I grew up here. One of the great things about Washington was that it didn’t have a state income tax. Oregon had one. We had the sales tax and a high property tax. Oregonians argued that their income tax was better because it had higher rates for higher incomes, so that the rich would pay more. In Washington the rich paid more in sales tax when they spent more, and more in property tax when they owned more, but the rates were the same. There was something in the state constitution about it.
Washington voters approved a graduated-rate income tax once, at the bottom of the Depression in 1932, but the court struck it down. When asked to approve it again with a constitutional amendment, the voters said no. In the next 80 years, they said no nine more times, most recently in 2010, by voting 64 percent against Initiative 1098.
Washington voters didn’t want Oregon’s tax. Oregonians didn’t want Washington’s tax. For Oregon people, the question was about fairness. Washington people argued more from prosperity — not so much who would pay, but under which system people could make the most money to pay their taxes with.
In the late 1970s, Washington began attracting entrepreneurs. Oregon was also in the game: it had Phil Knight of Nike. But we had Bill Gates, whose company, Microsoft, made him the richest man in the world. Later we had Jeff Bezos, who came here from New York. Back in 1999, I asked him why he had started Amazon in Washington, and he said it was the airline connections and the labor market. He didn’t want to talk about the tax system — but I note that when Washington passed a capital-gains tax 20 years later, Bezos moved to Florida.
Amazon is here. He had created it here.
Having no state income tax has been a commercial asset for Washington, and not just for high rollers like Bezos and Gates. You can see it in wages and salaries. Here, median individual income in Washington ranks 4th-highest ($47,149). Oregon ranks 22nd ($40,208). Taxes are not the only reason, so the question is arguable; but something is going on. If Washington has more high-profit companies, which tend to grow fast, a plausible reason is that our tax code has favored the people who invest and work in that kind of company.
Infant companies, which aren’t making any money yet, often pay key people in stock options. If the company makes it big, the stock can be worth millions. If the company fails, then not. The federal tax on infant-company stock gains is zero. Right now there’s a bill in Olympia at the Senate Finance Committee, SB 6229, to subject these gains to the state’s capital-gains tax. The measure’s sponsor, Senator Noel Frame, a Seattle Democrat, writes in defense of her proposal that stock options benefit “the wealthiest few individuals.”
Well, yes, they often do. The report by the Senate Ways & Means Committee estimates that subjecting them to the tax would hit 260 taxpayers and raise about $1 million a year for the state. In a budget of $39 billion, a million bucks — the cost of one house in Seattle — is two-and-a-half ten-thousandths of the total, raised at the cost of new companies and new industries not created in Washington.
Who’s right? It depends on what you want, fairness or prosperity.
Some years ago, Washington had a booth at the Paris Air Show. Its purpose was to tout the Evergreen State as a place to invest. Part of the sales pitch to foreign investors was that our state was one of the few that levied no personal or corporate income tax. That our state had a Democratic governor, Christine Gregoire, and that the Democrats were on record favoring an income tax was not mentioned. And why would it be? In sales work, you sell what you have. And we had it.
Now, it seems, we’re not going to have it. We’re not going to have Oregon’s system, an income tax but no sales tax. We’re going to have some of both. But how much of both?
The proposal that’s passed the Senate — SB 6346 — is a flat 9.9 percent tax. It would apply only to adjusted gross income above $1 million — hence the sales pitch from Democrats that this is a “millionaires’ tax.” According to The Seattle Times, its sponsors call it “a long-overdue remedy to a state tax system heavily reliant on regressive taxes.” But if the new tax was being put in to raise fairness rather than money, it should take away those regressive taxes. And it does very little in that way.
And the “millionaires’ tax” isn’t the first being piled on. In 2021, the legislature passed the state’s first tax on capital gains — the tax that prodded Jeff Bezos to flee to Florida. It imposed a 7-percent levy on long-term gains over an amount now set at $278,000 — a threshold that takes in a whole lot more people than billionaires like Bezos. Last year, the legislature raised the rate to 9.9 percent on gains over $1 million — the same 9.9 percent that SB 6346 would now apply to all taxable income.
Washington has long had an estate tax, which takes a pie-slice of the wealth of the dead. Most states don’t tax estates. The key thing is where our estate tax begins. Washington’s tax begins at 10 percent on estates above $3 million; our top rate, 35 percent, applies to estates above $9 million. The federal tax begins with estates above $15 million, which it taxes at 18 percent.
To grease the skids for their income-tax bill, Democrats have a companion bill, SB 6347, to roll back the top estate-tax rate to 20 percent. That would still be the highest state rate in the country (Oregon’s is 16 percent).
