Washington Research Council debunks claims that state’s tax structure is nation’s “most regressive.”

A new report from the Washington Research Council takes a close look at Washington’s tax structure. It’s an important analysis that effectively debunks the often-repeated charges that our state’s “upside-down” tax system is the “most regressive” in the nation. The claims were made repeatedly during discussions of the Seattle head tax. Repetition, however, does not make a claim true. 

From the brief overview of the WRC report:

Charges that Washington has the nation’s most regressive state and local tax structurestem from a 2015 report by the Institute on Taxation and Economic Policy (ITEP). 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 tooverestimate 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.

We also point to a key principle of fiscal federalism (a theory allocating responsibilities among the three levels of government), which holds that redistributive tax policies are best enacted at the national level. Adding this dimension to the analysis leads to our third finding:

3. All state and local tax structures are regressive. But when the steeply progressive federal income tax system is considered, the overall federal-state-local tax burden is progressive in Washington and every other state, and the differences among thestates represent smaller proportions of households’ tax burdens.

The report moves through each of these findings in some detail in a 7-page policy brief supported further by an extended academic appendix.

The WRC report is timely. In the coming weeks, the House Tax Structure Work Group holding meetings around the state, pursuant to ESSB 6032,

to facilitate public discussions throughout the state regarding Washington’s tax structure. As part of this effort, the work group may hold up to seven public meetings in geographically dispersed areas of the state throughout the 2017-2019 fiscal biennium. These discussions may include but are not limited to the advantages and disadvantages of the state’s current tax structure and potential options to improve the current structure for the benefit of individuals, families, and businesses in Washington state. 

The Research Council acknowledges.

This report, of course, will not settle the debate about tax policy in Washington. Those who prefer a highly progressive tax structure may examine the data, accept thatWashington is perhaps not the “most regressive” state in the nation, and still contendthat Washington should adopt a more progressive tax system. States with an income tax typically rank as more progressive than those that lack one. Others may examine the data and conclude that, within the context of fiscal federalism and the expressedpreferences of Washington voters, the state’s tax structure is satisfactory.

We recognize that the debate will be ongoing. Our hope is that this paper helps inform that debate.

We share that hope. And we recommend the Council’s clearly written and well-documented analysis to your attention.