An ‘excise tax’ on income is detrimental to WA’s future

Did you know Washington’s Supreme Court could approve a new “excise tax” that will follow you wherever you go? Did you know that over the past 12 years the state has experienced a 150% increase in tax revenue — from $26 billion to $66 billion? Do you believe that, even with this spectacular increase in revenue that the state Legislature would ever cut “regressive” taxes on sales, gas, soda or liquor?

If you answered no, no, and no, you are not alone.

Next Thursday, Jan. 26, the state Supreme Court will hear arguments about the legality of a new tax. The state Legislature invented this tax in 2021, despite having a $10 billion surplus, under an “emergency” clause. By using the emergency clause, it circumvented the will of Washington state residents who have traditionally had a say on any major tax changes via initiative or referendum. In fact, it is clear the citizens don’t want this excise tax as they rejected it 61% to 39% in a statewide advisory vote in November 2021.

The state also claims that this new tax is a legal “excise tax” on personal income from capital gains. The problem is that an excise tax is typically paid on things like retail sales, gas or liquor and collected where the items are purchased. But this new tax is on your income earned anywhere, which means it’s an illegal excise tax that would follow you wherever you go. Or to put it another way, it’s like Washington state charging you an additional gas tax on gas you bought in Oregon or any other state! 

So, if Washington has substantial tax revenue, and this approach is unprecedented and illegal, why did the Legislature do it? As state Sen. Jamie Pedersen put it: “We’ve got to figure out how to have an income tax in our state, in getting the state Supreme Court to say, ‘You are free Legislature to do an income tax, or a capital-gains tax, or wealth tax,’ you know, any of these things …” So, they have invented a tax that no other state has in order to unlock untold new state and local taxes on the residents of Washington.

At least the senator is being honest. But if that’s what this tax is, it isn’t an excise tax. Under the Washington state constitution, it is an unconstitutional income tax. Washingtonians have rejected a state income tax 10 times already and so the Legislature is trying to disguise an income tax as an excise tax. Recently, a Gov. Jay Inslee appointed judge in Douglas County ruled this tax is unconstitutional and illegal because it is a graduated tax on income. But that hasn’t stopped the state from continuing to pursue the case, hoping the Supreme Court would be more sympathetic to their misuse of excise taxes.

The initial excise tax is 7% and targets higher earners, but there is already a bill in front of the 2023 Legislature to raise the tax to 8.5% and lower the payment threshold to $15,000 of capital gains income — while the case is still in front of the courts! That is just the beginning. If the court allows it, you can expect cities and counties in our state to also create “excises” taxes that they can collect outside their geographic boundaries. How would Seattleites like to pay the soda and sugar tax even when they are in Bellevue?

Some have made the case that this illegal “excise tax” is necessary because Olympia needs additional revenues, and they argue it addresses a regressive tax system in Washington. Here’s the problem: The state Legislature hasn’t done anything about regressivity. You would have thought with a $10 billion budget surplus last year, it would lower the state’s existing 6.5% sales tax or 49 cent per gallon gas tax. It did not. Can we ever credibly expect our state to lower the various forms of excise taxes you pay? 

Washington’s longstanding tax system is not perfect, but it has worked to massively grow the state tax revenues to fund education, transportation, public safety and the other public services we need. If the goal of all this is real tax reform, let’s have that conversation. For those who think the budget is underfunded and that the state’s tax system is regressive, let’s have that debate. And let’s include everyone in it, especially the voters who ultimately will pay.

But passing an illegal tax to create a legal battle isn’t the right way. The Supreme Court should find that this “excise tax” on income is illegal, unconstitutional and detrimental to the future of our state.