By Erica C. Barnett
State house and senate leaders say their proposal to pass an income tax in Washington state will be paired with reductions to business taxes the legislature just passed last year, but that the bill will not be “revenue neutral,” as some progressive advocates had feared. That means the new “millionaires’ tax” will help pay for things like public education and health care, rather than being used entirely to offset reductions in other taxes, such as the business and occupation tax.
“More than half has to be additive,” House Majority Leader Joe Fitzgibbon said. “We’ve talked about ranges between 50 and 75 percent [new revenues.” I don’t know where within that range we’re going to ultimately land, but we wouldn’t do this if we weren’t getting a significant revenue boost” of between $3 billion and $4 billion a year.
Senate Majority Leader Jamie Pedersen said he anticipated that the proposal will include tax cuts that will offset between 25 and 40 percent of the revenues from the new income tax.
“Representative Fitzgibbon and the governor and I are arm-wrestling over what the tax reduction will be,” Pedersen said.
The underlying income tax proposal, a 9.9 percent tax on income (including capital gains) of more than $1 million in any calendar year, has the tentative support of Gov. Bob Ferguson, who wants to use the tax to fund the Working Families Tax Credit—an annual tax refund for low- to moderate-income families. In the short term, Ferguson has also proposed tapping funds from the Climate Commitment Act, Washington’s pollution tax, to fund the tax credit, which currently comes out of the state’s general fund.
Fitzgibbon said the cuts to other taxes will probably include cuts to the business and occupation tax increases and surcharge on large businesses that just passed last year. The surcharge—an extra 0.5 percent tax on revenue over $250 million—is supposed to raise about $550 million a year once the state starts collecting it in 2027. ”
“Obviously, there’s some businesses that have plenty of ability to pay [the surcharge], but there are some businesses, like hospitals or food wholesalers, where that increased tax liability makes its way back to people,” Fitzgibbon said. “The B&O surcharge is currently scheduled to run though 2030. The question is, could you sunset it earlier if you had the income tax?”
Pedersen said Gov. Ferguson “has asked for pretty dramatic expansion of the small business credit,” a tax exemption for small businesses that bring in less than $100,000 a year. Ferguson initially predicated his support for the millionaire’s tax on expanding the credit to businesses making up to $1 million a year. “That, as it turns out, is wildly expensive and probably not doable, but we could bump it to to $250,000 or $300,000— that’s a possibility,” Pedersen said.
Ferguson’s office did not respond to a request for an interview.
The income tax bill will also likely include a proposal to eliminate state sales taxes on some personal care and hygiene items, such as diapers and shampoo (“everybody uses shampoo!” said Pedersen, a man with a full head of hair) and prepared foods.
If the legislation passes, it will face at least two further hurdles. First, right-wing initiative funder Brian Heywood has already indicated he plans to file a measure to repeal the tax. If businesses end up opposing the tax and funding an initiative to repeal it, that could help Heywood fund a real campaign—one that’s more successful than his previous anti-tax efforts.
Fitzgibbon said he’s “pretty confident we can withstand a ballot challenge … especially if voters are seeing investments in things like education and health care.”
Pedersen said he’s seen polling that suggests people are less concerned about getting relief on specific taxes, like the state sales tax, than they are about the need to fund critical services and make the tax system more fair at a time when the federal government is subjecting blue states to ideological tests and funding cuts.
“If we have a more or less even campaign, where we can get out messages about the tax system and this 9.9 percent tax could lead to $4 billion a year of income that could help us invest in public schools and health care and avoid cuts, we think we will have a winning campaign,” Pedersen said. “If the spending is five to one against us, then it starts to become tough, because then the airwaves are full of ‘the legislature can’t manage its way out of a paper bag.'”
If the legislature passes a statewide high-earners’ income tax, and if voters agree it’s worth preserving, there’s still one more obstacle to a statewide income tax: A 1933 ruling by the state Supreme Court, which found that a progressive income tax would violate the state constitution’s uniformity clause, which says that different types of property can’t be taxed at different rates. Many legal experts believe this ruling, which defines income as a type of property, is weak, and are eager to open the decision to scrutiny after 92 years.
Speaking to PubliCola on Tuesday, Pedersen said he hopes to have a proposal to present publicly by next Friday. “The house, the senate, the governor, and leadership are mostly aligned on this. We still have a bunch of work to do. We have to talk to our caucuses. But we’re in a very different position on revenue than we were last year on the wealth tax, where there was enthusiasm from the caucuses but no support from the governor.”
