Policy Brief

Introduction

In November the people of Washington will again vote on whether to impose a state income tax. The income tax proposal will appear on the ballot as Initiative 1098. Currently Washington is one of only nine states that do not impose a general income tax on citizens.

The people of Washington first considered an income tax in 1932, when it was enacted by a large majority. In 1933 the measure was struck down by the state supreme court as a violation of the constitution’s uniformity clause (discussed below). In the years since 1932 Washington voters have rejected a state income tax four times, and the supreme court has invalidated income tax bills passed by the legislature.

Initiative 1098 is different from past proposals. In the past, an income tax was presented to voters in the form of a constitutional amendment, in order to avoid the uniformity clause violation identified by the supreme court. Initiative 1098 is different in three ways.

• It is presented to voters as a proposed state law, not as a constitutional amendment
• As a “high-earners” tax, it would impose a two-tier tax on residents above a certain income level, not a graduated tax directed at most income earners
• It includes cuts in two existing taxes, in addition to the creation of a new tax

This Citizens’ Guide describes the main provisions of Initiative 1098, how much revenue it would raise, and how a new tax on high-earners would affect charitable giving. The study explains the impact Initiative 1098 would have on the business climate and Washington’s competitiveness compared to other states. It also examines whether Initiative 1098 is constitutional, describing past state supreme court income tax rulings and whether they are relevant today.  Finally, this study examines the arguments made by Initiative 1098 proponents, particularly those involving fairness, revenue stability, funding for public schools, and whether the legislature would keep the tax limited only to higher-income people once it were in place.

Key Findings

1. I-1098 would enact a 5 percent tax on incomes over $200,000 for individuals and $400,000 for couples.
2. I-1098 would reduce the state’s portion of the property tax by 20 percent (amounting to a 4 percent overall reduction in property taxes) and increase the B&O tax exemption to $4,800.
3. If voters approve I-1098, after two years lawmakers can increase the tax rates and extend the income tax to anyone.
4. By enacting an income tax, Washington would be giving up a significant competitive advantage in relation to other states.
5. Passage of I-1098 would instantly raise Washington’s income tax rate from zero to the fourth highest in the country.
6. Under I-1098, a person could donate 100 percent of his yearly income to charity, and still owe income tax to the state.

Read the full Policy Brief here.

A summary Policy Note is available here.