Let's put a state income tax back on the table
And let's debate that canard that our lack of an income tax is a stimulus for business.
These are tough times for those who search for hard evidence to support public policy, especially fiscal policy. As anyone who studies economic reports and looks for reliable numbers knows, the challenge is to separate fact from unsubstantiated opinion and, too often, outright fiction.
This has been a long-standing concern of those who follow the civic debate. A comment sometimes attributed to Daniel Patrick Moynihan, sums up the problem: “Everyone is entitled to their own opinions, but they are not entitled to their own facts.” President Obama invoked it when he met with congressional leaders in 2010 to go over the costs of health care reform.
But it isn’t necessary to engage in the national level policy debates to experience the problem. During the 2010 state Initiative 1098 campaign, a Seattle Times editorial made the strong assertion, that “I-1098 also takes away the most important tax-based advantage Washington has in attracting business and jobs.” This supplemented the slippery slope argument: The Legislature could and would extend the initiative’s income tax on high earners to everyone. The job loss claim was echoed in another Times editorial that cited reasons some in Seattle’s biotech opposed I-1098. It quoted the CEO of biotech Dendreon that “having no state income tax is an attractive (recruiting) tool for us.”
As an aside, there are other important factors in addition to tax burden, just one cost of doing business, that dictate a company’s success. Dendreon for example has hit a rough patch and has had to scale back its Seattle footprint. Its drug Provenge, approved for prostate cancer therapy, has had disappointing sales.
The Times again invoked the job loss argument when it recently endorsed Rob McKenna for governor, inferring that Jay Inslee is a closet taxer who might turn to an income tax to fund basic education. According to the Times editorial writers, “Some suggest a state income tax is the answer, but that would remove one of the state’s competitive advantages, and scare away investment in technology companies.” It’s unlikely that the Times newsroom, which fact-checks candidate statements, will do the same for its editorial board. So this shouldn’t be the end of discussion.
Although it’s plausible that some investors would be put off by a state income tax, to what extent? Would potential investors in Washington’s growing technology sector, whether in-state or out-of-state residents, look elsewhere for profitable opportunities? Would companies seeking to locate or expand here instead settle in other states to avoid a corporate income tax? Would highly skilled and compensated scientists choose to take jobs in other states to avoid paying a state personal income tax?
Regardless of how one views a state income tax, these are questions that deserve an answer — to the extent they can be answered with some assurance. The reason is that the income tax may again be on the table for discussion as we — citizens, legislators, and the next governor, whether Inslee or McKenna — confront the need to find several billion in biennial budget funds to meet the state Supreme Court’s K-12 education mandate. And, as some have suggested, to roll back college tuition increases.
There are also other important issues that should be included in any discussion of a revision of the state’s tax system. These are the principles of taxation — stability, equity, economic vitality — in addition to revenue adequacy. The Washington State Tax Structure Study Committee, chaired by William Gates, Sr., addressed these principles and several income tax options in its 2002 report. It also looked into other key elements such as the ease of reporting and costs to administer the tax.
Then there are side benefits to take into account such as federal tax deductibility, which for the sales tax has proven problematic politically. And, just as the federal income tax allows credits for economic losses, so can a state income tax.
Even if more revenue isn’t the goal, an income tax can be an option in the context of tax system restructuring that is revenue neutral. A corporate income tax could replace the B & O tax dollar-for-dollar and eliminate numerous problematic business tax breaks that have been adopted to soften the impact of the B & O's tax on gross income.
But whatever the goal, it’s essential that the best facts be applied. That’s difficult to do in the heat of a political campaign, as was the case in 2010 when I-1098 was under consideration. Enter Arthur Laffer. In a Seattle Times op-ed Laffer, proponent of supply-side economics who popularized the Laffer tax-rate curve, threw a curve at I-1098. He suggested its passage would be “economic suicide” for Washington state. His argument was based on a comparison of the gross state product and personal income of states with and without an income tax. Washington, he said, would join the ranks of the slowest-growing states in economic returns if it voted in an income tax. Also in 2010, Laffer predicted an economic collapse in 2011 as a result of federal, state, and local tax increases.
