Washington's tax system, as in all states, is a contentious arena in which politicians, businesspeople, workers, parents, property owners, and educators wrestle over their share of taxes. Washington has evolved from a primarily property-tax state to an excise-tax state and is one of only four states with no form of income tax. Voters overwhelmingly approved an income tax in 1932, but the courts declared it unconstitutional, and several attempts since to pass an income tax have failed. Because of its reliance on sales taxes, Washington's tax system is among the most "regressive" in the nation. Middle- and lower-income wage earners spend a higher percentage of their income on taxes than the wealthy do. ("Progressive" tax systems attempt to compensate by levying higher rates on upper-income groups, a system predicated upon "ability to pay.") The tax system has been overhauled only once, by the Revenue Act of 1935, and the state has operated under that system ever since, with only minor adjustments. Over the years, nine governor's tax advisory councils have found the system "flawed" (Gates Report), and most recommended some form of income tax, but no significant reforms ever emerged from their conclusions.
Simpler Times
Property taxes were the primary revenue source for Washington state's first 30 years, a carryover from territorial days, and they initially served the region's simpler, largely rural needs. A poll tax on all males over 21 supplemented the property tax, and cities and towns could assess license fees for various vendors and businesses such as pool halls, bowling alleys, and ferries. The poll tax was unpopular, however, and in 1907 it was rescinded.
The Washington State constitution, adopted in 1889, required that all property must be taxed uniformly and equally, a laudable caveat that would generate controversy throughout the state's history. Its extensive sections on taxation appear to have been cobbled together "by borrowing sentences and parts of sentences" from the constitutions of other states (Harsch). The state constitution and legislation also define and limit the kinds of taxes that counties and cities can levy.
The growing new state needed more roads, schools, and other services, and in 1890 a 2 percent tax was levied on insurance premiums. An amendment to this statute in 1891 allowed companies to use it in lieu of their personal property taxes, making it the first of "several excise taxes levied by the state in place of taxes on specified kinds of personal property" (Harsch). An excise tax, such as the current business-and-occupation (B&O) tax, typically levies a flat rate on the gross value of transactions such as retail sales as opposed to net revenue after costs or ultimate profit.
Property values plummeted during the Depression of the mid-1890s, especially for farmers, and property taxes could not generate adequate revenue to meet the state's needs. Reformers lobbied for change, with the Washington state Grange among the most vocal, but to little avail. A board of equalization, composed of state officials, oversaw levy rates and the tax assessment process until in 1905 a state Board of Tax Commissioners was created.
Inequities from the Beginning
Inequality -- what the 1966 Tax Advisory Council would call "substantial nonuniformity of property tax assessment" -- has dogged Washington state's property tax system ever since. This endemic problem has fostered a mini-science with arcane formulae designed to measure such characteristics as "income elasticity of taxes" (Berney).
Washington state endorsed a national income tax in 1911, when the Legislature approved the 16th Amendment to the United States constitution, with "nearly universal support" (Roberts). Progressives championed the income tax as a way to tax the wealthy, to relieve the burden on workers and farmers, and to redress what they saw as the plundering of the West by eastern tycoons. The income tax amendment was ratified February 3, 1913.
The 1911 Legislature also was notable for passing a wide-ranging package of progressive legislation that included the state constitutional amendments providing for citizen initiatives, referenda, and recalls of elected officials; workmen's compensation; and an eight-hour work day for women. In 1912, the Legislature passed an inheritance tax that ranged from 1 to 12 percent. Motor vehicles were appearing, and in 1915 an auto license (excise) tax was added. Gasoline was first taxed in 1921, at one cent a gallon.
Expectations, Taxes Rise
Property taxes continued to rise, however -- nearly doubling from 1910 to 1920 -- as the growing population and economy required more and better schools, roads, hospitals, and civic infrastructure. In 1921, Governor Louis F. Hart (1862-1929) appointed a committee to examine the state's tax structure and recommend reforms. It was the first of nine tax investigations launched by governors over the years to mend the state's tax system.
The commission endorsed an income tax, but found it "unwise" to implement at the time, dismissed a sales tax as "not a proper tax" for the state, and recommended property tax equalization (Roberts). No significant legislation emerged from the committee's work.
In 1924, the Washington Education Association (WEA) and other reform groups offered an initiative calling for a $4 million bond issue to upgrade schools, while business groups offered the first of many attempts to limit annual property taxes to 40-mills (40 thousandths, or 4 tenths of a percent) per dollar of assessed value. Voters rejected both measures.
