Taxes like Texas: Washington’s system among nation’s most unfair

Washington and Oregon are alike in many ways — but when it comes to how we tax ourselves, we’re more like mirror images.

New census data on state taxes across the U.S. show that Oregon — which has no sales tax — relies far more heavily on income taxes than any other state: In 2014, the tax accounted for about 74 percent of state revenue there, more than 10 percentage points higher than No. 2 New York.

Here in Washington, of course, we have no income tax. In fact, we’re one of just four states that doesn’t tax any individual or corporate income.

And that leaves us heavily reliant on taxes generated from sales. Of the $19.5?billion the state collected in taxes in 2014, taxes on sales and gross receipts accounted for more than $15?billion (including the state business and occupation tax, which is a tax on businesses’ gross receipts). That’s about 78 percent of the total, ranking us fifth among the states.

Archival data show that Washington was once even more reliant on sales taxes — as high as 84 percent of state collections in 1948. Over the decades, that number gradually declined as the share of revenue raised by property taxes grew. But since 2000, when restrictions on property-tax increases were imposed, more of the burden has shifted back onto sales taxes.

Since we lean so heavily on sales taxes in Washington, the rates, naturally, need to be high. Our combined state and average local sales-tax rate is 8.9 percent, the nation’s fifth-highest, according to the Tax Foundation, which pushes for policies that lower taxes and broaden the tax base. Seattle’s sales-tax rate is 9.6 percent, among the highest of any city in the nation. Washington is No. 1 for liquor sales tax, and we’re in the top 10 for taxes on gasoline and cigarettes.

And to keep growing revenue, we’re imposing sales taxes on more stuff. For example, since January, we have a retail sales tax on physical-fitness services: You have to pay extra for everything from personal training to paintball.

A problem with relying on sales taxes is that, compared with income or property taxes, they hit the poor the hardest.

“Low-income people spend most, if not all, of their income on just getting by,” said Matt Gardner, executive director of the Washington, D.C.-based Institute on Taxation and Economic Policy (ITEP). Even though wealthier people spend more money, they also save and invest. So a big chunk of their income is not subject to a sales tax.

As a result, poor Washingtonians pay taxes on a much larger percentage of their earnings, effectively paying a tax rate seven times higher than the wealthiest residents. That rates Washington’s tax system as the most unfair in the country, according to the ITEP.

“It’s basically asking those who have the least money to fund government,” Gardner said. “And that’s not a growing source of revenue. By far, the fastest-growing income group is the best-off Washingtonians. So from a fairness and a sustainability perspective, sales taxes are a bad idea.”

The sales tax can also drop off precipitously in bad economic times. That happened here after the dot-com bust in the early 2000s, and even more so during the Great Recession, when consumers dramatically curtailed spending.

“The income tax also has its ups and downs,” Gardner said, “but it tends to grow faster over time … it’s more effective for raising revenue over the long haul than a sales tax can be.”

And yet, in Washington, an income tax is a nonstarter. Remember Initiative 1098? It would have established an income tax on only the state’s highest earners — and it got trounced at the polls in 2010.

It’s the same in the other handful of states that don’t have an income tax.

“Everyone wants something special about their state,” Gardner said. “There is this sense — and I think it’s mistaken — that if you don’t have an income tax it’s going to be an economic draw. Oregon says the same thing about not having a sales tax.”

But Gardner says that as an economic-development strategy, the lack of an income tax is terrible: “The primary effect of not levying a tax on income is you’re diminishing your tax base. You’re diminishing your ability to pay for services … and you’re pushing other taxes higher.”

From where we stand now, it’s hard to believe that Washingtonians once voted in favor of a graduated income tax — overwhelmingly. That was in 1932. But it was never collected because the state Supreme Court ruled it unconstitutional.

Washington’s first sales tax went into effect the next year, and we’ve never looked back.