Last week’s legislative launch of a bill to create a Washington income tax on high earners was hailed by Democratic legislative leaders as a “generational” moment in the history of state policy. But it landed with an underwhelming thud at the governor’s mansion.
The same day Senate Majority Leader Jamie Pedersen and House Majority Leader Joe Fitzgibbon unveiled it, Gov. Bob Ferguson, a fellow Democrat, branded the proposal unacceptable at his own news conference.
The initial proposal provides a pittance of the necessary tax relief for a change of this magnitude in a state that has relied heavily on sales and business taxes. Of an anticipated $3.7 billion in new revenues from the tax, only about 20% goes to lower other taxes to offset the new collections. That’s far too low.
If Democratic lawmakers are serious in imposing a 9.9% tax on those earning more than $1 million a year in Washington, they must commit with equal fervor to reducing tax burdens on lower-income Washingtonians and businesses. Saddling high earners with new taxes simply to cover a perpetual budget deficit is both politically disingenuous and economically dangerous.
Washington is one of nine states without an income tax. That single fiscal factor, paired with a skilled workforce and historically low energy costs, made the Evergreen State a job-producing powerhouse. Lawmakers must acknowledge that enacting a tax on seven-figure incomes will fundamentally change the economic landscape of the state. That is, if it survives a likely court challenge and potential initiative campaign.
If Democrats are genuine in their desire to make the state’s tax code fairer to all, they must commit to two imperatives: First, they must provide more tax relief for those who need it most. Second, they must also recalibrate a tax code that has made the state a policy outlier in the country.
1. Commit to real relief
To be fair, what Pedersen and Democrats have included thus far — an expansion of the Working Families Tax Credit and a business-and-occupation tax exemption for smaller Washington companies — are worthwhile initiatives. But far more is necessary. A tax exemption on hygiene products like soap and mouthwash? That amounts to crumbs from the table.
Pedersen’s bill includes enough sponsors to pass the state Senate, which held its first hearing in the Ways and Means Committee Friday. A battle among majority Democrats is likelier in the House.
Pedersen told the editorial board the bill’s writers had purposely left room for negotiating more tax relief. What could that look like? A Republican-backed bill with some Democratic sponsors proposes an exemption on diapers and essential day care supplies for families. Lawmakers could also have a serious conversation about further reductions to the regressive sales tax if they want to put real money back in Washingtonians’ wallets.
At his own news conference, Gov. Ferguson said the initial proposal was “not close” to the amount of relief necessary, in a state that is one of the least affordable in the nation. He is right to make that argument and should continue doing so.
This can’t be another chance to expand state government largesse. For years, ruling Democrats have outspent rising revenues, feigning budget crises that belie repeated failures to live within the state’s means. This budget drama comes just a year after Democrats raised $12 billion in new taxes, the largest batch in state history.
2. Reduce the ‘squeeze’ by other taxes
In recent sessions, when an income tax was viewed as a third rail in state politics, Washington lawmakers turned up the dial dramatically on all other revenue options. “They’ve squeezed the balloon onto everything else,” said Jared Walczak, a senior fellow at the nonprofit Tax Foundation.
That’s made for some dubious distinctions among states. Though Washington has no income tax, its sales taxes are second highest in the country; its fuel taxes are third highest. Estate taxes come in at No. 1. Business and occupation taxes? No. 4.
Meanwhile, in the last decade, eight other states, including neighboring Idaho, have flattened their income tax rates and even issued rebates to residents.
Adding an income tax to this strained buffet of revenue streams increases risk on Washington’s overall economy, at a time when it is already vulnerable.
Though state revenues have continued to grow, lawmakers still want to spend at rates that eclipse what’s coming in. In his budget proposal, Ferguson was not able to close a $1.9 billion deficit in the 2027-29 biennium, according to recently released numbers from the state’s Economic Revenue and Forecast Council. And that amount doesn’t cover yet-to-be-negotiated state employee collective bargaining agreements.
Unless lawmakers are willing to cement a reputation for Washington being a place where businesses neither develop nor expand operations, they should view realigning the tax code as a priority. They must also resist their insatiable urge to grow the state budget while providing meaningful relief across the rest of the tax code. The quest to do that is off to a rocky start.
If spending continues unabated, it likely won’t be long before Democrats cast a wider net for revenue. One Democrat, longtime Rep. Larry Springer, D-Kirkland, has already predicted the income tax could affect more Washingtonians in the future. Even calling it a millionaires tax is misleading — the bill’s fine print notes that it’s a tax on income with a $1 million deduction. And proponents last week said they would not include any provision that would bind future Legislatures from lowering the threshold. In other words, there’s no protection.
