Does Washington have the nation’s “most unfair” tax system? New report fails to make case, but expect more income tax talk.

The Institute on Taxation and Economic Policy has released a new report, again arguing that Washington has the nation’s “most unfair” tax structure. You’ll recall that ITEP has sounded the theme before. The Washington Research Council examined the 2015 ITEP report in July, concluding 

The ITEP analysis contains a number of methodological flaws that lead it to overstate the tax burden on low-income households nationally and, to an even greater extent, in Washington. In particular, our critique of the ITEP report identifies two major errors:

1. ITEP overestimates consumption spending by lower-income taxpayers relative to income, leading to an overstatement of the taxes they pay.

2. The ITEP treatment of Washington’s business and occupation tax causes it to overestimate the degree to which the tax is shifted onto lower-income taxpayers. Their treatment of personal and corporate income taxes levied in other states shifts relatively less of the burden to lower-income taxpayers.

In the methodological statement on its 2018 report, ITEP writes,

The methodology used in this study is broadly similar to the approach used in previous editions of the report. However, we have recently made several methodological improvements impacting both income estimation and tax modeling. For this reason, we discourage direct comparison of the report’s results with prior editions.

The changes they made appear to be relatively minor and, so far as we can tell, failed to correct for the problems identified by the WRC. The Research Council will most likely do its own, more thorough, review of this latest piece.

As we noted in our July post, the ITEP study has played a role in fueling income tax discussions in our state and was cited often during the Seattle City Council’s income tax and head tax debates. Expect more of that in the coming months.

Speaking of income taxes, the Association of Washington Cities has sided with Seattle, arguing that cities don’t need legislative approval to impose municipal income taxes. The Seattle Times reports,

“While cities and towns have differing policy views on revenues, AWC believes its mission includes protecting local revenue authority for city services,” the nonprofit lobbying group wrote Oct. 17 in a brief filed jointly to the state Supreme Court with the cities of Olympia, Port Townsend and Port Angeles.

After a lower-court ruling struck down Seattle’s income tax last year, the city asked the state Supreme Court to review the case. The court is likely to make a decision before the end of this year.

Given the diverse political interests in AWC, the group waded into a particular legal debate while leaving alone other questions related to Seattle’s tax, said Peter King, the group’s chief executive officer.

For instance, the group didn’t weigh in on whether Seattle’s tax violated the state constitution’s ban on taxing property progressively, or on whether taxing high earners is a good idea.

Jason Mercier, with the Washington Policy Center, commented in a blog post,

We told you that Seattle’s illegal income tax was never just about that city and instead was an effort to bring an income tax across the state. Proving our warning true is a new legal brief by the Association of Washington Cities (AWC) arguing that not only does Seattle have the broad authority to impose an income tax, but so does every other city in the state. AWC claims: 

“Regardless whether Seattle’s tax is considered an excise tax or a sui generis income tax, it is permissible under the broad legislative authority conferred by RCW 35A.11.020 . . . The only constraints should be where the Legislature has preempted tax authority or where a municipality seeks to tax governmental activities of another municipality and triggers issues of governmental immunity. Neither circumstance is present in this case.”

Along with the fact AWC is advocating for every city to be able to impose an income tax, it is also disturbing its brief totally ignores one of the major reasons King County Superior Court ruled the Seattle income tax illegal:

RCW 36.65.030 – Tax on net income prohibited. A county, city, or city-county shall not levy a tax on net income.”

Call me crazy, but that seems like a pretty clear prohibition by the legislature that should have given AWC pause before asking the state Supreme Court to allow every city the power to impose an income tax. 

The discussion will doubtless continue, regardless of what the court rules later this year.