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Report: Washington still has least-fair tax system in country; hits the poor six times harder than the wealthy

Post by Brad Shannon / The Olympian on Jan. 30, 2013 at 3:25 pm | No Comments »
January 30, 2013 3:32 pm

The beauty of a tax system is always in the eye of a beholder, and some business rankings say Washington state’s business climate is good partly because of its lack of an income tax. But a report by the nonpartisan Institute on Taxation and Economic Policy rates Washington state’s system as the worst in the country in terms of how much harder it hits the poor and middle-class than the rich. Lack of an income tax is a clear factor.

ITEP, based in Washington, D.C., found that all states’ tax systems are actually weighted in favor of the wealthy. In other words, those well off pay a smaller share of income in state and local taxes than do the poor. But Washington was at the top of what ITEP calls the “Terrible Ten.”

“In these ‘Terrible Ten’ states, the bottom 20 percent pay up to six times as much of their income in taxes as their wealthy counterparts. Washington State is the most regressive, followed by Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana, and Alabama,” the report’s executive summary states.

You can read about Washington’s details here. Washington’s poorest 20 percent pay six times what the richest 1 percent pays, while those in the middle 20 percent pay almost four times what the top 1 percent pay.

It’s not clear that the rankings, which mirror what Washington earned in past years, will greatly change the debate on taxes in Olympia. But some Democrats are trying to push for new taxes that might spread the burden – including Seattle Sen. Ed Murray’s proposal for a 5 percent tax on certain capital gains, which faces an uncertain future in Senate where a Republican-dominated coalition has the majority.

And Democratic Rep. Marko Liias of Mukilteo introduced House Bill 1545 on Wednesday to impose a 2 percent income tax on those who earn over $1 million a year.

The left-of-center Washington State Budget and Policy Center said the ITEP report is evidence Washington needs to consider new options. For more than a year the center has been advocating for a capital gains tax – dedicating a portion of proceeds for a long-term trust fund for higher education.

In a news release the Budget and Policy Center said:

Combining all of the state and local property, sales and excise taxes Washington state residents pay, the average overall effective tax rates by income group are 17 percent for the bottom 20 percent, 10 percent for the middle 20 percent and only 2.8 percent for the top one percent. Nationally, those figures are 11.1 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.6 percent for the top one percent.

“The latest version of Who Pays? makes it clear that policymakers must reform Washington state’s out-dated, upside down, and inadequate revenue system. Our 1930s era tax system takes a huge bite out middle class family budgets while asking little of those at the very top of the income scale,” says Remy Trupin, Executive Director of the Washington State Budget & Policy Center. “The system is failing to support things that all Washingtonians care about, such as education, health care, the environment, and policies to help families find and keep a job. That’s not right. The Budget & Policy Center has put forward key reforms, such as full funding for the Working Families Tax Rebate, and an excise tax on capital gains that would create a more robust and equitable revenue system. Now is the time for policymakers to come together and build a tax system that works for all Washingtonians, not just those at the very top.”

States like Washington, without an income tax consistently rank as the most regressive. Who Pays? shows that of the ten most regressive states, four do not have any taxes on personal income, one state applies it only to interest and dividends and the other five have a personal income tax that is flat or virtually flat across all income groups.

But Tim Eyman, who sponsored last year’s successful Initiative 1185 to require two-thirds supermajority approval of tax increases, said he looks at the interplay of federal, state and local systems when judging tax burden. And Eyman said the federal system avoids taxing those at the low end, below $50,000.

“I think this is the worst time for government to look at raising taxes on people that are struggling already,” Eyman said. “All taxpayers are struggling right now and they are not in favor of raising taxes right now.’’

He said voters also overwhelmingly rejected taxes on banks and oil firms in advisory votes that also were on the ballot. And, he noted efforts in other states with income taxes to replace them with consumption taxes.

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