Every year at about this time, local, state and federal government officials come knocking, asking Washingtonians to pay up for the web of goods and services that make up our public network — some welcome, some not; some adequate, some not. In turn, taxpayers and teams of accountants dust off arcane texts and engage in annual rites — now, like so many traditions in the modern world, performed in a digital space — to try and get out of it.
My parents lived in Federal Way for a decade in the late 1970s and early 1980s, a crucial time for Washington immediately after residents voted to limit the amount of money that could be gained through property taxes, the first of several such moves that has hamstrung the government’s ability to collect crucial revenue to fund things that most people agree on: mainly schools and social services.
My parents described the bags of receipts collected over a year that they meticulously stitched together to demonstrate the consumption habits of a young, middle-income family in a state where sales tax, rather than income tax, reigned supreme.
It was and continues to be a tried-and-true strategy because, in Washington, sales tax can be used to maximize a deduction on a federal return, in part because we pay so much of it: In the absence of an income tax or taxes on “unearned” income like stocks and dividends, governments repeatedly go to voters asking for increases to sales and property taxes.
That hurts poor people, who end up paying a much larger portion of their overall income than the wealthy on purchases that they cannot avoid, like rent, household items or clothes.
This year, organizers and lawmakers alike have begun to re-examine that stance amid demands from the courts to raise revenue to fund basic education and threats to federal resources devolved to states as a result of new priorities writ large in the Trump administration’s proposed budget and possible retaliation for Washington’s pro-immigrant politics.
And, of course, there’s the growing feeling among people in lower income brackets that Washington’s super wealthy benefit from kinds of income that the taxman doesn’t touch, and simply are not paying their fair share to support the place that made their wealth possible.
As local officials contemplate going back to the well to raise money for homeless services and housing, proposals from the governor’s mansion, state Legislature and even a coalition of Seattle-based organizations aim in different ways to more effectively capture the abundant wealth hidden in deep pockets in this state. What shape that ultimately takes will define the future of government services in Washington.
A playground for the untaxed ultra-rich
Washington’s taxation system is a case study of perverse incentives.
The state is home to two of the richest men in the world, Jeff Bezos of Amazon and Bill Gates of Microsoft, but it has no income tax. Seattle’s start-up culture and tech firms exist in a frothy milieu of idea, creation and rampant acquisition, but it has no capital gains tax. Property values shoot up, goosed by an influx of high-paid tech workers, foreign investment and low housing turnover, but government is tightly constrained in how much of those gains it can recoup.
The result: A state with vast wealth and resources that struggles to fund basic services and local governments forced to rely on two uniquely regressive forms of revenue, property taxes and sales taxes, to pick up the slack.
An analysis of state tax systems by the Institute on Taxation and Economic Policy (ITEP) found that Washington has the most unfair tax system in the country, beating out more conservative, reputedly tax-averse states such as Texas and Florida.
In 2015, people making less than $21,000 a year paid 16.8 percent of their family income in taxes compared with just 2.4 percent for the wealthiest, those making over $507,000, which does little to improve economic conditions and systematically moves wealth upward systemwide.
It’s what Misha Werschkul, executive director of the Washington State Budget & Policy Center, refers to as “upside down,” and the consequences fall most harshly on the most vulnerable, low-income families and people of color.
“Washington has relied so much on regressive taxes, people feel they’re paying too much in taxes,” Werschkul said. “The truth is that middle- and lower-income people are paying more than they should.”
The trickle-up nature of Washington’s taxation system is a strange byproduct of a place with a tax code originally written to assess wealth, a populace who once embraced progressive taxation and a constitution that requires equality in taxes rather than equity.
“One of the things that is interesting is that there has been public support for progressive taxes in Washington, historically,” Werschkul said.
From 1853, when Washington became a territory of the United States, to 1930, property taxes made up most state and local revenue. That made sense: In an agrarian economy, the amount of land a household owned and worked as a proxy for overall wealth, according to a report by Washington’s Department of Commerce.
That calculus changed during the Great Depression when a number of underlying economic factors began to change. Many people found themselves out of work and unable to pay their property taxes and the job mix shifted from farming to manufacturing and industry. In 1932, voters decided to change the system, approving the state’s first income tax, only to have it thrown out by the state Supreme Court because it was too likely to assess different people at different rates.
That consequential decision led to the Revenue Act of 1935, which shifted the tax base away from property and toward taxes on transactions such as retail sales, gasoline and “sin taxes” on alcohol and cigarettes. The changes — and the decision to limit the amount of property tax charged by local government in the 1970s and again in 2000 — led to property taxes accounting for 86.5 percent of local tax revenue in 1970 to 57.8 percent in 2007.
