Income tax in Washington: Has the climate changed?

Are Washington voters ready to soak the rich? Bill Gates Sr. certainly hopes so — although he doesn't describe it or think of it in those terms.

Gates is spearheading the campaign for Initiative 1077, which would impose a 5 percent tax on anyone who earned more than $200,000 a year ($400,000 for a couple), and 9 percent on anyone who earned more than S500,000 ($1 million for a couple). The money would be used to reduce state property taxes by 20 percent, and provide a $4,800 credit on the state's goofy business and occupation tax. The funds left over — an estimated $1 billion a year — would be divided 70-30 between education and basic health.

It's certainly eye-catching politics: The father of the nation's richest man wants Washington to tax high personal incomes.

A state income tax is hardly a new idea, here or elsewhere. Washington is one of only seven states that lack some form of personal income tax. The others are Alaska, New Hampshire, Tennessee, Florida, South Dakota, Nevada, Texas, and Wyoming. Curiously, none of these states is listed among the states facing the largest budget gaps; California, Illinois, and New Jersey top that list.

In this state, a tax on personal income, corporate income, or both, has been passed by the voters or the legislature, and/or put on the ballot for public approval roughly a dozen times in the past 80-odd years. Every time, it has perished: Courts have ruled against it, governors have vetoed it, and the public has voted it down decisively.

Why should this time be any different? Gates' initiative needs two things to succeed: a change in the public's attitude toward the income tax and a change in the state supreme court's. Without the first, it won't pass. Without the second, even if it passes, it will never raise a dime.

The income tax's public appeal reached its high-water mark in 1932, when voters approved Initiative 69, imposing a graduated tax on personal and corporate incomes, by more than two to one. Washington'ꀙs farmers had lots of property and not much cash to pay taxes on it. The Grange, representing farm interests, sponsored initiatives to limit the property tax and replace the lost revenue with a tax on income. Organized labor and teachers' unions came on board.

What wasn't to like? At the start of the Depression, not many Americans paid federal income tax. For most citizens, therefore, voting for a graduated income tax meant voting to tax the rich.

Anyone who doubts the Grange framed the issue in terms of class conflict should check out a Grange News cartoon from 1928 that shows three men carrying a log: a poorly dressed man labeled 'ꀜThe Homeowner'ꀝ struggles with bent knees under the thick end of the log; 'ꀜThe Farm Owner,'ꀝ dressed in overalls, struggles along with him; a third man, 'ꀜThe Bond Owner,'ꀝ dressed in a plutocrat'ꀙs top hat and spats, strolls along resting a soft hand casually on the small end of the log.

In the same 1932 election that saw them approve Initiative 69 — and vote overwhelmingly for Franklin D. Roosevelt — the people of Washington imposed a 40 mill limit on property taxes. To plug the revenue gap until the income tax went into effect, the 1933 legislature imposed a business and occupation tax. Then in Culliton v. Chase,the Supreme Court ruled that a graduated income tax was unconstitutional. The court reasoned that income was a form of property and the state constitution says clearly in Article III that 'ꀜ[a]ll taxes shall be uniform upon the same class of property.'ꀝ Therefore, the state could not have a graduated income tax.

Legislators could have come back with a flat-rate income tax, but they didn'ꀙt. Instead, they waited the constitutionally-mandated two years for amending an initiative by a simple majority then exceeded the 40-mill limit on property taxes. The people wouldn'ꀙt stand for it. In 1934, they passed another 40 mill limit on property taxes but turned down a constitutional amendment that would have authorized a graduated income tax. The income tax was evidently an idea whose time had already passed. 'ꀜThere is abundant evidence that [voters] knew what they were doing,'ꀝ J.W. Gilbert wrote in the Seattle Times. Whatever their reasons, 'ꀜ[t]he next session of the Legislature . . . must devise new sources of revenue.'ꀝ

The next session of the legislature did exactly that: in 1935, it imposed a tax on retail sales. And so the legislators completed the trifecta: a limited property tax; a new B&O tax; a new sales tax. Washington'ꀙs current tax system was complete.

On more than one occasion, the legislature probably could have passed a flat-rate income tax, but Democratic 'ꀜprogressives'ꀝ held out for a graduated tax. They pretended the choice was between flat-rate and graduated income taxes. The real choice was between flat-rate and no income tax at all.

The people have never voted for an income tax again. And the debate over taxes has shifted from its Depression-era form of the people versus the wealthy to the people versus their own government. In the 1970s, conservatives started making government itself the enemy. 'ꀜTaxation had always been unpopular, of course,'ꀝ Bruce J. Shulman writes in The Seventies, 'ꀜbut it had long remained a weapon of class warfare — a way ordinary Americans could limit the power and influence of the nation'ꀙs wealthiest citizens. . . . [Ronald] Reagan transformed taxation: it ceased to be an issue of equity, and it became a matter of tyranny or freedom. Instead of dividing rich and poor, business and labor, the tax issue united them against big government and elitist bureaucrats.'ꀝ

Gates says he really doesn't know why people voted against an income tax when Washington's moderate Republican three-term governor, Dan Evans, pushed the idea in the late 1960s and early 70s. (Gates and Evans are old friends, both Republicans of the old moderate stripe.) But Gates senses that people are less hostile to it than they once were

