As summer draws to a close November elections are less than two months away. Before we know it voters will have the chance to vote for the statewide and federal candidates of their choice. In addition, voters in 36 states will have the chance to weigh in on over 140 statewide ballot measures. Many initiatives have become hot button tax and spending issues that, if passed, would have enormous fiscal consequences for individual states. This is especially important now as the country is still slowly moving out of an economic downturn. Now more than ever state governments need to be concerned about job creation and fostering business friendly environments -low taxes and sustainable government spending. However, many statewide ballots questions would produce the opposite, effectively raising taxes even higher, creating news taxes and increasing spending.
Washington is one of those problem-child states. Currently on the ballot is Initiative 1098, which would tax “adjusted gross income.” It’s an income tax, the first in the state’s 121 year history. It would mean that couples earning over $400,000 would be taxed 5 percent on income in excess of $400,000. For those earning over $1,000,000, the state will take $30,000 plus a whopping 9 percent of earnings over $1,000,000. Single filers would face a similar tax bite of 5 percent on income over $200,000 and 9 percent on income above $500,000 plus $15,000. Proponents claim the new tax will bring in $1 billion annually to fund education and health services. However, “soak the rich” schemes like this are recipes for out-of-state migration, increased state revenue volatility, and an avenue toward taxing not just the rich, but residents who earn all levels of income.
First, some comparisons. According to Tax Foundation, Washington currently ranks 9th in terms of its business tax climate. This is because the state levies no individual or corporate income taxes, which encourages people and businesses to move and set up shop in Washington. The opposite seems to happen in high income tax states like New York, New Jersey, Illinois and Ohio. New York, for example, boasts one of the nation’s highest state and local tax burdens, consuming an estimated 11.7 percent of income per year. The state’s personal income tax system consists of seven brackets with a top rate of 8.97%, kicking in at an income level of $500,000 and a flat rate of 7.1% on all corporate income. As a result, New York is ranked as having one of the worst business climates in the nation and its citizens have been leaving in droves.
The Empire Center for New York State Policy has shown that the state has experienced a mass exodus of taxpayers from New York to other states. From 2000 to 2008 New York saw domestic migration outflow of over 1.5 million taxpayers. That is over 8 percent of its population at the start of the decade, more than any other state. Most New Yorkers favored Florida, one of seven states along with Washington without an income tax. Also, ALEC’s Rich States, Poor States report shows that this is case for most Northeastern and Midwestern states with high income tax rates. Each saw net decreases in population over this time period.
Coincidence? We don’t think so.
During this same time, Washington’s domestic migration inflow saw a net increase of 199,180 people. We can expect the opposite trend if an income tax is adopted.
Furthermore, a new income tax on high income earners will not provide the state with a stable revenue source to fund education and healthcare. Josh Barro, Senior Fellow at the Manhattan Institute has written extensively on state tax policy and cites the inherent volatility that comes with high income taxes on rich people. He notes that high-income people have incomes that move more with the economy. In other words their income is not based solely on salary but also investment income such as interest, capital gains, and dividends. These are usually hit hard during economic downturns. As a result, when times are good revenues increase, but when times are bad revenues sharply decline. He notes that for the 2009 tax year tax receipts on investment income were off by a whopping 29.8 percent from 2008. States that rely heavily on those receipts for revenue were forced to make serious cuts to programs during the recession.
Lastly, the claim is that this new tax will only apply to the rich, while lowering certain business and occupation taxes and cutting property taxes for the beloved middleclass. However, due to the inherent revenue volatility of “millionaires taxes” it is only a matter of time before Washington politicians say they are starved for money. From then on, there will be a push for further tax hikes – those that will inevitably hit middleclass families. We saw this trend among Washington politicians toward higher taxes back in February when majority Democrats in the House and Senate passed a bill to temporarily suspend the voter-approved Initiative 960 in its entirety. I-960 requires that two-thirds of the Legislature approve any tax increase, a significant hurdle compared to the simple majority approval needed for other bills. Governor Chris Gregoire later signed a 16-month suspension of some provisions of the initiative. What’s not to say Washington politicians won’t pull a similar move with the income tax.
Overall, a new income tax on high wage earners is a bad deal for Washingtonians. Rich people have a greater ability to get up and leave to escape high taxes. As they go so does their taxable income and businesses. Also, their incomes are more likely to move up and down with the economy, which makes them a volatile source of revenue. As a result, the $1 billion in expected revenue for education and health services will not come to fruition, setting the stage for future tax increases.