When Washington’s sales tax began in 1935, it was 2 percent. The state rate today, 6.5 percent, is not the highest — California’s 7.25 percent is — but our local governments pile it higher. If you ask Google, “What U.S. city has the highest total sales tax rate,” the answer is Seattle, with a combined rate of 10.55 percent.
Our oldest tax, the property tax, places Washington in the middle among states. We also have an excise tax on real estate transactions. On that tax, we’re not in the middle. The median amount collected here, $6,624 per transaction, is third-highest among U.S. states, after New Hampshire and Delaware. (Oregon doesn’t have this tax.)
Then gas taxes. Washington’s rate, 55.04 cents a gallon, is third-highest in the country. Jay Inslee’s Climate Commitment Act also requires oil refineries to bid for permission to emit carbon dioxide. This amounts to another tax on gasoline of about 57 cents a gallon. Washington has the third-highest gasoline prices among the states, behind only Hawaii and California.
If you ask Google, “What U.S. state has the highest liquor taxes?” the answer is the same: Washington, with a tax on distilled spirits of $36.98 per gallon. We’re way up there: Oregon is at $22.86 and California is at $3.30.
Then there’s the cigarette tax. In 1935, when it began, it was 1 cent a pack. It is now $3.025 a pack, which seems like the second-highest tax among Western states, after Oregon’s $3.33, but when you add the sales tax it’s the highest.
I know, it’s low-class to whine about the cigarette tax. It’s there to protect our health — you know, like Seattle’s tax on sugary drinks. But who pays the cigarette tax? Mostly people with lower education and income. The cigarette tax is at the top of the list of regressive taxes.
Under our unique pile of taxes, the Evergreen State has been able to prosper. Partly that’s because we didn’t have Oregon’s big beautiful income tax, a comprehensive tax that reaches into the pockets of nearly everyone. And the proposal that’s passed our state Senate — SB 6346 — is not a comprehensive tax. It’s only on million-dollar earners. It aims to raise $3.5 billion a year, which is not enough to replace the sales tax. The bill passed by the Senate does not lower the state sales tax, even by a tenth of a percent. The progressives denounce the sales tax, but they don’t lower it.
In an effort to throw the people a bone, Governor Ferguson wants the “millionaires’ tax” bill to suspend the sales tax for five days a year. Imagine that: five Black Fridays! But don’t imagine buying a car, or even a big TV, because the offer is only for items under $1,000. Ferguson also offers to end the sales tax on “grooming and hygiene products,” including diapers. Tax-free toilet paper!
And the “millionaires’ tax” is not the final product. In 1933, the Washington Supreme Court ruled against a graduated income tax. This one is a flat tax: 9.9 percent, kicking in at $1 million. If the court squeezes it past the constitution, it goes on the books without a vote of the people, which would be required for a constitutional amendment.
The state constitution allows Washington to have a referendum on any new law, except for a law “necessary for the support of the state government and its existing public institutions.” Guess what? Senate Bill 6346 says, “The tax imposed in this act is necessary for the support of the state government and its existing public institutions.”
Technically, that statement is not binding on the Washington Supreme Court. But legislators slap it on lots of things, and the justices usually go along. They let the legislators decide what’s “necessary,” and what the people can have referendums on. Here the legislators are Democrats, which is ironic if you think about what that word means.
Under the state constitution, the people of Washington still have the right of initiative. An initiative is like a referendum, except that it requires twice as many signatures to get on the ballot. And an initiative requires the question on the ballot to be stated in a different way. To repeal the tax, voters would have to vote “yes,” whereas on a referendum, they would vote “no.” Logically, that shouldn’t matter, but it does,since it’s easier to get people to vote “no.”
The upshot is that the door is now open for big changes — increases — in our taxes. And that is not comforting to business. Rachel Smith is president of the Washington Roundtable, which represents the big companies. What her members need, she says, is a tax system that is stable, so that CEOs can make plans for how to invest millions of dollars. They don’t want a personal income tax, but having the tax system in chaos is worse. “We don’t want to be lurching from crisis to crisis,” she says. In the past five years, the legislature has already made huge changes — and, last year, the largest tax increase in this century.
Partly because of that, the pace of business slowed in the past year. “The economy is really weak at the moment,” says Kris Johnson, president of the Association of Washington Business, which represents many of the state’s mid-sized companies. In the association’s most recent survey of members, many of the CEOs said they are thinking about moving their homes to other states.
AWB’s Johnson doesn’t want to say who they are. Even talking about it is bad for business. The business lobby’s opponents will say the talk of capital flight is propaganda, but Johnson insists it is not. “Look at what’s happened between Seattle and Bellevue,” Johnson says, referring to the movement of companies and jobs, such as Amazon. “It’s real. Capital and jobs go where they are wanted and supported.”
And where’s that? Who knows — maybe to Oregon? They have an income tax but no sales tax. It looks like we’re going to have both.
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