Income tax worries based more on myth than reality

Camas City Council members agreed this week to consider a proposal that the city becomes an “income-tax-free municipality” and asked city staff to collect information and place the item on a future Council workshop agenda.

There is no statewide initiative or legislation proposing Washington enact a statewide income tax, but a recent Washington State Supreme Court decision upholding a new 7% capital gains tax — a tax that is expected to impact fewer than 7,000 of the state’s 7.7 million residents, applies only to the sale or exchange of long-term capital assets such as stocks, bonds and business interests in excess of $250,000 a year and has exclusions for real estate transactions and the sale of retirement accounts — seems to have prompted panic among some tax-averse public officials.

“The capital gains tax that was challenged and approved by the court finally by appeal left many wondering if an income tax is next now that (the capital gains tax) has been validated,” noted Camas City Councilman Don Chaney during the Council’s meeting on Monday, May 1. “Whatever argument was used to support the capital gains (tax) seems to (have given) the legislature confidence to do an income tax.”

Chaney and other Camas officials said they worried a statewide income tax would impact the city’s ability to attract new businesses.

Camas Mayor Steve Hogan said he worried about “being business friendly and not losing our attraction to big businesses and international businesses that might want to be here.”

Despite the lack of current legislation asking for a statewide income tax, several Washington cities and counties have already enacted local income-tax bans. The majority of those cities preempting a statewide income tax with a local ban are scattered throughout the deeply conservative eastern half of the state — in Franklin, Grant, Spokane and Yakima counties.

There is no doubt many Washingtonians balk at the idea of a statewide income tax. In fact, Washington voters have, between 1932 and 2010, knocked down 10 different income-tax initiatives.

But Washingtonians are living in a drastically different world than they were in 2010, when a statewide initiative that would have established an income tax for those earning more than $200,000 while reducing property tax levies and business and occupation taxes failed 64-36.

Now, Washingtonians are looking to local and state government officials to address public education funding shortfalls, replace failing infrastructure, preserve open spaces, clean rivers and lakes, provide robust public health services in the face of a pandemic that is still killing more than 1,000 Americans a week, stave off climate change and fight for affordable housing — may be far more receptive to implementing an income tax.

After all, Washington is one of only seven states that do not already have an income tax and has long held a reputation for being one of the most regressive states when it comes to taxing its citizens.

“Studies have shown over and over that poor Washingtonians pay more than their fair share in taxes — an effective rate of 17% according to one study — while the wealthiest pay a percentage in the low single digits,” The SeattlePI pointed out in May 2019. “Many contribute the disparity to the state’s lack of an income tax.”

When the topic of income taxes came up during Monday night’s Camas City Council meeting, at least one city councilor mentioned a worry that citizens are already hurting financially. But pursuing a progressive income tax would likely relieve the tax burden on lower- and middle-income residents. Done correctly, an income tax would pull money from those who can well afford it and reduce regressive taxes that impact lower-income earners.

The other argument is that an income tax would make Washington cities less attractive to businesses. The research, however, shows this worry is based more in myth than reality. In 2017, the Institute on Taxation and Economic Policy compared states with the highest top-income tax rates and those that did not tax personal income and discovered “the states with the highest top rates saw faster economic growth, faster average income growth, and lower unemployment rates.”

“Income tax opponents tend to overstate the impact that income taxes have on state economies and underappreciate the economic importance of investments in education, infrastructure and other public services that are funded with income taxes,” the ITEP stated. “And despite the gloom and doom predictions that often accompany proposed income tax rate increases, we also know that states that have opted for higher income tax rates have seen economic conditions at least as strong, if not stronger, than the states that have shunned income taxes entirely.”

Evidence also suggests that corporations looking to site in a particular area are less influenced by the lack of a statewide income tax — one study of the country’s fastest-growing firms found only 5% of owners cited taxes as a factor in their business siting decision — and more swayed by strong education systems and the type of quality-of-life amenities Camas already offers — and could possibly strengthen with an influx of income tax dollars if and when that day ever comes.