Research & Commentary: Don’t Be Fooled Washington. An Excise Tax on Wages Is an Income Tax

Published April 25, 2019

Washington is one of only seven states that do not impose a tax on personal income. Not surprisingly, these states consistently perform better economically, generate more jobs, and attract more new residents than those with high personal income taxes. Despite the evidence showing the detrimental effects of high personal income tax rates, over the past several years Washington State lawmakers at the state and local levels have attempted to impose new taxes that would target high-income Washingtonians with what can only be classified as “millionaire taxes.”

The Washington State Constitution specifically states property must be taxed at a uniform rate. Moreover, the state Supreme Court has ruled on several occasions that income is property. Washington voters have also overwhelmingly rejected efforts by the legislature to redefine an income tax as an “excise tax.”

In the wake of a recently failed effort to impose a new capital gains tax on Washington taxpayers, a new millionaire tax proposal has emerged from the legislature. In an effort to bypass the constitutional restrictions against an income tax, Senate Bill 6017 would require Washington employers to pay a 5 percent tax on wages from $1 million to $5 million, a 7.5 percent tax on wages earned from $5 million to $10 million, and a 10 percent tax on wages greater than $10 million. The objective of this tax increase is clear: to bypass the state constitution’s rules outlawing a progressive income tax in the Evergreen State. Apparently, if it requires Washington lawmakers to override the will of the people, so be it.

The sponsors of S.B. 6017 claim it is an excise tax on businesses, not an income tax. However, even if this tax were to pass, it would face an immediate legal challenge, and there is no guarantee it would pass constitutional muster. When Seattle considered a similar tax in 2014, attorneys consulted on the matter argued legal precedent may not be in the city’s favor. The tax was never implemented. In a recent article, the Washington Policy Center cited the attorney’s advice given in response to Seattle’s proposed tax: “The court looks at the actual character of the tax and not just at the label. In fact, in Jenson, the second case in which the court overturned a state income tax in the 1930s, the legislature characterized the tax as an excise tax on the privilege of receiving income. Despite that characterization, the court ruled that the tax was an unconstitutional income tax …”

A millionaire tax is likely to discourage new capital formation in the state. When states increase taxes, they typically drive the most productive residents out, taking their income, capital, and sales tax revenues with them. The revenue-generating results of millionaire taxes have been mixed—many states that increased taxes on the upper brackets, including Maryland, New York, and New Jersey, have allowed their tax hikes to expire.

Relying on a fluctuating tax with a small base, the millionaire tax can lead to larger budget deficits. Although some supporters of millionaire taxes argue large-scale relocation by wealthy taxpayers is unlikely, evidence indicates otherwise. In 2009, Maryland enacted a millionaire tax projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year, . Maryland took in $100 million less from millionaire earners than the previous year, and the state allowed the tax to expire in 2010.

Although income taxes are often sold to the people as a tax on the rich, they almost never remain so. Income taxes almost always expand over time to cover increasingly more taxpayers. This is because of government’s insatiable need for tax revenue, which it uses to fuel out-of-control spending. Instead of increasing taxes on the state’s most productive residents, Washington lawmakers should focus on making the state a more attractive place for businesses and workers. This goal could be easily accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.

The documents cited below examine millionaire taxes and their history of failing to shore up budgets and increase revenue.

Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

One Rich Guy Moves, New Jersey Budget in Peril
Scott Drenkard of the Tax Foundation discusses how overtaxing the wealthy can drive high-earning residents from a state, thereby having a significant negative effect on a state’s budget.

Seattle Passes Municipal Income Tax; It is Almost Certainly Illegal
Scott Drenkard of the Tax Foundation examines Seattle’s proposed income tax on higher earners. Drenkard argues the tax goes against the will of Washingtonians and is an illegal law that seeks to use the legal system to impose an income tax in Washington. “So, in the textbook sense, enacting an illegal tax violates the public finance principle of stability because you are creating business uncertainty about future tax burdens. But even on a more basic level, this charade invites some head-slapper questions like: if you say you need more revenue for government programs, why would you willfully set yourself up to spend revenue on a legal battle?” wrote Drenkard.

Why You Should Care about Seattle’s Plan to Impose an Income Tax
Jason Mercier of the Washington Policy Center discusses the Seattle income tax and criticizes the city council’s effort to use the city tax as a backdoor challenge to the state’s laws rejecting the income tax. “One thing is certain, if Seattle opens the door to an income tax in our state, we will constantly be hearing from the tax collectors as the income tax expands to target more taxpayers and the tax rate creeps higher and higher,” wrote Mercier.

Taxing the Rich Will Bankrupt Your State
John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.

Trend #1: “Millionaires’ Taxes”
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.

Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.

The U.S. Tax System: Who Really Pays?
Writing for the Manhattan Institute, Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.

Seven Myths About Taxing the Rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.


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