Laffer, whose work is underwritten by the American Legislative Exchange Council (ALEC), a limited-government organization that seeks to influence state as well as federal legislation, continues to beat the drum for lower state taxes and no income taxes. His analyses often appear in the Wall Street Journal as well as in ALEC reports.
As one might expect, there is a contrary viewpoint. The Institute of Taxation and Economic Policy (ITEP), which describes itself as a non-profit, non-partisan research group with a focus on federal and state tax policy, has rebutted Laffer, calling his work “junk economics.”
The ITEP says that Laffer’s commits a fundamental mistake by ignoring state population growth that is unrelated to states’ tax structures. It suggests that “high rate” income tax states have experienced economies “at least as good, if not better, than states lacking a personal income tax.”
The ITEP finds that nine non-income tax states including Washington have performed worse than the average as measured by economic growth per capita. And Washington along with five others has had higher than average unemployment rates.
Naturally, dueling economic and tax readings have contributed to widely divergent state policy prescriptions for dealing with the lagging economy. Some states are pursuing lower income tax rates, while others think it’s time to boost rates, especially on high earners, and thereby avoid budget cuts.
There is neither time nor space here to sort through the conflicting data and claims to arrive at a direction for our state as we deal with what will be a significant revenue shortfall in the next several budget cycles. A deliberate and fact-based conversation involving our elected leaders and the public is clearly needed.
However, one starting point might be to compare our experience with Oregon’s. Two states with very different tax structures but similar in many other respects. Oregon has both a personal income tax and a corporate income tax. Its highest bracket (over $250,000) for individual taxpayers is 11 percent. Oregon, along with Hawaii, has the highest rate of 43 states that tax personal income. Corporations pay 6.6 percent on earnings less than $250,000, and 7.6 percent at and above that amount.
High-income earners do not seem to have abandoned Oregon but they are somewhat less common there than in Washington. IRS data for 2010 indicates that Oregonians with annual incomes greater than $500,000 account for 0.37 percent of all Oregon federal tax returns compared with 0.53 percent in Washington.
Another indicator of economic health is business startup data. The Kauffman Foundation, which tracks entrepreneurial activity, found that Oregon’s startup index in 2011 was slightly higher than Washington’s, 0.25 percent to 0.23 percent. Oregon’s index has exceeded Washington’s since 1997.
There are other rankings, indices, and data sets that bear on the question of how tax structures and tax rates impact the economies of states. They should be explored.
Let the discussion begin.
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Comments:
Posted Fri, Jul 13, 9:03 a.m. Inappropriate
Hey Dick:
Can I get a little of whatever you're smoking?
We can debate the wisdom of an income tax in Washington, but does anyone seriously believe that it will pass this legislature and/or a majority vote of the population? In what alternate universe do you see that happening? There are many issues in which the logic of change many be inescapable to some, but the reality of the voting public's opposition to change is completely intractable. Time spent debating this issue is time you will never get back. Please move on to something more productive.
Posted Fri, Jul 13, 9:54 a.m. Inappropriate
or is that "income tax panacea" Kool-aid he's been drinking?
Posted Tue, Jul 24, 4:03 p.m. Inappropriate
Whatever he's been drinking or smoking, it's clouding his judgement.
Posted Fri, Jul 13, 9:20 a.m. Inappropriate
As usual, Dick's perspective is cogent and thoughtful. But his well structured argument misses the point entirely; we voters don't want an income tax. Period. If we approve one for the well off it will be extended to the middle class - and should be. Asking only some citizens to support the rest of us is greedy - and greed is one of the seven deadly sins for a reason - it is the antithesis of altruism and saps our individual and societal morality.
So Dick, please use that powerful intellect to help us find new and better ways to provide and support necessary services for our citizens. Perhaps one approach might look at allowing local jurisdictions to adopt new revenue streams to support all the services a particular community wants to provide. That way urban communities that want heavily subsidized, community supported services can provide them and less urbanized communities with their own ways of solving problems can do so without raising new taxes. Since urban areas seem to support higher taxes and a higher level of community provided services, let's figure out a constitutional path to give them the taxing power needed to provide those services - and let the rest of us muddle along in peace.
Or your way, whatever it is. I'm eager to read about it.
