Washington Legislature Takes Up Formal Income Tax Ban

February 15, 2017

If the Washington state legislature succeeds in referring a constitutional ban on income taxes to the voters, it will put an end to a constitutional controversy that has raged for over eight decades. The state’s constitution never uses the phrase “income tax,” but since 1933, a state supreme court decision all but precluding an income tax has held sway.

How can this be? It’s all a matter of definitions.

In 1930, Washington voters ratified a constitutional amendment with a sweeping impact on the state’s powers of taxation, holding, among other things, that “all taxes shall be uniform upon the same classes of property” and—here’s where it gets interesting—that “the word ‘property’ as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.” (Art. 7, § 1 as amended.)

When voters ratified the 1930 amendment, state income taxes were still relatively rare. A few states experimented with them during and in the immediate aftermath of the Civil War, though these were of short duration. Several more states adopted income taxes during the Progressive Era in the early 20th century, though not all survived legal challenges. The next big wave of income taxes was in response to the Great Depression, and was just emerging as the Washington amendment came into effect.

At the time, most state taxes fell on property as we commonly understand it: real property (real estate, structures, improvements, etc.) and tangible property (basically, physical objects that can be touched and moved, both business and personal). Uniformity clauses for property taxes are hardly unique to Washington. What the voters ratified in 1930, however, included an extremely broad definition: everything, whether tangible or intangible, subject to ownership. In 1933, the Washington Supreme Court held that income is a thing subject to ownership, meaning that the uniformity clause applied.

That did not wholly preclude an income tax; it simply meant that it would have to be uniform, which would theoretically allow a single-rate but not a graduated-rate income tax. Eight states currently impose single-rate income taxes, so this is hardly an insurmountable obstacle in and of itself. There is, however, a complication, namely another constitutional provision (Art. 7, § 2) limiting the aggregate of all state taxes on real and personal property to no more than “one percent of the true and fair value of such property in money.” An income tax, therefore, would have to be flat and imposed at a rate of no more than one percent—even less, realistically, given that other state taxes also count toward that cap.

The practical upshot of these provisions has been a functional restriction on the ability of the state to impose an individual income tax, though there have long been critics of the 1933 ruling who argue that the definition of property was too broadly construed, and that it should not apply to taxes on income.

(There have also been attempts to circumvent the restriction by indirect means, for instance, with proposed taxes on capital gains income styled as an excise on the privilege of selling capital assets. This is an unconvincing argument, particularly since the tax would be based not on the entirety of the sale but rather on the net realization—in other words, on the income earned through the transaction.)

Whatever the courts might think about income taxes were the issue to arise again, the voters have been consistent, rejecting an income tax nine times, most recently in 2010. A local income tax proposal in Olympia, designed as an explicit test case to challenge the 1933 ruling, also failed at the ballot in 2016. (The proposal may have faced an even larger hurdle: state law is clear in dictating that “[a] county, city, or city-county shall not levy a tax on net income.”)

With SJR 8204, ten senators are hoping to settle the question once and for all by amending the constitution with unambiguous language prohibiting any state or local tax on “individual income derived from wages, investments, the sale of goods or services, or any other source.” Such an amendment would not only foreclose any possibility of levying a state or local tax on wage income, but it would also close the door—if indeed it has not already been closed under existing law—on Governor Inslee’s capital gains tax proposal.

Garnering the necessary two-thirds vote in both chambers is a decidedly uphill battle, but in a state whose voters have so consistently rejected income taxes, the proposed amendment is one to watch.


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