The question Washington voters should ask themselves before voting on a state income tax this fall is, “Will we be better off with an income tax?” Judging from experience, the answer is, “No.”
Initiative 1098 would impose a 5 percent income tax on individual income over $200,000 and $400,000 for a couple. In addition, the measure would reduce some business-and-occupation taxes for small businesses and reduce property taxes by about 4 percent.
That might sound reasonable to some, but experience tells us that a state income tax is a bad idea.
First, economists agree that it’s never a good idea to raise taxes in a recession. Increasing the tax burden on small employers – many of whom file taxes as individuals – makes it harder for them to add or retain employees.
Secondly, taxes always experience bracket creep. When the federal income tax was introduced in 1913, less than 1 percent of the population had to pay the tax, which ranged from 1 percent to 7 percent. Within five years, the top marginal rate had skyrocketed to 77 percent.
Critics warn that bracket creep would be a near certainty with a state income tax. After just two years, state legislators can amend Initiative 1098, and they’re free to expand the tax every year thereafter.
Third, while Gov. Gregoire says she’ll probably vote for the state income tax, her Department of Commerce is touting the lack of a state income tax as an incentive to draw employers to the state.
Famed economist Arthur Laffer says approving a state income tax in Washington would be a big mistake. He says that, rather than increase revenue, income taxes inhibit economic growth and reduce tax revenue. In an Oct. 5 piece in the Wall Street Journal, Laffer points out that the revenue growth in the nine states with the highest tax rates was actually 22 percent lower than in states with no income tax. In other words, instead of getting richer, they got poorer.
“In one fell swoop,” writes Laffer, “Washington would move from being one of the lowest-tax states in the nation to being one of the top nine highest. It’s economic suicide.”
Some of our state’s largest employers, including Microsoft, Boeing, Amazon, Weyerhaeuser and Safeco Insurance, have joined the Defeat-1098 campaign. The campaign says the companies joined the effort “….because of the significant negative impact this income tax will have on the state’s economic competitiveness and employment environment.”
But will an income tax solve our revenue problem? Experience tells us it will not.
California imposes every tax known to man, including a 10.55 percent state income tax on high earners, but the state is bankrupt. Oregon has an income tax but no sales tax. “If we only had a sales tax, everything would be fine,” say some in Oregon. Washington has a sales tax but no income tax. “If we only had an income tax, things would be fine,” say some in Washington.
Gov. Gregoire has pledged to transform and streamline the state budget to reduce spending, suggesting that everything is on the table, even privatizing the state ferry system. Sen. Joe Zarelli (R-Ridgefield) has taken the governor at her word, putting together an initiative to reduce spending in the current budget. We look forward to seeing the governor work with Sen. Zarelli to put her commitment into action.
These are not easy times. Families across the state have had to make tough choices and government must do the same.
Don Brunell is the president of the Association of Washington Business.