And he may be right. Gates sees two key issues: 'ꀜI think that there is clear need'ꀝ for more public school funding, he says, referring to McCleary, the February King County Superior Court ruling that the state is violating the constitution by failing to provide 'ꀜample'ꀝ funds for basic education. 'ꀜAt the same time, we have a tax structure in our state that's the most unfair in the country.'ꀝ

There is ample reason to believe that a modern income tax, established by the Legislature or by the voters, would now be upheld. — Attorney Hugh Spitzer

Education advocates celebrated McCleary. Some seemed to relish its rhetoric as well as its conclusions. The state 'ꀜhas passed legislation, it has ordered countless studies, it has commissioned a multiplicity of reports,'ꀝ Judge John Erlick wrote. 'ꀜAnd yet there remains one harsh reality — it has not and is not amply and fully funding basic education.'ꀝ But McCleary plus two dollars will get them onto an off-peak Metro bus. The legislature won't come up with more money just because a King County Superior Court judge says so.

But Washington voters probably won't back an income tax just because special levies have risen once again to the percentage of school budgets that the supreme court, in 1978, found unconstitutional. To make that decision, voters may need a little 21st-century populist fervor, possibly stoked by ambient anger toward Wall Street bonuses and bailouts.

But even that won't matter if the supreme court still believes that income is property, that a class of property must be taxed uniformly, and that therefore, a graduated net income tax would be unconstitutional. (Since 1972, right after the Boeing recession in which unemployment hit 15 percent, the constitution has also limited property taxation to an aggregate 1 percent.) The court still believed that back in 1951, saying 'ꀜit is no longer subject to question in this court that income is property.'ꀝ

And the state attorney general's office still believed that in 1974, when it conceded: 'ꀜit is possible that the supreme court, as presently constituted, could be persuaded to reverse its earlier rulings,'ꀝ but insisted that 'ꀜuntil and unless those decisions are . . . overruled, we must continue to be guided by them and so conclude that at this time, the constitution of this state continues to prohibit the imposition of a tax upon corporate or individual net income'ꀝ

At this time, however, one might conclude otherwise. In Appendix B of the 2002 report of the Washington State Tax Structure Study Committee — which Gates chaired — Seattle attorney Hugh Spitzer, who teaches Washington constitutional law at the University of Washington Law School, suggested that the question was ripe for reexamination. 'ꀜMany people assume that Culliton is still good law and that Washington courts would reach a similar decision today,'ꀝ Spitzer wrote. 'ꀜHowever, there is ample reason to believe that a modern income tax, established by the Legislature or by the voters, would now be upheld.'ꀝ

In a 1993 University of Puget Sound Law Review article, Spitzer explained that 'ꀜthe swing votes (and lead opinion) in the 1933 Culliton decision . . . were based on a misconstruing of [an] earlier ruling in Aberdeen.'ꀝ The Aberdeen court ruling — which emphasized the narrowness of its focus — wasn't interpreting the Washington constitution at all; it was applying the Due Process clause of the United States constitution. Besides, two U.S. Supreme Court precedents on which Aberdeen relied have long since been overturned. Because of all that, Spitzer suggested that 'ꀜopponents of a net income tax today would face an uphill battle.'ꀝ

Gates certainly assumes that if 1077 passes, the court will take a fresh look at the issue. And he figures that Spitzer's reasoning will prevail.

Why didn't he avoid the legal issues altogether by going for a constitutional amendment? Because amending the constitution would require a two-thirds vote of the legislature, and he knows that isn't going to happen. So — just like the king of anti-tax initiatives, Tim Eyman — Gates is bypassing the legislature and going directly to the people. Ironically, many citizens who tend to favor an income tax tend to deplore Eyman's tactic of legislating by initiative. But both sides in the tax debate seem to agree: Our elected legislators are the problem, not the solution.,

Gates was clearly disappointed when his 2002 committee report sank into the swamps of Olympia without a trace. The legislature, which had commissioned it, didn't react. (A few years before Initiative 69, another blue-ribbon commission recommended an income tax, and the legislature passed one — but the governor vetoed it.) In fact, 'ꀜnobody paid much attention to it,'ꀝ he says, 'ꀜincluding the governor.'ꀝ

That 2002 report pointed out, in Gates' words, 'ꀜhow lopside[ly] the burden of taxation fell'ꀝ in this state. It called for a tax system that would be, among other things, 'ꀜfairer to low- and middle-income people'ꀝ and 'ꀜmore effective in supporting the state'ꀙs economy.'ꀝ It proposed a flat-rate income tax. Why hasn't Gates stuck with the flat-tax proposal? Because the goal is to not only to reduce other taxes but also to funnel more money to schools and basic health. And with a tax imposed on only 3 or 4 percent of Washington citizens, a flat tax wouldn't generate enough cash. Gates says frankly that a graduated tax is the only way 'ꀜto generate enough funding.'ꀝ

Gates himself has favored a graduated tax from the get-go. When did he get religion on this subject? 'ꀜI'm not sure,'ꀝ he says, 'ꀜwhether I was 13 or 17.'ꀝ