These constraints on revenue, and the difficulty in finding new sources, shifts the burden to the local level, leaving cities and counties to determine if they’re willing to tax themselves to pay for basic things, such as schools, libraries, transportation and public services. The result is a patchwork of overlapping taxation systems that cause overall payments to swing wildly, even within a single county.
In King County, levies on unincorporated land swing from a bottom rate of $7.4 to a top levy of $15.5 for every $1,000 of assessed value in the property. That pattern gets mirrored in sales taxes that start at the base of 6.5 percent for the state assessment and climb as high as 10.4 percent in Mill Creek in Snohomish County.
The result is less a mix of services that responds to local needs than a series of fiefdoms, carveouts for those able and willing to vote to “lift the lid” on property taxes or bump up sales tax yet again. It’s a system that doubles down on structural inequalities rather than eliminating them and, to some degree, asks low- and fixed-income folks to fund policies that will eventually chase them out.
Several proposed solutions
A number of factors, including in no small part pressure from the Washington courts, gave state lawmakers and local government little choice but to grapple with the state’s ill-performing revenue system this year.
In December, Gov. Jay Inslee proposed new taxes that target pockets of resources previously ignored, including a 7.9 percent capital gains tax, modifications to business taxes to capture more money from out-of-state entities, broadening the net for real estate taxes and close certain tax loopholes.
The governor’s December proposal included nearly $4.4 billion in net new revenue compared to the House Democrats’ $3.2 billion in new spending to shore up schools, health care and social safety net spending, increasing overall expenditures.
Neither of the proposals hit the level of capital gains suggested by the Budget & Policy Center — 9.9 percent, in their Accountable Washington program — and though the governor’s proposal suggests property taxes will come down when the state pays its share, it doesn’t take immediate action to hit the $250 million in potential savings. The Center wants to adjust taxes through rebates to people based on income and increase the state’s property tax to $3.60 per $1,000, the maximum allowed under current law.
The Republican-held Senate took a different approach, relying on a statewide property tax measure and cuts to social services that would put an additional $1.8 billion toward education without the tax increases in the Inslee proposal.
There are a lot of good ideas on the table, as well as more nuanced methods of approaching certain taxes that could alleviate some of the burdens that the current system imposes, Werschkul said.
“For me, I take it back to who do we want to be as a state,” Werschkul said. “What kind of school system do we want to have for all kids in Washington state, what kind of medical system, environment?”
An idea that was dead-on-arrival: an income tax.
The courts rejected the notion in the 1930s, but people did not stop trying to leverage the initiative system to put an income tax in place over the following 90 years 10 times, the most recent in 2010.
It’s become a point of derision for opponents. In an op-ed that appeared in Crosscut in January, Sen. Tim Sheldon, D-Potlatch, wrote, “Every few years, some dang fool puts an income tax on the ballot, and then the rest of us get together and stomp it to death.”
But that last one, in 2010? It would have passed in Seattle, and there’s a coalition of Seattle-based organizations that is willing to try again.
Trump-Proof Seattle is championing a 1.5 percent tax on income exceeding $250,000 that organizers hope will appear on the ballot this year or 2018. That’s different from the March 1 proposal announced at a Seattle City Council “lunch and learn” that would have assessed 1.5 percent tax on unearned income over $250,000.
They expect it would raise $125 million each year, more than any recent tax increases proposed that relate to property or sales tax.
Daniel Goodman, a spokesperson for the organization, believes they have a simple, compelling argument.
“It’s not a radical proposal,” Goodman said. “We’re just catching up with Kansas.”
Kansas, like most states in the union, has an income tax. It’s not particularly progressive, with a rate for those making under and over $15,000 a year for a person filing as single, but it still shocked Goodman when he moved to Washington a few years ago that a state with such a progressive reputation could operate counter to its values.
“I hate to use hyperbole, but we’re creating this haven for the super wealthy, and completely neglecting the poorest,” Goodman said.
The proposal represents more than just a leveling of the taxation playing field: It’s deliberately set up to provoke a legal challenge.
The strategy is twofold, wrote Katie Wilson, general secretary of the Transit Riders Union and part of Trump-Proof Seattle. First, the group wants to challenge the idea that income is property. That leads into the next piece, the possibility that taxing income over $250,000 would violate that section of the state constitution that requires a uniform tax “upon the same class of property.”
Keeping the proposal to 1.5 percent increases the chances of it getting passed and prompting legal action.
“Politically, it’s going to be hard to get a really enormous measure passed. So 1.5 percent seemed like a good balance,” she wrote. “Assuming we prevail in the courts, we can then have a larger conversation about how we can use this new tool to more fundamentally revamp our system, at least in Seattle.”
Who knows. Maybe this change, too, will start in Seattle.