Roland Hartley (1864-1952), an aggressive anti-union, tax-slashing Republican, was elected governor in 1924. He convinced the Legislature to revamp the state Tax Commission and appointed supposed "loyalists" (Roberts), but the commission in 1926 increased the property tax mill levy, angering newspapers, property owners, and Hartley's fellow Republicans.
Constitution Amended
In 1929, the Legislature and voters amended the state constitution's article on taxation, altering the language about uniformity and the definition of "property." The redefinition of property "has had an enormous impact upon the shaping of the tax structure in this state" (Harsch).
A state income tax also was first officially proposed in 1929, as well as a tax on banks and financial institutions. The income tax measure passed the state Senate but was killed in the House Rules Committee. The tax on banks passed, but in 1930 the Washington State Supreme Court declared it unconstitutional.
Hartley appointed another commission to examine the state's tax woes. Like Governor Hart's council, it recommended tax uniformity across the state, but also recommended personal and corporate income taxes to ease increasingly burdensome property taxes. (Oregon had passed an income tax in 1923, repealed it in 1927, but passed it again by referendum in 1930.)
In 1931, the country now mired in the Great Depression, both houses of the Legislature passed bills proposing personal and corporate income taxes, but this time Governor Hartley vetoed them.
Democratic Reforms
A year later, with the Depression bottoming out, President Franklin D. Roosevelt (1882-1945) led the country's Democratic sweep and reform was in the air. Farmers were losing their land to foreclosure, more than 25 percent of the state's work force was unemployed, and the added burdens of aid and services for the jobless were draining public coffers. "Our present tax system is on the verge of collapse," said M. K. Norton, president of the Washington State Assessor's Association (Roberts).
Conservative Democrat Clarence D. Martin (1884-1955) was elected governor and the Democrats controlled both houses of the Legislature as well as all congressional seats.
State voters also overwhelmingly (70 percent) approved an initiative mandating a graduated state income tax that had been endorsed by the Parent-Teachers Association and Seattle Central Labor Council as well as the Grange and WEA. Voters also approved a 40-mill limit on property taxes -- another issue that would remain contentious.
Despite the support for an income tax, a measure mandating a sales tax was introduced as insurance, though Democrats found a sales tax an anathema. "If no income tax, a sales tax" (Roberts). Repeal of Prohibition in 1933 also opened a new stream of revenue via taxes on beer and wine and via the state's monopoly on liquor sales.
Magnuson Prediction Wrong
Freshman State Rep. Warren G. Magnuson (1905-1989), who later went on to serve many years in the U.S. Senate, predicted that a sales tax would be an "emergency measure" that would not "become a permanent part of our tax system" (Roberts). The income tax measure itself was complex, confusing, and diverged often from the federal statute. The Tax Commission wasn't sure how many citizens would have to file, so forms were sent to virtually everyone. Newspapers offered tax tips and advice, often erroneous.
Two lawsuits filed against the income tax initiative were consolidated by Thurston County Superior Court Judge D. F. Wright, who declared it unconstitutional. The State Tax Commission appealed Wright's decision to the State Supreme Court, but the path to judgment -- for income tax proponents at least -- was potholed by poor planning, bad luck, and politics.
Justice Emmett Parker was ill and the eight remaining justices heard the case, Culliton v. Chase, but deadlocked 4-4. When Parker's health slipped further, he resigned. Governor Martin appointed friend and income-tax supporter James M. Geraghty to the court, but one previously pro-income-tax justice, unidentified, switched his vote and the court upheld Wright's decision in a 5-4 vote.
"Property" Problem
The court "held that net income constitutes property," as defined in the constitution and, therefore, "the net income tax was invalid because it improperly created two classes of real estate, namely income-producing land and unproductive land" (Harsch). Some legal scholars called the reasoning behind the decision "tortured" (Roberts).
The Legislature also had passed a bill authorizing a "temporary" business-and-occupation (B&O) tax, which the Supreme Court did judge constitutional, along with the 40-mill limit on property taxes. The B&O tax, of course, became permanent and a major component of the state's revenue stream.
A joint resolution by the Legislature in 1934 proposed a constitutional amendment for an income tax, but voters rejected it by more than 56 percent. A companion 60 percent reduction in the proposed income tax levy did pass, but that was moot.
Tax System Revamped
By 1935, Depression woes had deepened in Washington state and the Legislature launched a massive overhaul of the tax system. It again proposed personal and corporate income taxes, a new B&O tax, and several minor taxes on liquor, cigarettes, public utilities, fuel oils, radios, stock transfers, toiletries, and medicines.
The most controversial proposal, however, was a 2 percent tax on retail sales, with some exclusions for basic food items. Democrats to the left of Martin, farmers, the Grange and WEA denounced the sales tax as regressive -- more burdensome for low- and middle-income households.
