Democrats hope to change Washington’s regressive tax structure with new taxes on wealthy

OLYMPIA — In an effort to make the state’s tax system more progressive, Democrats are proposing new taxes on the wealthy, using some new and some old proposals to get there. 

Washington has one of the most regressive tax systems in the country, meaning low-income earners pay more taxes than the high-income earners. With no income tax, Washington’s tax system relies heavily on sales tax and property and business taxes, which Democrats say puts the burden on those with less income.

Democratic Rep. Noel Frame, of Seattle, called the tax system’s reliance on low-income earners “unconscionable, unacceptable and frankly unsustainable.”

Democratic lawmakers have tried for years to flip that system. This year’s efforts include implementing a capital gains tax and a “billionaire” tax.

The controversial capital gains tax proposal, requested by Gov. Jay Inslee, would create a 9% tax on annual investment earnings of more than $25,000 for an individual and $50,000 for a married couple. It has been proposed before but has never made it through both chambers of the Legislature. 

The wealth tax would apply a 1% tax on intangible wealth above $1 billion. Intangible wealth includes cash, stocks, bonds and contracts.

The proposal would only affect the wealthiest of Washington residents, including Jeff Bezos and Bill Gates. Less than 100 taxpayers have wealth in excess of $1 billion, according to the Department of Revenue Services’ fiscal analysis of the bill. That number could vary from year to year.

Democratic leadership has said while these and other taxes are currently being discussed, there has not been a lot of discussion on how they would work together with their two-year budget proposal.

“We are going to be talking about how we can make our tax code more fair,” House Majority Leader Pat Sullivan, of Covington, told reporters last week.

As the Legislature looks to draft a two-year budget and get the state on the road to economic recovery post-pandemic, Democrats have said now is the time to implement these new taxes. Although the state’s economy has rebounded since the beginning of the pandemic, the budget may still be a challenge for many proposals this session.

Democrats have said new taxes would be needed to make up for some of the revenue lost due to the pandemic. Republicans, on the other hand, don’t believe now is the time to be raising taxes as it could hurt those who are already struggling to make ends meet. 

Senate Majority Leader Andy Billig, of Spokane, said when lawmakers look at new taxes, they look at three components: revenue generated from it, where the revenue goes and how it will make the tax code more fair.

“Nobody’s going to vote for taxes just for taxes’ sake,” he said. “It’s about where the investment goes.”

The “billionaire” tax sponsored by Frame would establish a 1% tax on intangible financial assets of more than $1 billion.  It does not include income and does not apply to the first $1 billion of a person’s assets, according to the bill. 

No other state currently has a wealth tax of this kind.

The revenue would be deposited into the state general fund and help pay for certain services, such as education, child care, public health, housing and public safety, according to the bill. Frame also said the revenue could fund the state’s Working Families Tax Credit, a plan that gives a tax credit to low-income workers.

It would bring $4.95 billion to the 2023-25 budget cycle and $4.83 billion to the 2025-27 budget cycle, according to a fiscal analysis of the proposal. The state’s current operating budget was $52.4 billion when it was signed into law in 2019.

“Should we ask the wealthiest Washingtonians, many of which happen to be the wealthiest people in the world, to share equitably in the responsibility to recover, rebuild and reimagine our economy?” Frame told House Finance Committee members last week. 

In the bill’s public hearing on Tuesday, 1,326 people signed in to give an opinion, including 1,317 who supported the bill.

Republican Rep. Drew Stokesbary of Auburn told reporters Tuesday he worries that the wealth tax would just cause billionaires to move to another state, adding it sets a “troubling precedent.” 

“If 7 million Washingtonians gang up on the nine richest this year, what’s to stop us from ganging up on the next thousand richest the next year and so on?” he said.

Sullivan said last week there hadn’t been much discussion in the caucus around the wealth tax, but he knows there is support in their communities for it. He added it’s too early to say whether it would pass either chamber. 

Multiple bills have also been introduced this session that would create a capital gains tax to fund various programs. The idea isn’t new to Democrats, who have tried and failed to pass a capital gains tax in previous sessions. Eight other states currently don’t have a capital gains tax. Of the 41 that do, some tax capital gains in the same manner they do income while others treat capital gains differently. 

Inslee’s proposal, which would create a 9% tax on capital gains, got its first public hearing in early January. More than 100 people signed up to testify remotely. 

Supporters said it would help close the wealth gap that exists in Washington. 

“Our tax system now is completely upside down,” Cynthia Steward at the League of Women Voters of Washington said in the hearing. “A capital gains tax is a good first step.”

Opponents, on the other hand, called it an unconstitutional income tax. Opponents also said it will hurt small business owners, who often use the sale of their business to fund their retirement.

“This is the wrong direction for our state to go,” Mark Johnson of the Washington Retail Association said.

Other bills already introduced would create a capital gains tax to fund a specific portion of the budget.

Rep. Tana Senn, D-Mercer Island, filed a bill last week that would create a capital gains tax that is intended to more adequately fund child care services in the state. The bill would impose a 7.7% tax on real estate sales and a 9.9% tax on the sale of stocks, bonds and other assets for earnings greater than $200,000 per person. The bill will receive its first public hearing this week. 

Republicans have long spoken out against a capital gains tax. Sen. Lynda Wilson, lead Republican on the Ways & Means Committee, said in December that “every other state in the Union calls it an income tax.”

“It’s the most volatile revenue source that there is,” she said.

Stokesbary called it “just bad economic policy, especially right now.”