income, Washington state and local governments have spent less than the average of all other states,” according to Conway. “This is because, relative to personal income, Washington state and local governments have collected less in taxes than the average of all other states. Little wonder we cannot adequately fund basic education.”
Unfortunately, Washington residents show no inclination to change the status quo. Repeated referendums for a personal income tax have been defeated.
Maybe Seattle could open the door to reform. But going it alone carries risks, too.