Will WA income tax plan drive people to Oregon?

Share this

Look who wants to give Washington state an income tax.
Wall Street Journal Editorial Board,
8-14-2010

The battle between taxpayers and government unions will define the fiscal future of the 50 states, and the newest battlefield is Washington state. That’s where a few rich taxpayers led by Bill Gates Sr. and the Service Employees International Union (SEIU) are bankrolling a November ballot measure to create the state’s first income tax.

And not just a toe-in-the-water tax. They’re diving into the deep end with a proposal that would immediately impose a 5% tax rate on income above $200,000, or $400,000 for married couples. The rate would climb to 9% on single filers making $500,000, or $1 million for couples.

No state has introduced an income tax since Connecticut nearly 20 years ago, and that state’s experience has not been happy. The top rate in Hartford began at 4.5% but has since climbed to 6.5%. Washington wants to leap over that and achieve California and New Jersey heights in one giant step. Washington would move overnight from one of the nine states with no income tax to having the eighth highest rate in the country.

Mr. Gates, a wealthy lawyer whose son is among the richest men on the planet, is pitching the proposal as a chance for 97% of the voters to pay the state’s bills by socking it to the richest 3%. What he doesn’t say is that Washington’s lack of an income tax is among its main comparative advantages in luring those top 3%, along with their businesses and jobs, into the state.

In addition to Washington, the states without an income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. Combined they had an average 18.2% growth rate in jobs over the past decade, more than twice the 8.4% job growth of the nine states with the highest income tax rates, according to a new report based on Commerce Department data by the American Legislative Exchange Council.

The liberal Seattle Times accurately describes the state’s zero income tax as “a selling point. An asset. And more than that: It’s a bonus for living here.” Even liberal Democratic Governor Christine Gregoire begins her sales pitch to prospective business investors with the reminder: “No income tax.”

That’s an especially powerful attraction on the West Coast, where California and Oregon impose a top tax rate of 10.55% and 11%, respectively. Proponents say Oregon raised its income tax last year, so Washington should get in the game. But Oregon at least has no state sales tax. Washington has close to the highest sales tax burden in the nation, varying by area but reaching as high as 10% in Seattle depending on what you buy.

To win votes, the ballot measure resorts to all sorts of trickery. Unions describe the initiative as tax “relief” because it includes a mandatory cut in the hated property tax (only by 4%) and it eliminates various unpopular fees and taxes on business. Still, the overall impact of the measure is a $1.5 billion tax increase in 2012 and $2.5 billion a year by 2016. Small business taxes are cut, but they are also hit with a whopper of a new tax: a personal income tax paid out of their profits. Over half of the tax will be paid by Washington businesses.

The biggest deception is the description of the new income tax as “an excise tax on income.” This language is cleverly designed to dodge the state’s constitutional prohibition against an income tax and the requirement that any tax be “uniform upon the same property.” Obviously a tax that hits only 3% of taxpayers and applies graduated rates is anything but uniform. Proponents claim that because the tax is withheld from worker paychecks, the money was never the property of the person who earned it. That’s like saying if someone steals your paycheck, it’s not your property.

We hope Washington voters aren’t duped by the claim that only the rich will pay this tax. After two years, the law allows the legislature by simple majority to extend the tax to nearly everyone. The revenue from the tax will finance new spending, which will soar and lead to even higher deficits in the next downturn, which will create political pressure to expand the tax to the middle class.

Income taxes are always sold as a one-time way to reduce deficits, but they always become engines of greater spending, and eventually deficits. Just ask Californians. If Mr. Gates wants the rich to finance more Washington spending to create more SEIU dues-paying jobs, he and his son can do so by donating their own fortunes.