Editorial: Lawmakers should outline fairness of millionaires tax

By The Herald Editorial Board

Maybe it’s like counting chickens before the eggs have even been laid — much less hatched — but discussions and debate about how to allocate the revenue from what’s dubbed as the “millionaires tax,” now under consideration in the state Legislature, is necessary and goes to the justifications for reforms that could begin to better balance tax fairness in Washington state.

Senate Bill 6346 passed out of the Senate’s Ways and Means Committee on Monday on a largely party-line vote with all Republicans in opposition. All but one Democrat on the panel voted to move the legislation on to the chamber’s rules committee. The Senate will have to get the bill to the floor for a vote before a Feb. 19 deadline to send the issue to the House.

Requested initially by Gov. Bob Ferguson, the legislation seeks to adopt a 9.9 percent income tax for those with an annual income of more than $1 million. That threshold would be raised annually by the rate of inflation.

As amended since introduction, the bill provides a B&O tax break for small businesses with gross revenues of less than $300,000, and some exceptions for others up to $600,000; in effect exempting about 70 percent of small businesses in the state. New language also doubled a charitable donation deduction to $100,000.

Collection of the tax wouldn’t begin until 2029, but is forecast by the state to bring in $2.6 billion in its first year, then collecting an estimated $3.6 billion a year after that.

With Republicans opposed on principle to the income tax, one significant Democrat voiced opposition earlier, that of the governor who at the start of the month said the legislation as introduced didn’t provide enough tax relief to most in the state. Ferguson had suggested elimination of the sales tax on personal hygiene products, which was in the bill, but had initially called to eliminate the B&O tax for small businesses for up to $1 million of revenue. The result, the governor estimated of the legislation, returned only 7 percent of the new revenue as tax relief.

Chris Reykdal, the state schools superintendent, had his own thoughts, suggesting that some $1.6 million of the tax’s annual revenue be allocated for K-12 and higher education, while at the same time cutting property taxes by $1.4 billion, essentially exempting the first $300,000 of home value.

It should be a given that education — which the state’s constitution has mandated as its paramount duty — should see a significant share of the revenue from this tax. But Reykdal, in suggesting a property tax break, speaks to the need for tax code fairness as well and recognition of the responsibility that property taxpayers have borne toward education over the state’s history.

The property tax reduction would be a significant break for the average taxpayer, as well as the many renters in helping to keep rents more affordable by lowering costs for rental homes. A higher threshold for the B&O tax could also help to hold down consumer costs. But the legislation’s most obvious tax break — elimination of the sales tax for personal hygiene items — is seen as less than impressive by some.

While not ruled out altogether, an amendment to add diapers to the sales tax exemption was not adopted by the Ways and Means Committee on Monday, despite pleas from a significant number of the committee’s grandparent caucus.

But adding one or more exemptions for personal hygiene products only hints at a far more effective measure for better balancing a regressive tax system: reducing the sales tax for all taxable items. A reduction of the state’s current 6.5 percent base rate would, as with a property tax exemption, provide relief that more of the state’s consumers would notice and appreciate.

Here’s how: Currently the state’s lowest-paid 20 percent of families — those making less than $33,500 a year — pay about 13.8 percent of their income as taxes, according to the Institute of Taxation and Economic Policy; much of that in a sales tax that they cannot avoid in spending the bulk of their income for day-to-day living expenses. Meanwhile, the top 1 percent of earners in the state — those making more than $878,400 a year — pay 4.1 percent of their income as taxes, according to the Institute on Taxation and Economic Policy. Even those with incomes between $33,500 and $107,700 — the next 40 percent — are paying about 10.9 percent of their income as taxes. Those making between $107,700 and $162,900 a year pay about 9.4 percent as taxes.

Lawmakers, with the millionaires tax, are looking for a two-fer here: generating more revenue but also making adjustments to the state tax code that correct for that regressiveness. Even with recent adjustments to the state’s taxes, including adoption of the Working Families Tax Credit and a capital gains tax, ITEP still ranks Washington as having the second most regressive tax system in the U.S., behind Florida.

The more that can be done to lower the tax rate for lower-income families — such as expansion of the Working Families Tax Credit and state’s Working Connections Child Care program — the more equalization will be seen among resulting tax rates for all income levels.

That should be a goal for a change to tax policy that may yet face a popular vote in the state. In the past, state voters have been less than receptive to an income tax, most recently in 2010, when a ballot measure to tax income above $200,000 for individuals — about $300,000, today — was rejected. But some 16 years later, there may be a better understanding of the state’s regressive tax system and a willingness to tax those with higher incomes.

A poll by DHM research taken in December found that 61 percent of 500 state residents polled said they would support a 9.9 percent income tax for those making more than $1 million; about evenly split with 30 percent somewhat supportive and 31 percent strongly supportive. Separated by party affiliation, even 54 percent of Republicans supported the tax. Also notable, of those making $150,000 or more in annual income, 71 percent were supportive; with lower income brackets expressing between 56 percent and 59 percent.

Lawmakers may actually have the support of voters for a millionaires tax, but key to assuring its acceptance will be clarity on how that revenue will be used, especially in correcting a still-regressive system of taxes.