Posted Fri, Jul 13, 3:16 p.m. Inappropriate
Since urban areas seem to support higher taxes and a higher level of community provided services, let's figure out a constitutional path to give them the taxing power needed to provide those services
Bad idea! When that kind of thinking gets implemented around here not only is it a financial disaster for people it turns out to be unconstitutional. Old-Metro was one of those misadventures – it was struck down as unconstitutional in 1990 and we’re still living with its excessive regressive taxing. The Seattle Popular Monorail Authority was a debacle in every sense of the word. Sound Transit is a financial disaster for people here, and its political-appointee controlled board was delegated grossly excessive governmental powers.
You understand Sound Transit’s governance structure is unconstitutional, don’t you “crankyoldlady”? The US Constitution requires that Americans have the right to vote for and against the individuals who would set policies for the local governments to which we are subject. The appointive board of legislators Sound Transit has runs afoul of that constitutional limit on how local governments must be structured.
Posted Fri, Jul 13, 6:57 p.m. Inappropriate
Under my construct, perhaps we need to change the constitution to let local governments adopt new taxes - maybe even an income tax - but require a local referendum on each tax when first adopted and every so many years after that. Or have new revenue streams subject to the same voter approval requirements as school levies - a simple majority for maintenance with a four year limit on the amount taxed and a sixty percent majority for any revenue stream that will be bonded.
Posted Sat, Jul 14, 8:57 a.m. Inappropriate
That doesn't sound too bad. You've identified some good taxpayer-protection provisions.
I assume by "local governments" though you are referring only to constitutional ones that voters can control by political means (unlike Sound Transit, the SPMA, etc.).
FWIW, as I recall the big problem with that proposed state income tax measure Bill Gates (the elder) backed several years ago was it would have amended the constitution to allow an income tax, but it would not have established a constitutional limit on how low that tax could creep toward/into the middle class going forward. A constitutional "floor" -- to keep it just a tax on really high earners -- would be appropriate.
We have far too regressive a state and local taxing scheme as is, it's the worst in the nation here. That bad situation should be corrected before the state legislature even thinks about delegating more taxing power to local governments.
Posted Fri, Jul 13, 10:18 a.m. Inappropriate
WA Initiative 1098 - State Income Tax
No: 64%
Yes: 36%
Dick's still talking income tax.
Dick prefers the Democratic Party.
See Dick flail.
Flail, Dick, flail.
Posted Fri, Jul 13, 10:35 a.m. Inappropriate
Problem solved if only the poor would pay at least some income taxes at the federal level and pay taxes on all the benefits and freebies they receive. Dittos for all folks who live off of tax-free benefits from public and private employers. 'Fair share' should mean everyone pays something at all levels and modes of taxation.
Posted Fri, Jul 13, 12:30 p.m. Inappropriate
Advocates of a WA State income tax are laughably clumsy and out of touch. They routinely ignore the basics. This article is just one more example. No wonder the last attempt lost in every county including King.
1. It's against the state's tradition. That's not an insurmountable barrier, but it does mean that advocates have to do better than their typical smarmy, one-sided "progressive" shtick.
2. It should be treated not as a revenue raiser, but as an equity issue. The way to do it is to have an iron-clad link between sales and income taxes. If you institute an income tax, it should be offset by a cut in sales taxes. The rates and any exemptions should be specified in the state constitution.
3. A state income tax should have a flat rate above a relatively low floor. Massachusetts is a good example. Protect the poorest with some exemptions, but have everyone else put skin in the game. Let the federal rate structure be progressive.
If you look at state taxes around the country, with a few exceptions most states wind up somewhere around 10%. That's the case for Washington, too. We are not undertaxed. We are mis-taxed. But if the advocates of an income tax continue to propose it as an add-on to what we have now, they will NEVER win.
Posted Fri, Jul 13, 4:16 p.m. Inappropriate
Anecdotal evidence --- lots of wealthy Portland residents are buying and building very expensive homes in Clark County, Washington. I don't think it is because the north side of the river is so much better than the south.
