Washington’s state and local tax code is the most regressive in the nation – households with the lowest incomes pay taxes as a share of their income at a rate seven times higher than the richest households. That’s completely upside down.
With the right investments, we could lead the nation in education, healthcare, and overall quality of life. But our upside down tax code holds our state back from having the resources necessary to invest in these foundations that make our state thrive.
How did Washington get itself into this situation? For starters, powerful special interests have manipulated our tax code for decades and left our cities and state with less to invest in our people and communities.
With our partners at the Washington State Budget & Policy Center, we put together a timeline to help explain the events that led us to having the most upside down tax code in the nation.
- Early days of statehood – Property taxes provide a shared tax responsibility in an agricultural economy. Property taxes provide a reliable revenue stream at a time when most residents live on farms, and property ownership is a good indicator of wealth.
- 1920s – Economic shifts strain the property tax system. A sharp decrease in farm income coupled with urbanization and industrialization – along with an increased need for money for roads and schools – place a new strain on the current tax system. Farmers now pay a majority of the state’s taxes despite their decreasing share of the state’s population and income.
- 1921 – A patently unjust poll tax proves unpopular. The $5 tax per head, which ultimately turns out to be a tool to prevent people with low incomes and people of color to have access to voting, is repealed by initiative the following year.
- 1921 – Gas tax earmarked for roads and highways. Because it is levied on a flat dollars-per-gallon basis, as opposed to a percentage of the price at the pump, the gas tax is not set up to keep pace over the years with prices of fuel, energy, construction materials, labor, and other components of inflation.
- 1929 – 1931 – The beginning of the Great Depression pushes the revenue system in further crisis. Many farmers are unable to pay their property taxes. The need for revenue intensifies at a time of high unemployment, coupled with declining income and property values.
- 1932 – Voters overwhelmingly call for an income tax. Restrictions are also placed on property taxes. In the midst of the Depression’s revenue strains, an income tax passes on the ballot with 70 percent of the vote. Voters also approve an initiative to place limits on the rate of property tax the state can collect, effectively cutting property tax revenues in two.
- 1933 – In a controversial ruling, the state Supreme Court overturns the voter-approved income tax by a 5-4 vote. Washington businesses launched the challenge that leads to the ruling.
- 1935 – Under financial crisis, the state adopts a sales and business tax. Under the Revenue Act of 1935, the state’s taxation shifts from property taxes to taxes on sales of goods, paving the way for the regressive tax code Washington has today – in which the sales tax more heavily impacts people with low incomes than on people at the top of the income scale.
- 1970s – Property tax restrictions are enacted. In 1970, annual increases in ongoing local property tax levies are limited to 6 percent per year. Later in the decade, a constitutional amendment limits the total amount of ongoing state and local property tax levies to $10 per $1,000 of assessed value per property owner. Limits on special school levies are also approved.
- 1977 – Voters approve a sales tax exemption on food. The sales tax exemption on food sold at grocery stores and markets (not restaurants) provides a significant benefit for lower-and moderate-income households. This is a small win toward making the state’s tax code more progressive.
- Late 1990s and early 2000s – Initiatives limit taxes, progress, and growth. In 1999, voters repeal the motor vehicle excise tax, replacing it with a $30 fee on vehicle registrations. This eliminates more than $800 million annually in tax revenues. In 2000, a damaging law that restricts the growth of state and local property tax levies to a maximum of 1 percent per year is approved by voters. As a result, by 2016, revenues from the state property tax – which are dedicated to K-12 education – are $1.6 billion lower per year.
- In recent years – Economic shifts continue to lead to shrinking revenues for important state programs. Since the 1970s, consumers have been spending increasingly more on services (i.e. haircuts, financial services, movies), which are not captured through sales tax, than goods (i.e. toiletries, tools, appliances). Further, the current system does not capture revenue from rapidly increasing online sales.
- 2010 – Corporate sponsors pour millions into defeating a revenue-growing initiative. An initiative that would have instituted a state income tax on high earners fails, despite the fact that it would’ve impacted only the richest 1.2 percent of the state’s population and significantly grown our state’s shrinking revenue supply.
- Today – Washington’s tax system is the most upside-down and regressive in the county. Residents with the lowest incomes pay seven times more in state and local taxes as a share of their income than the richest 1 percent of Washingtonians.
Want additional information about the history of Washington state tax system? Check out these great resources:
- The Strange, Short Story of Washington State’s Income Tax, KUOW, 2015
- Framework for Prosperity, Washington State Budget & Policy Center, 2012
- Why Washington State Doesn't Have an Income Tax: The 1930s Campaign for Tax Reform and the Origins of Washington's Tax System, University of Washington Great Depression in Washington State Project, 2010
- WASHINGTON'S TAX HISTORY: A Brief Overview of the Development of State and Local Taxes in Washington, Department of Revenue Washington State, 2010
- A Washington State Income Tax—Again?, Seattle University Law Review, 1993