With the Washington State Supreme Court unwilling to reexamine its long-standing position that a graduated income tax is illegal, some local and state elected officials continue searching for ways to enact an income tax. At the state level, lawmakers may propose a capital gains income tax to shore up anticipated revenue shortfall or challenge the state’s progressive income tax ban.
However, such taxes could dissuade “economic refugees” – those who came here from other states due to Washington’s lack of an income tax – from staying here. .
Brian Heywood is the CEO and managing partner at Taiyo Pacific Partners LP, a company that invests in Japan and other Asian countries. Originally formed in California where state revenue is heavily dependent on a capital gains tax, Heywood and his employees moved to Washington in 2007 primarily because it lacked that tax.
However, at the Washington Policy Center’s April 14 virtual summit, Heywood said that if Washington were to impose even a one percent flat-rate income tax, he would consider leaving.
“Once you open that door, you don’t stop at one percent,” he said. “You’d creep up very quickly. I’d prefer not to move again, but if one percent (income tax) started…I would definitely look at moving again.”
The city of Seattle is currently contemplating a flat-rate income tax along with a job tax after the state Court of Appeals struck down a 1984 state law banning local income taxes. The Washington state constitution allows an income tax, but its uniformity clause requires that property of different classes be taxed uniformly.
While these taxes are often touted as targeting “big business”, the burden is not restricted solely to them, as one commentator recently noted.
However, former State Attorney General and gubernatorial candidate Rob McKenna anticipates political blowback similar to that which the city’s 2018 job tax received because “it would apply to everybody.” For progressive income tax advocates, a flat-rate income tax would also fail to trigger a lawsuit allowing the state high court to once more take up the constitutional issue.
Yet, other state officials have touted the lack of an income tax as a “selling point” for Washington state to prospective businesses. The state Department of Commerce’s Choose Washington campaign states: “we offer businesses some competitive advantages found in few other states. This includes no personal or corporate income tax.”
Heywood said it’s for that reason his company moved to Washington in the first place. He added that the prevailing attitude in California was “nobody’s going to move away…the weather’s too nice. I remember thinking, ‘Well, watch me.’”
Once his company moved, Heywood said the money saved in taxes within several years enabled both him and employees to fully pay off new homes while also recovering the moving costs. Heywood now runs a horse boarding business out of his ranch that employs 5-10 workers, many of them young college students.
From a state budgeting perspective, State Tax Policy Director Jared Walczak with the Tax Foundation argues that capital gains taxes are also extremely volatile. At the April 14 virtual summit, he noted that the combined revenues of all state capital gains taxes during the Great Recession fell by 71 percent. In California, capital gains revenue dropped by 78 percent.
“You really don’t want to be tying so much of your revenue…to sources of income that are extremely volatile, like capital gains,” he said.
Meanwhile, the total sales tax revenue decreased by only eight percent. “It’s pretty manageable for states,” he said, adding that when states rely primarily on various income taxes, whether individual or corporate, “recovery also takes significantly longer. You don’t get back to normal on income for some time.”
While talk of new taxes are likely in store for the legislature either during a special session or next year, how the issue will move forward at this point in the context of current events is up for debate.
For his part, Heywood cautions: “my employees can work from anywhere.”