New Revenue Projection for Proposed Washington State Income Tax Does Not Justify Targeting High-Income Earners

August 12, 2010

Washington State has the distinction of being one of only seven states with no personal income tax. That could change soon: Voters will decide in November whether to implement one.

A new estimate shows that the proposed income tax, which would apply only to taxpayers earning over $200,000 a year, could raise more revenue than initially thought. From the Seattle Times:

The income tax initiative, I-1098, would bring in more than twice as much money as proponents have said, according to a new analysis by the governor’s budget office office.

Proponents of the high-earner income tax had estimated it would bring in about $1 billion annually. But the governor’s budget office projects the tax would generate about $11.6 billion between 2012 and 2016.

I-1098, backed by a coalition including labor, health-care and education groups, would create a 5 percent tax rate on annual income above $200,000 for individuals and $400,000 for couples, and a 9 percent tax rate on income above $500,000 for individuals and on income above $1 million for couples. It also would cut the state property tax by 20 percent and increase the business-and-occupation tax credit for small businesses to $4,800 from $420 per year. Sponsors say the new tax revenue would help pay for education and health-care programs.

Regardless of the tax’s revenue potential or worthiness of the revenue’s uses, income taxes that fall only on high-income earners are poor tax policy. A 2009 Tax Foundation study on high-earner state income taxes explained:

States that adopt new taxes on high-income earners are ones where policymakers are persuaded to ignore concerns about long-term economic growth in favor of a short-term budget fix that avoids deep spending cuts. …

Yes, such taxes will generally raise revenue in the short term without a sudden exodus of wealthy people fleeing to the state next door… . But over the medium term, the taxes will negatively impact location decisions. People expanding old businesses or creating new ones will incorporate the higher cost of doing business into their decision-making, and steer clear of the state.

More on Washington State’s tax system and income taxes on high-income earners.

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