Starter income tax is bad enough, collections rebound

Last week, the Legislature got a terrific piece of news. State tax collections have rebounded despite one of the worst economic situations we’ve ever faced. The latest projection adds $3.3 billion, and we’re right back where we were before COVID-19-related shutdown orders.

The strange thing about it was the reaction of our Democratic colleagues. They said they wouldn’t let this good news stand in the way of their effort to impose an income tax on the people of Washington. And never mind that the voters keep saying no to the idea —10 times since 1934.

It’s been like that all session long, as this year’s proposal for a new state income tax has advanced in the Legislature. Logic has been tortured, syntax twisted, elaborate subterfuges employed. Two weeks ago, the Senate’s Democratic majority passed a starter income tax they insist would only hurt millionaires.

But I think everyone understands that if this starter income tax survives court challenges, it is only a matter of time before it becomes a big, broad income tax that hits the middle class.

For the trusting souls who wish to believe this is only about the rich, I want to explain why this will lead to a middle-class income tax, as surely as night follows day.

Senate Bill 5096, proposed by the governor, enacts a narrow type of income tax, on capital gains. There are so many exclusions that it really leaves one major target, high earners who are compensated with stock and options, mainly in the tech industry.

Some people may think it is a good idea to soak the rich, even if it means we must attack the industry that has driven the state’s prosperity for the last 25 years and give it an incentive to leave the state. Unfortunately, in every other state that has tried something like this, it hasn’t ended well.

The problem is called volatility.

The state Department of Revenue tells us to expect $1 billion every two years if this tax is enacted, but that’s just an average. Actual collections from capital gains income taxes go up and down like a roller coaster – anywhere from 200% of projections to a 91% decrease, according to the National Taxpayers Union. The reason is simple. No one sells assets in a down market if they can help it. They wait before cashing in their stock options.

So when recession hits, tax collections tank. Every state foolish enough to build budgets around this anticipated money – which is to say, all of them – has to find hundreds of millions in a hurry. Broadening the tax base is the easy way out. It happened in Connecticut, New York and New Jersey. Taxes on the rich became taxes on everyone within a few short years.

Right now, this bill appears to be on the fast track in the House, and nothing seems likely to stop it. I fully expect the people will have to take it to an initiative or referendum. When the people get their chance to vote against an income tax for the 11th time, I hope they’ll look beyond the platitudes to the experience of other states and the evidence they can see with their own eyes.

For instance, advocates of higher taxes and spending like to tell us our tax system is broken. It just doesn’t take enough of the people’s money.

But if our system is so well-balanced it can produce a $3.3 billion turnaround in the worst of times, that sounds like a “problem” we would be crazy to fix.

– Sen. Perry Dozier, R-Waitsburg, represents the 16th Legislative District.