Wash. Voters Once Passed An Income Tax By A Wider Margin Than Vote For Legal Booze
Editor's Note: We're taking a closer look at Washington's tax system through a week-long series. This is the first installment of “Where’s the Dough? On the Hunt for Washington’s Missing Tax Dollars."
Washington state’s tax system has long been heaped with insults. Lately, it’s been called a jalopy, a Ford Pinto and the worst in the country.
The Institute on Taxation and Economic Policy, a Washington, D.C.-based think tank, says Washington's tax system is the most regressive in the nation. That’s because with our state’s heavy reliance on sales tax and lack of an income tax, the poorest 20 percent of residents pay 16.8 percent of their income in state and local taxes, while the richest pay 2.4 percent.
Many Democrats and some Republicans say the system set up in the 1930s isn’t adequate for the 21st century.
Back In The Day, Farmers Shouldered The Tax Burden
Let's rewind the clock to see how we got here.
Here’s a pop quiz: Did you know Washington voters once passed an income tax?
They did. The year was 1932, and it all had to do with what was going on with farmers.
To tell the story, you have to go back even further in time to World War I. Farmers were doing great. They were supplying crops to the world. And that was important for Washington state because we counted on those farmers for tax revenue.
“They were the ones who were essentially paying the taxes in a lot of their counties,” said Phil Roberts, a professor of history at the University of Wyoming and author of "A Penny for the Governor, a Dollar for Uncle Sam: Income Taxation in Washington."
Back then, the state really just had a property tax, and in rural areas, farmers were the ones who owned property.
“County government and state government and school districts all relied on property taxation in order to keep them going,” Roberts said.
Why Farmers Began Pushing For An Income Tax
But then commodity prices plummeted after the war, and farmers began hurting. They looked around and asked why they were the ones shouldering the tax burden.
So an association of farmers, the Washington Grange, started pushing for an income tax.
One farmer told Business Week in 1931: “The narrowing margin of net return to agriculture will not permit us to meet the increasing property tax, and the industrialist must help pay for the privilege of living in a state endowed with natural advantages."
So in 1932, the Grange pushed a ballot initiative for a progressive income tax. It exempted many people below a certain income. Also on the ballot was an item to limit property tax increases. And, notably, legalization of booze was on the ballot.
Surprisingly, the income tax passed by a wider margin than liquor legalization. Roberts says the tax had the support of labor groups in addition to the Grange, which is why it passed.
“Yes, it passed overwhelmingly,” he said. “It was extremely popular.”
So Where Did The Income Tax Go?
So if voters passed it, why don’t we have an income tax today?
The answer: the state Supreme Court struck it down. The court, in a 5-to-4 decision, ruled that the tax violated the state constitution because it wasn’t uniform; wealthier people would have paid a higher rate than lower-income people.
There may have been another reason the court rejected it. People, possibly even justices, received complex tax forms in the mail and got spooked, Roberts said.
After that, support for an income tax evaporated. Farmers got some tax relief from the property tax cap voters had approved. But that measure forced the state to come up with other ways to fund schools and other services.
So lawmakers put in a sales tax and a tax on business revenue called the business and occupation tax.
That system from the 1930s is what we’ve got today.
But there have been other attempts to overhaul it, notably in 1969.
Gov. Evans Attempts An Overhaul
Republican Gov. Daniel Evans decided to take on the politically risky goal of revamping the state’s tax system. Back then, like now, the state was struggling with school funding.
“We didn’t have an adequate tax system,” he said. “The local school districts had to have increasing special levies. And pretty soon, it just broke the back of people, and they voted the levies down.”
Evans embarked on a major reform that would have reduced the sales tax, the property tax and the business and occupation tax, while at the same time adding a flat-rate income tax with deductions to make it more progressive.
The legislature — both Republicans and Democrats lawmakers — went for it.
“So it was a huge vote by the legislature recognizing that we had a problem, and here was a responsible way to handle it,” Evans said. “We put it up for the voters and they voted it down, two-and-a-half to one.”
Evans says the system would have been fairer, more stable and more productive.
“We would not have needed any tax increases whatsoever in the ensuing 40 years, and we’d be in pretty darn good shape,” he said. “I hate to say I told you so, but the people turned it down and now we’re stuck with what we’ve got.”
Then There Are The Tax Breaks
Meanwhile, all along, lawmakers have been giving special tax breaks to some groups and industries.
In fact, there are now about 650 tax breaks in Washington. That means money the state’s not collecting on everything from cleaning freshwater fish to processing dried peas, to building airplanes. (See how the tax exemptions break down.)
In the next installment of our series, we'll meet one of the people directly responsible for some of those tax breaks.