The Lens takes a look at Washington’s supposedly “regressive” tax structure.

Much of the impetus behind the Seattle income tax and calls for a capital gains tax stems from the widely-held conviction that Washington’s tax structure is regressive, imposing a proportionally higher tax burden on low-income taxpayers and treating high-income taxpayers very lightly. In The Lens, TJ Martinell takes a look at the belief and writes that the popular conception may be a tad off. 

Although businesses pay over half the taxes collected by the state and local governments, a frequent claim among some tax reform advocates is that Washington has one of the most regressive tax structures in the country. It’s the impetus behind ordinances such as the city of Seattle’s progressive income tax, approved in part in the hopes of overturning State Supreme Court rulings rendering it unconstitutional. It’s an argument likely to be heard during public meetings with state House lawmakers discussing the state’s tax structure that were funded in the 2017-19 operating budget.

Yet, some fiscal experts say the “regressive” claim isn’t wholly accurate, while warning that progressive taxes lead to revenue volatility.

It’s a good discussion, worth reading in its entirety. As he reports, a report from the Institute on Taxation and Economic Policy (ITEP) is generally citied by those claiming the tax structure is regressive. Yet, the ITEP study has been challenged by tax experts and economists.

However, Tax Foundation Senior Policy Analyst Jared Walczak writes that the ITEP study erroneously treats the B&O tax as a sales tax paid by the consumer, rather than employers.

Similar criticism has been raised by WRC’s Research Director and Senior Economist Dr. Kriss Sjoblom. He told Lens that the study “overestimates the amount that poor people consume, and then as a consequent overestimates the amount of sales tax poor people pay. A lot of those businesses taxes are assumed to be passed on to consumers prices that are being paid by the poor.”

What makes the system “regressive” are the high “sin” sales taxes on liquor and cigarettes, he added. According to the Center for Disease Control, “people living below the poverty level and people having lower levels of educational attainment have higher rates of cigarette smoking than the general population.”

“If you look at the share of income spent on these selective sales taxes, we’re the highest,” Sjoblom said. “If you look at the share of business taxes that the poor are paying, we’re the highest. It’s the businesses taxes and the selective sales taxes that are driving us into this extreme position.”

In reviewing Initiative 1098, an income tax initiative proposed (and overwhelmingly defeated) in 2010, the Washington Research Council examined the regressivity claims from ITEP. The discussion also points out that state and local governments have only a limited ability to redistribute income through tax policy.

Because people and business- es are mobile, state and local governments have only lim- ited ability to redistribute income. Public finance experts who study the appropriate allocation of func- tions within the federal-state-local hierarchy of government conclude there- fore that redistribution—to the extent it is a policy objective—is primarily a federal responsibility.

The federal tax system—and therefore, the overall federal-state-local tax system—is progressive. To quote the Gates Committee: “Analysis by the Committee confirmed that when evaluating the total tax system—local, state and federal—all states have progressive taxes and the differences among states are not as great.”

In conclusion,

The popular conception that Washington’s tax system is the most regressive in the nation is based on a study with serious flaws that bias the comparison to other states. The system is certainly less regressive than the study makes it appear. When federal taxes are considered—as they should be—the tax system is progressive and when expenditures are considered the overall sys- tem is even more progressive.

The WRC brief holds up well as a review of the state tax structure and a primer on analyzing tax burdens. Given the current discussions, it’s once again timely and relevant.