In “Truth on taxes,” part 1, published Nov. 24, we looked at who pays federal income tax at different income levels.
In “Truth on taxes,” part 2, we are going to look at the fight to enact a Washington state income tax and what the recent court ruling on Seattle’s effort to implement a city income tax means to you. We also will put forth some thoughts on what types of new taxes may be coming.
For people who don’t follow Seattle politics, the Seattle City Council recently voted to enact a city income tax. Because the city has increased property taxes and other taxes about as much as it can, options for raising more “revenue” are limited.
The City Council passed the legislation because statewide income tax initiatives and local propositions have been voted down.
An income tax is illegal under the Washington state constitution, which when challenged, has been upheld by the State Supreme Court on more than one occasion.
About a week ago, the city of Seattle was sued. The case went before King County Judge John Ruhl, who rejected the Seattle’s claim that a city income tax really was an excise tax “for the privilege of living in the city.”
The unspoken reason the Seattle City Council is trying to find a way to enact a city income tax is because many Democrats want a statewide income tax. If the city of Seattle could persuade the court that a city income tax is legal under the state constitution, it would pave the way for a statewide income tax.
Seattle’s theory also extends to other taxes that possibly could be enacted as well.
For example, Gov. Jay Inslee has supported implementation of a capital gains tax, which is another form of an income tax. In every state that has a capital gains tax, the tax is classified as an income tax.
As it stands today, the Washington state constitution states that an income tax is illegal and since a state income tax is illegal, other income-related taxes, such as a capital gains tax, also are illegal.
Hopefully, now it is clear why some state Democrats want an income tax ruled constitutional – it is the pathway to substantially more tax dollars. Incidentally, the governor’s last budget proposal included significant discussion of how Washington’s outdated and inefficient tax system has left us “behind” in terms of collecting more tax dollars. Huh?
Judge Ruhl’s recent decision most likely will be appealed. Our hope is the progressive Washington State Supreme Court does not turn into political activists and overrule past Supreme Court decisions.
Assuming the Washington State Supreme Court does not overrule past legal precedents, what options does this leave for those who want more taxes?
The three big means for raising tax dollars in the state of Washington are the sales tax, the business and occupation tax and the property tax. According to the State Office of Financial Management, these three taxes raise about 60 percent of the state’s revenue. The remaining 40 percent comes from a variety of smaller taxes, fees and charges.
Raising the sales tax is unpopular among many people because it is “regressive,” meaning lower-income citizens pay a higher percentage of their earnings as sales tax. Some folks are OK with increasing the sales tax because they claim it is a voluntary tax. If you don’t buy taxable goods, you don’t pay taxes. Staples, such as food are exempt from the sales tax.
Gov. Inslee has proposed increases to the business and occupation (B&O) tax in the past and we imagine will do so gain. In last year’s budget proposal, the governor advocated for increasing taxes on services as the economy has become more service oriented and less manufacturing based.
The state property tax system has just been overhauled to provide more funding for schools. We can’t imagine the state portion of the property tax would be increased, and even if it was, the money would likely go for schools.
There is talk about King County getting property tax relief by phasing in the upcoming property tax changes as opposed to having the changes take affect all at once.
Our guess for other proposed taxes would include a carbon tax and the elimination of the out-of-state sales tax exemption. Removing the out-of-state sales tax exemption would mean Oregonians would have to pay Washington state sales tax, which would severely hurt the economies of border towns.
Any carbon tax is likely to be focused on manufacturing companies. This means businesses that employ thousands in our area would take a hit.
Time will tell if our thoughts are on point. With Democrats holding a slim two-seat majority in the House of Representatives, and one seat in the Senate, it might be tough to get any new taxes passed – and maybe that is good.