A Progressive Tax Fix For the Legislature

Our legislature is floundering when it comes to passing progressive taxes that will address the coming budget gap. I offer the following fix.

The Barriers in Washington State That Block Progressive Income Taxes

A bit of context for those who do not know: For too long, commentators and lawmakers have assumed we cannot have a progressive income tax in Washington State. But this has largely been because of a lack of legal creativity—there are very promising pathways around the current limits.

It’s time to try.

As a reminder, Washington State is a low-tax state, especially for the rich. As such, we underfund everything from K-12 education to health care for the poor and working class. This is largely because of two factors:

1. First, a constitutional provision called the uniformity clause, which requires a uniform rate of taxation on property. This was interpreted to apply to income as well. The case was Culliton v Chase, and the court in the 1930s was exceptionally hostile to taxes. Washington State is now one of only two states in the union where income is considered the equivalent to property. This is why we cannot have a normal income tax that gets higher with income.
   

2. Second, countless years of bald-faced lies from business leaders pretending that modestly taxing the rich or companies will snuff out innovation and economic growth have prevented most innovative tax ideas from seeing the light of day. (Remember 48 of 50 states do a better job of relying on the wealthy for revenue than Washington). Other than modest progressive payroll taxes in Seattle, and state tax on extreme capital gains, nothing else serious has yet come to fruition.

A Welcoming Court

While our current court has had the opportunity to overturn the 1930s decision, they have not. But they have let taxes like the payroll tax and capital gains tax mentioned above stand by classifying them as “excise” taxes, which aren’t subject to the same uniformity requirement.

This suggests they are open to legally creative pathways into progressive taxes.

While could try to classify income taxes as an excise tax, that seems unlikely to work, since the 1930s court already already weighed in on the status of income and the current court seems to want to avoid openly overturning the decision.

Instead, it’s time for a little creativity.

Here is a progressive income tax that is uniform in nature. Given the court’s amenable approach to other progressive taxes in recent years, it has a very good chance of meeting the court’s definition of “uniform.”

(I ran this by a state constitutional expert who could not think of a reason it wouldn’t work, by the way. That person declined to be identified publicly, however.)

A Tax That Solves The Problem

Each Washington State Household must pay a tax of 1% on gross income minus a refundable credit of $700. 

This is awesome for several reasons:

1. It is statutorily uniform: Tax = ((Household Income x 1%) - $700)

2. It raises a lot of money - about $1.85B per year.

3. Its impact on households is progressive.

To see how it is progressive, consider five households:

1. Earns $30,000 per year. Receives a $400 payment, a tax of -1.3% of their income.

2. Earns $70,000 per year. Pays no tax.

3. Earns *$95,000 per year. Pays $250, just under ¼ of 1% of their income.

4. Earns $150,000 per year. Pays $800, just over ½ of 1% of their income.

5. Earns $500,000 per year. Pays $4300, nearly 1% of their income.

(*$95,000 is the median income—half of households earn more, and half earn less).

If we doubled it to 2% and doubled the deduction, it would raise $3.7B per year, and be better for the poorest families- the family earning $30,000 would receive an $800 payment!

To reduce legal risk even further, the legislature could make the rebate “severable” - so if a court struck it down, we would have a mere 1% flat tax on our hands. That isn’t amazing, but it is still much more progressive that sales taxes and property taxes, which fall hardest on working families.

A More Cautious Alternative

Perhaps lawmakers would like to be more even more cautious when it comes to legal risk. After all, this rebate concept, through promising, is untried in the courts. If they would like a more conservative approach, they could design the tax around the following constitutional provision:

“The legislature shall have power, by appropriate legislation, to exempt personal property to the amount of fifteen thousand ($15,000.00) dollars for each head of a family liable to assessment and taxation under the provisions of the laws of this state of which the individual is the actual bona fide owner.”

In that case, they could levy a tax—say of 1%, with a $15,000 exemption, in order to more closely match the rules and court precedents associated with property taxes. It would raise more - $3.55B which is great! But it would be less progressive. Still, it would be much more progressive than sales taxes or property taxes.

1. Earns $30,000 per year. Pays $150, .5% of their income

2. Earns $70,000 per year. Pays $550, about ¾ of 1% of their income

3. Earns $95,000 per year. Pays $800, about 5/6 1% of their income.

4. Earns $150,000 per year. Pays $1350, or 9/10 of 1% of their income.

5. Earns $500,000 per year. Pays $4850, or 97/100 of 1% of their income.

Washington State Voters showed us last year, by an almost 2 to 1 ratio, that they want to tax the rich to fund public services. And that was before we faced the huge budget hole, and Donald Trump and Elon Musk started hacking apart federal services.

It’s time to fix our unfair tax code, and this is a good way to start. Some of the less reactionary folks in the business community might even support it, as a way to reduce the likelihood of higher payroll taxes.

Whether or not they do, it is time to try.