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High Earner Income Tax Will Harm Economic Growth

Article by Amber Gunn | Evergreen Freedom Foundation | April 22, 2010. Published on Thursday, April 22, 2010 EST.

By Amber Gunn/ Evergreen Freedom Foundation

 

If you thought a $2.5 billion tax hike over three years was enough to satiate the greediest of redistributionists, you’d be wrong. The nature of government is to expand, and so it has. Government spending will grow by $3.3 billion over the next 14 months, thanks to bloated supplemental budgets and a complete failure to reform, prioritize or define the role of government. You can thank legislative and gubernatorial leadership (or lack thereof) for that.

 

Despite these multi-billion dollar increases in spending and taxation, a large coalition headed by Bill Gates, Sr. is forming to push an initiative which would force an income tax on individuals making more than $200,000 annually. In order to win majority support for the initiative, the language includes a tax carrot for the majority of the population, in hopes that 97 percent of voters will gang up on 3 percent in exchange for a payoff.

 

Here are the main elements of the initiative:

 

A new “trust fund” is established dedicated to funding “education and health services and middle class tax relief.”

 

Beginning in 2012, the state portion of the property tax will be reduced by 20 percent.  

 

Beginning in 2012, the business and occupation tax credit will be increased to $4,800 per year.

 

An income tax is established among the following income categories:

 

Income                                    Rate

Individuals

$200,000—$500,000              5% of the excess over $200,000

$500,000 and up                     $15k + 9% of the excess over $500,000


Married, filing jointly

$400,000-$1,000,000             5% of the excess over $400,000

$1,000,000 and up                  $30k + 9% of the excess over $1,000,000

 

In practice, the establishment of a dedicated trust fund for education and health services means nothing. Legislators routinely raid dedicated accounts in order to balance the general fund or redirect funds to priorities they consider more important at the time.


The property tax reduction isn’t nearly as posh as it sounds. It represents a mere four percent reduction for the average taxpayer. This is because the state portion of the property tax makes up only 21 percent of a taxpayer’s total property tax bill on average. 20 percent of 20 percent is four percent.  


There are a few interesting clauses throughout the initiative. Part VIII, for example, sets up a new withholding system nearly identical to federal withholding, where taxpayers who qualify must pay as they go. As it turns out, this withholding system is part of the justification that initiative authors use to claim that their graduated income tax is constitutional.


Part X of the initiative reads: “The tax established by this initiative is intentionally structured as an excise tax on the receipt of income during a taxable year rather than as a property tax on money as an asset, after it has been received.”


This is an attempt to get around a 1933 State Supreme Court decision striking down a graduated income tax based on Article VII, Section 1, of the Washington Constitution. The section reads:


All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word “property” as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.


You can read more about the constitutional hurdles a graduated income tax faces in Washington here.


The claim that this income tax is not a tax on property because it would be collected from your income before it’s in your possession is nonsensical. If your employer fires you the day before pay day, does that mean you are not owed for the work you have already completed because it is not in your possession as an asset? Of course not. It is your property at the moment you earn it under a contract that provides for remuneration for work performed. The constitution’s sweeping definition of property as “everything, whether tangible or intangible, subject to ownership” certainly includes income you have earned, whether or not it is in your actual possession.


Part X of the initiative also acknowledges the harmful effects of taxation, but selectively demonizes only the sales and business and occupation taxes.


The sales tax is regressive and stunts business growth. The business and occupation tax, which is peculiar to Washington state, discourages investment and encourages many potential employers to take their business elsewhere.


An income tax, especially of the high-earner form which hits job creators and small businesses the hardest, does not stunt business growth? An income tax on high earners does not discourage investment and encourage potential employers to take their business elsewhere? The gaps in economic reasoning in this section are embarrassing.


And speaking of reasoning gaps, Section 1004 of Part X is designed to placate fears that the income tax would expand to other classes of earners (that’s you):


The excise tax rates in section 501 of this act may not be increased for any income level without a majority vote of the legislature and submission of the changes to the people for approval.


Whether this statement stems from naïve or deceptive authorship is unclear. What is clear is that this restriction extends to the same people who just overturned Initiative 960’s two-thirds requirement for tax increases the instant they had the chance. The requirement that the people be allowed to vote before any new income tax classes are included can be overturned by two-thirds of the legislature during the first two years after the initiative is passed or by a simple majority after that. Rest assured, you will not get the opportunity to vote on this again. They will creep the brackets down slowly to minimize political opposition (unless inflation solves this problem for them).


Income tax backers claim an income tax will remove volatility from Washington’s revenue system, smoothing out the effects of economic boom and bust cycles on state coffers. The problem is that the data do not support that claim. Forty-three states have income taxes, and with the exception of North Dakota, all of them are facing budget deficits and long-term unfunded liabilities. An income tax is not a cure-all for budget woes. The simple reason comes down to human nature and economic reality. The great predicament for humanity is unlimited appetites pitted against limited resources. “More” is never enough to satiate gluttony.


Besides that, Washington routinely ranks among the most highly-taxed states in our existing categories of taxation—whether sin taxes, the gas tax, sales tax or worker’s compensation rates. Our state’s primary saving grace is that we are among the elite few without an income tax. If we institute an income tax, we lose our competitive advantage over 43 other states. Higher earners who are fleeing states like New York, New Jersey and California in droves will not seek refuge here, which hurts investment and economic growth. This is Economics 101. People respond to incentives. Wealth will go where it is welcome. As a state, we would do well to profit from other states’ poor policy choices, not emulate them.


If this initiative becomes law and the State Supreme Court upholds it, in a couple of years we’ll face the same predicament, except our entitlements will have expanded, our liabilities and debt will have grown, and our personal income and standard of living will have fallen.


The only way to break this cycle is to define the role of government (and stick to it), prioritize spending, and set up as many constitutional safeguards as possible to prevent overreach.


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