Posted Sat, Jul 14, 1:26 p.m. Inappropriate
I harbor considerable skepticism that a state income tax, if it makes any attempt to require each citizen pay something (unlike the recent income tax initiative) is any fairer than a sales tax. Food, pharmaceuticals and rent are excluded now; you could make the argument that some clothing should be excluded but the perverse loveliness of the sales tax is that it reminds us all that the government is there and it needs some money. It's not just other people who are paying. That's my money the store is taking and giving to the state. It's unfair to retailers but by this time the mechanisms and protocols for collecting the tax are well programmed into our economy. BTW, when I lived in Massachusetts decades ago lunches that cost less than $1.00 did not trigger sales tax (a gesture to the working man). Boston and Cambridge abounded in 99 cent lunches. I mention that because the sales tax has at least some flexibility to shelter low income citizens, probably more than is commonly acknowledged.
Posted Sun, Jul 15, 10:03 a.m. Inappropriate
I'm in favor of a state income tax (particularly if it rolls back the more regressive aspects of the sales tax) but I did want to point out that Oregon, whatever its tax structure, is having an even more miserable time funding its schools than we are currently.
Posted Tue, Jul 24, 5:48 p.m. Inappropriate
Oregon is a considerably poorer state than this one. They're having a hard time funding just about everything there, except for the money-sucking black hole known as Portland's Tri-Met fixed rail network.
Posted Mon, Jul 16, 7:55 p.m. Inappropriate
Property taxes are based on an assessed property value, which can be appealed. Then the County sends a bill and we pay it. If we don't pay it the property is sold at auction. Cheating is impossible.
Sales taxes appear as a simple predictable line-item on cash register tapes, are collected by retailers and sent to the state with little complexity and scant involvement by citizen taxpayers. Cheating is a problem, but a manageable one.
Income taxes are endlessly complex, mostly due to lobbyists hired by the "1%". A substantial majority of taxpayers must hire experts to ascertain liability, followed by arguments and audits and all manner of unpleasantness. Cheating (by lying or simple nonpayment) is rampant, worst of the three as any tax office in a state with all three forms of taxation will confirm.
Posted Wed, Jul 18, 6:24 a.m. Inappropriate
Mr. Nelson, Please encourage Mr. Inslee to run on your proposal of a State Income Tax. As a matter of fact, you should insist that in order to keep your "D" card all candidates must aggressively promote a State Income Tax on everyone.
Posted Thu, Jul 19, 7:07 p.m. Inappropriate
As someone who supports McKenna, I would also urge Inslee to run on a pro-income-tax platform.
Posted Wed, Jul 18, 8:09 a.m. Inappropriate
The premise of this article is that taxes, and particularly more and new taxes, are inevitable and necessary. While we are distracted arguing over how much more money and which of us must fork it over, we blankly ignore the reality that no matter how much money is handed over, by way of whatever taxing label, it will never be enough.
Posted Fri, Jul 20, 8:42 a.m. Inappropriate
The income tax failed badly at the polls, even with big money supporting the initiative, even with the average taxpayer getting a tax cut, even with the regressive nature of the state's tax system. There is also the nagging question over whether an income tax in this state would be constitutional. The bottom line is an income tax will never fly in this state.
If we are to reform the state's regressive tax system then it must be done within the existing tax structure.
Posted Sat, Jul 21, 4:24 p.m. Inappropriate
I am really tired of rich people freeloading off the rest of us. I would support a progressive income tax or a tax just on high income earners.
Posted Tue, Jul 31, 11:02 a.m. Inappropriate
Just a reason that I'm following the Progressive Voter Guide's recommendations
progressivevotersguide.com/2012/washington/primary/?src=CC
Posted Tue, Oct 2, 7:40 a.m. Inappropriate
Instead of a direct income tax, I think that the public at large would prefer:
Eliminate government waste. Pork barrel projects, grants that only favor a few, unlimited expansion of government benefits and perks without allowing the public to vote on it, etc.
Increasing consumption taxes on all expenditures both personal and corporate.
The public already bought into the national income tax.
The 16th Amendment.
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
So how does everyone think how well that existing income tax has been laid out equally among all individuals (physical single entities and now corporate individuals). GE's income was $14.1 billion. The actual amount paid in taxes (depending on your news source) vary from $1 billion paid, to $3.2 billion in a refund!
Between 7% paid to a 23% check courtesy of you and I. I cannot speak for the average citizen...but I have never had a tax rate that low...and never had a quarter of my income sent to me in a check from the government.
So where is the guarantee if this is added that the money won't be wasted and that the pain is going to spread out equally, whether you are a real or corporate person?
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