Washington state voters this November will be asked to approve a graduated state income tax for high earners that would not be deductible from federal income taxes, according to Washington Attorney General Rob McKenna (R).
McKenna announced in June he believes Initiative 1098’s wording will disqualify state taxpayers from being able to deduct the state income tax from their federal returns.
McKenna argues the initiative is written to evade Washington’s sweeping constitutional prohibition against non-uniform taxation of property, and that such maneuvering makes the tax ineligible for a deduction.
Initiative supporters flatly dispute McKenna’s claim, saying they’re confident the initiative would survive a court challenge and get the federal deduction.
Long History of Rejection
The dispute has highlighted what is bound to be a sticking point in a contentious initiative campaign.
Washington has managed to avoid an income tax since 1933, when the state Supreme Court struck down a graduated income tax adopted by initiative the year before.
The case hinged on Article VII, Section 1 of Washington’s Constitution, which declares, “all taxes shall be uniform upon the same class of property,” where property includes “everything, whether tangible or intangible, subject to ownership.”
With this expansive definition of property, the court held that income fell within that classification.
‘Income Is Property’
“Income is either property under our Fourteenth Amendment, or no one owns it…. The overwhelming judicial authority is that ‘income’ is property and a tax upon income is a tax upon property,” the court wrote.
The state Supreme Court subsequently rejected various forms of graduated personal or corporate income tax proposals based on its original decision.
Washington voters have also expressed their displeasure with the idea, rejecting personal or corporate income tax proposals eight times since 1933.
Proponents of the latest attempt to pass a graduated income tax believe they can not only reverse a strong trend of voter rejections but also, with the help of some tricky legal maneuvering, survive a Supreme Court challenge.
Income Tax as Excise Tax?
The initiative authors have explicitly declared within the language that the proposal is an excise tax, and therefore permissible under Washington’s Constitution.
“As an excise tax rather than a property tax, this tax is intended to conform to the legal framework adopted by almost all states, consistent with United States supreme court rulings as they have evolved during the past eight decades,” the initiative states.
The trouble, Attorney General McKenna said in a speech to the Mainstream Republicans of Washington, is that the federal tax code allows a deduction for state income taxes only, not excise taxes. Thus initiative backers want the state Supreme Court to view the tax as an excise tax but want the Internal Revenue Service to see it as an income tax.
‘Disingenuous, Legally Questionable’
“It’s a case of wanting to have your tax and deduct it, too,” said Mike Reitz, General Counsel for the Olympia-based Freedom Foundation said. “It’s disingenuous, not to mention legally questionable, to play both sides of the field,” he said.
McKenna isn’t offering an official opinion, and probably won’t until after the November election. State and federal agencies have declined to comment because the initiative has not yet become law.
In the meantime, some federal tax experts are nonplussed at initiative backers’ attempts to frame the new tax as both an income tax and an excise tax depending on the context.
Joseph Henchman, tax counsel for the Washington, DC-based Tax Foundation, said if there are any states that define their income tax as an excise tax, they are in the minority.
“[They’re] also wrong from a definitional viewpoint: excise taxes are generally a specific dollar amount imposed on each unit of a specific good or service, while income taxes are generally a percentage rate on all wages or other income. The constitutional difference between indirect and direct taxes, so to speak. If the proponents define the tax one way for the voters and another way for the feds, it’ll either collapse under its contradictions or survive by being all things to all people,” Henchman said.
Amber Gunn ([email protected]) is director of the Economic Policy Center at the Evergreen Freedom Foundation in Olympia, Washington.