Tax revolts are usually led by citizens, sometimes banding together into taxpayer groups. But in Washington State, the latest tax revolt is being engineered by cities and towns objecting to the Democratic-led state legislature’s attempt to impose a capital gains tax. Local officials fear that the new levy, which faces a court challenge, would be a prelude to a state income tax that could hamper economic growth and opportunity. Right now, the Evergreen State is one of only seven states without an income tax and one of just nine without taxes on capital gains.
Five Washington communities—Spokane, Yakima, Spokane Valley, Granger, and Battle Ground—have passed resolutions in recent weeks pledging to outlaw income taxes at the local level if the state adopts income or capital gains taxes. More jurisdictions are promising to follow suit. Local officials are intent on sending the state a message. “Small businesses are the backbone of our local, regional, state, and national economy and it is imperative that the city not put unnecessary hurdles in the way of their success,” Battle Ground’s resolution declared. “Citizens want good government that is fiscally responsible,” Republican state representative Chris Corry argued at a hearing in Yakima. “Putting an income tax ban locally shows a commitment to being fiscally responsible.”
Washington lacks an income tax thanks to a 1932 state Supreme Court ruling that interpreted the state constitution as prohibiting the levy. Over the years, voters have rejected ten attempts to amend the constitution to institute an income tax. The last vote was in 2010, when nearly 65 percent of voters gave a thumbs-down to a ballot initiative heavily supported by the state’s public-sector unions and Bill Gates Sr. (Then-Microsoft CEO Steve Ballmer and Amazon founder Jeff Bezos helped lead the opposition.) Undeterred by these failures, Washington Democrats narrowly approved the tax on capital gains in a straight party vote this past May, arguing that it is not an income tax, though capital gains taxes are typically levied as part of an income-tax system. Citizens and groups have already filed lawsuits against the tax; arguments in the case are scheduled to be heard later this month.
The tax, amounting to a 7 percent levy on capital gains from the sale of stocks, bonds, and other types of investments where the profit exceeds $250,000, is projected to raise $415 million annually. Critics argue that it is both unconstitutional and unnecessary. Like many states, Washington’s tax revenues have bounced back robustly from last year’s economic lockdowns, and the state government, as well as localities and school districts, received about $10 billion from the Biden administration’s stimulus bill. Earlier this year, Washington legislators passed a two-year budget that increases spending by 12 percent. “With strong revenue projections and operating budgets already leaping—up to around $59 billion in 2021-23 from $32 billion just a decade ago—it’s difficult to justify a brand-new tax,” the Seattle Times complained in an editorial.
Opponents also say that the lack of an income tax has long given Washington a competitive economic advantage. They point out that the state’s economic-development agency touts the tax-friendly environment in ads to out-of-state businesses. Washington has among the lowest tax bites of states governed entirely by Democrats. A 2018 study by the Federation of Tax Administrators ranked it 26th among states in taxes as a percentage of personal income. “We are an economic powerhouse,” former state treasurer Duane Davidson, a Republican, has observed in arguing against the new levy.
Backers of the capital gains tax, however, argue that wealthy residents have a “moral imperative” to pay more, regardless of the state’s strong fiscal position. “We are asking the wealthiest Washingtonians to share in the responsibility of funding the needs of our communities and putting money back in the pockets of low-income families,” Seattle state representative Noel Frame said. The new levy makes Washington the third Democratic-governed state seeking to raise taxes amid an unexpectedly strong rebound in revenue. Earlier this year, New York raised taxes by $4.3 billion, and Democrats in Massachusetts have put a referendum on the ballot to amend the state constitution so that they can pass a $2 billion tax increase. By contrast, 11 states, mostly Republican-governed, have cut taxes in the wake of the lockdown rebound.
States typically raise taxes most aggressively after economic slowdowns that reduce government revenues. After the 2008 recession, they boosted taxes collectively by $29 billion in 2009, the largest one-year increase in state taxes up to that point. A new generation of progressive Democratic state leaders is now intent on raising taxes during times of plentiful government resources. They’ve framed the debate as a moral crusade, arguing that it’s righteous to require those who have earned more to pay more.
That raises the question: Just how much more will these legislators ask for the next time government revenues take a hit? The sky’s the limit, it seems. Taxpayers beware.