Seattle's Income Tax Gambit Will Likely Fail
When it comes to income taxes, Seattle seems intent on defying the law, history, and economic sense. Enacting a tax on high-income earners always invites unpleasant, albeit unintentional, economic consequences — but this holds especially true in the state of Washington. Washington is one of just seven states forgoing a statewide individual income tax, and its constitution also prevents localities from enacting an income tax. The city’s attempt to mimic the policy choices of Chicago and Detroit will chill Seattle’s economic climate. Moreover, the questionable legal status of the tax creates additional negative consequences.
The purpose of any tax is to generate revenue for core government services in a way that minimizes economic distortions. But the Seattle income tax aims to address fashionable social justice issues ranging from educational equity to climate action, rather than fund such core services. Government officials should refrain from crusading for favored causes using the sledgehammer of tax policy.
Seattle’s income tax was specifically enacted to challenge clear legal and constitutional precedent prohibiting such a tax. The precarious legal footing of this tax clearly violates the reliability principle, according to which a tax system should be reliable and predictable. According to an analysis by Jason Mercier of the Washington Policy Center, eight decades of state Supreme Court precedent in Washington have determined that a graduated income tax is illegal at the local level. The lengthy and costly battle ahead will squander hard-earned taxpayer dollars in order to fight for a new tax that is almost certainly illegal.
This punitive tax also sends the wrong message to the wealthy — many of whom are small business owners, job creators, innovators, and entrepreneurs. Under the measure, the city would impose a 2.25 percent tax on incomes above $250,000. This tax would extract an estimated $125 million in annual revenue from a small subset of approximately 11,000 city residents — an average of $11,000 annually for each of those 11,000. Unfortunately, this tax would incentivize some of the most productive residents of Seattle to move, deterring other individuals from moving into the city. While an immediate exodus is not likely, creating an environment hostile to wealth doesn’t bode well in the medium or long term — just look at Connecticut.
High income taxes are also an unreliable source of revenue, because wages and business income are subject to the ebbs and flows of the business cycle. Creating a dependence on an unpredictable source will almost certainly lead to future funding problems for the state.
In deciding to test the legal waters with an income tax, Seattle’s policymakers picked the wrong fight. A low-tax system coupled with efficient, priority-based spending would be a prudent alternative, which would safeguard economic growth and opportunity for all Seattle residents.
Erica York is a tax policy analyst for the Center for State Fiscal Reform at the American Legislative Exchange Council. ALEC is the largest nonprofit organization of state legislators dedicated to principles of limited government, free markets and federalism