Washington’s a taxing place for non-rich

A loyal reader this week passed along a thought-provoking booklet from an outfit called the Institute on Taxation and Economic Policy, a think-tank based in the Other Washington, titled “Who Pays – A Distributional Analysis of the Tax Systems in All 50 States.” The study looks at the “fairness” of each state’s tax system by calculating the proportion of family income paid in taxes by folks at various income levels.

According to ITEP, Washington is a runaway “winner” for the most regressive tax structure in the nation. The least well-off 20 percent of us – households making less than $17,000 – pay 17.6 percent of their income in state sales, excise and property taxes. As income rises, the proportion paid in state taxes drops: 12.8 percent taxes for those making up to $31,000; 11.1 percent for income to $48,000; 9.2 percent for income to $75,000; 7.4 percent for the 15 percent who make between $75,000 and $143,000; 5.2 percent for the 4 percent who make between $143,000 and $922,000; and only 3.3 percent for the fortunate 1 percent of Washington households that rake in more than $922,000 per year.

(An interesting footnote – one must make more money to crack the top 1 percent of earners in Washington than in any other state – plainly, the “Microsoft Effect.”)

It doesn’t have to be that way. In California, the least affluent 20 percent pay 11.3 percent of their income in state taxes, while the best-off 1 percent pay 7.2 percent. The difference – Washington relies on regressive sales and excise taxes, while California has a graduated state income tax.

The ITEP booklet is particularly timely as our state Legislature struggles with a biennial budget deficit of $2.5 billion or thereabouts. While a solution is nowhere in sight, all proposals on the table cut services, mostly to the poor. Those plans that boost revenue call for higher “vice taxes” on alcohol and tobacco, gasoline taxes, higher user fees and the proliferation of gambling, all of which burden the less affluent far more than the better off. Whatever happens, the less well-off will get clobbered both ways, in more taxes and fewer services.

Not surprisingly, ITEP advocates state income taxes – a bias inherent in the group’s decision that tax burden as a percentage of income is a meaningful figure. But as we know, public opinion has run strongly against a Washington income tax, mostly from those who claim that they already pay too much.

But what if an income tax were imposed only on those who don’t bear a particularly heavy state tax burden? Suppose, for example, that the state imposed a 2 percent tax on income over $75,000, 4 percent on income over $150,000 and 6 percent on income over $500,000?

Using ITEP’s numbers, a tax of that magnitude – affordable to those affected and deductible from their federal income tax, considerably easing that bite – would bring in something on the order of $2.6 billion per year. While that’s a bit inflated, because ITEP used 2000 income numbers, which have likely dropped with the dot.com collapse, such a tax could still likely plug our deficit, give teachers their raise, make a decent start on fixing our transportation system and maybe even reduce some of the tax burden on those who do indeed pay too much.

Just a thought.

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