Frequently Asked Questions
Millionaires move less than the wider public. Family, business, and social networks often keep them in place, along with access to local amenities. Washington state has many attractive qualities that keep people here: our sports teams, access to quality skiing and gorgeous hiking trails, fresh and well-prepared food, ample water (the ocean, the Sound, lakes). Tax policy does not usually compel the majority of millionaires to move out of state nor does it significantly disrupt the accumulation of excess wealth. There were more than 463,000 millionaires in Washington in 2021, the year a capital gains tax was introduced. Two years later, there were over 681,000 millionaires with a wealth increase of more than $748 billion.
Unfortunately, it’s often people with low and middle incomes who are forced to make difficult decisions about moving for cheaper access to housing or for family support with child care.
Terms like “progressive” and “regressive” are terms used to describe how taxes impact people at different income levels.
A progressive tax means that as incomes rise, the amount of taxes owed also rises too. Typically this means that the amount you owe in taxes is connected to your ability to pay those taxes, so people with the least end up paying the lowest amount of taxes, while people with the highest incomes pay the highest share.
By contrast, a regressive tax means that people with the least end up paying the highest share of their income in taxes. This is what we call “upside down.”
An example of a “regressive” tax is a sales tax, which is flat tax that ends up impacting people with lower or middle incomes more than those who earn high incomes or have a lot of wealth. For regressive taxes, the amount you pay, as a share of your annual income, decreases the more you earn.
The Institute on Taxation and Economic Policy’s Tax Inequality Index ranks Washington state as the 2nd worst tax code in the nation. In other words, Washington state has the 2nd most regressive state and local tax code. The lowest-income 20% of households in Washington pay 13.8% of their income in state and local taxes, and the middle 20% of households pay 10.9%, while the wealthiest 1% of households pay 4.1%.
Our ranking as 2nd worst actually reflects some improvements. For decades, Washington had the 1st worst tax code, but the passing of the Working Families Tax Credit and capital gains tax moved Washington up one spot, now ahead of Florida.
By comparison, Minnesota is ranked as the most equitable – i.e., least regressive tax code – with the lowest-income 20% of households paying an effective 6.2% tax rate, the middle 20% of households paying 10.0%, and the wealthiest 1% paying 10.5%. Our neighbors in Idaho, Montana, Oregon, and California all rank in the top 15 most equitable tax codes in the country.
The tax code Washington has today was established 100 years ago with the passage of the Washington State Revenue Act of 1935. While property taxes had already been in use in Washington, this act created the sales tax and the highly unique Business & Occupation tax (AKA the B&O tax).
Over time, there have been minimal changes to the tax code and a lot of exemptions to certain sales and B&O taxes for wealthy corporations. Over the past few decades, lawmakers used sales and B&O tax preferences as an attempt to incentivize companies to do business. In reality these preferences to wealthy individuals and corporations has reinforced our upside down tax code, which requires people and small businesses with the lowest incomes to pay the highest share of their annual incomes in state and local taxes.
A wealth of research shows that the sales tax, B&O tax, and property taxes in Washington state are regressive taxes. Until these taxes can be reformed, Washington state will rely on a tax code built for the early 1900s.
A budget deficit or budget shortfall occurs when projected state tax revenues decrease below what’s needed to fund the budget. Unlike the federal government, the Washington state government has a balanced budget requirement, meaning that legislators cannot pass a budget that is larger than anticipated tax revenues over the next 4-year period. However sometimes, the cost to fund and maintain services in the current budget can unexpectedly increase, or tax revenues come in lower than originally projected.
Washington state frequently faces budget deficits due to a history of budget cuts and underinvestment in core public services and an unsustainable, inequitable tax code that doesn’t keep pace with our state’s population growth, economic growth, and inflation. For example, despite a constitutional obligation to fully fund K-12 public education, the state remains approx. $4 billion per year short. In economically challenging times for lower- and middle-income Washingtonians, the demand for public services and safety net programs goes up, while revenue from sales taxes (which makes up 50% of Washington’s general fund revenues) shrinks.
Actually, nothing! In the 1930s, a series of Washington State Supreme Court rulings interpreted income as property. Property is beholden to a uniformity clause, meaning all property taxes must be applied at the same rate within a given class of property. In Washington state, that rate is 1%. With income being classified as property, our state legislature cannot tax income in a progressive way. To enact a truly equitable income tax, or any income tax at a rate higher than 1%, we need the court to overturn the definition of income as property. The current uniformity restriction leaves the lowest-income earners paying the greatest share of their income.