The income tax measures were carefully phrased to meet the inevitable constitutional challenges. The income tax was recast as a "privilege tax" (Harsch) to be paid "for the privilege of receiving income (in the state) while enjoying the protection of its laws" (Roberts).
The legislators believed that "the voters would approve the necessary constitutional changes if adequately informed" (Harsch).
After a stormy session, both houses passed the measures on March 14, 1935. Martin signed the legislation 11 days later, but line-vetoed the taxes on fuel oil, radios, stock transfers, toiletries, and medicines. Neither the leftist Washington Commonwealth Federation nor the conservative Washington Taxpayers' Association was happy with the legislation and lawsuits were filed immediately to challenge the income taxes, B&O tax, and sales tax.
Unconstitutional, Again
In 1933 a lower court again declared the income tax unconstitutional, though the sales and B&O taxes passed muster. Upon appeal, the state Supreme Court upheld the decision, unmoved by the Legislature's attempt to finesse the definition of "income."
With the sales and B&O taxes a reality and a lid on property taxes, the pressure for an income tax eased, but the Grange, WEA and other reformers wouldn't give up. Income tax proposals would be offered and rejected regularly for the next 70 years.
The Revenue Act of 1935 was the most comprehensive tax overhaul in the state's history. "With a few additions and some tweaking, this system remains today – a tax structure suited well enough for an economy based on commercial agriculture, manufacturing, resource extraction, and locally based commerce" (Gates Report).
With the act, the state's principal revenue sources shifted from property taxes to excise taxes -- taxes measured by a transaction, such as the selling price of a car. In fiscal year 2003, taxes authorized in the Revenue Act of 1935 generated 75 percent of all tax receipts supporting the general fund, the state Department of Revenue reports.
Progressive Thrust Slows
In 1937, Roosevelt swamped Republican presidential candidate Alf Landon (1887-1987) in Washington state by more than a two-to-one margin and Democrats retained control of state politics, but support for progressive, New Deal initiatives was waning. Conservative judges also were chipping away at Roosevelt's New Deal package, and a reactionary backlash was coalescing. The farmer-labor coalition, forged in early support for Prohibition, public utilities, and transportation regulation, started to fragment as rural and urban interests focused on their own special needs. Voters rejected an expansion of old-age pensions, flood control bonds, and, of course, another attempt at an income tax.
This time, the Legislature simply added a sentence that reads, "The constitution does not prohibit the levy of a graduated income tax." That didn't work either.
Voters also rejected this latest attempt to amend the constitution and add some flexibility to the tax system. Also soundly defeated was Initiative 119, Production-for-Use, which would have mandated $55 million in bonds to employ the jobless. It was patterned after the End Poverty in California (E.P.I.C.) project of novelist-social reformer Upton Sinclair (1875-1968), which also failed.
Finally, in 1940, voters approved a constitutional amendment allowing voters to pass extra levies with a supermajority of 60 percent. Such "excess levies" became the primary support for school construction and operations and backing public bonds for parks, roads, and other local and state improvements. ("Pay as you go" levies, which do not create public debt through bonds, require only a simple majority.)
Another Income Tax Defeat
The 1941 Legislature also tried to validate an income tax, but it again was overwhelmingly defeated. Three years later, Washington state voters approved constitutional amendments that would lock in the 40-mill property tax limit and would dedicate all motor vehicle and fuel taxes and licenses to highways.
Elsewhere in early 1940s Washington -- in the cities, towns and school districts that still relied on the property tax to support their services -- "the picture was dismal" (Harsch). Equality, uniformity, and consensus on assessment practices remained elusive.
So did sources of adequate state and local revenue. The legislature added a pinball and slot machine tax here, a cigarette or liquor tax there, and slowly increased the rates on all state taxes. The sales tax was added to hotel/motel accommodations (1951), rental properties (1959), and some amusement-recreational services (1961).
Arthur B. Langlie Tries
In 1950, Gov. Arthur B. Langlie (1900-1966), a "moralistic" (Oldham) though otherwise liberal Republican, muscled a 4 percent corporate income tax through the Legislature, but the state Supreme Court again found it unconstitutional. Democratic legislators offered another personal income tax bill in the 1951 session, but it didn't survive either.
In 1957, Governor Albert D. Rosellini (1910-2011) appointed another Tax Advisory Council to address the state's projected red ink. Some reforms were instituted and the Legislature bumped the sales tax from 3.3 percent to 4 percent, as recommended by the council. But an extension of the B&O tax to rental property passed by the Legislature was struck down by the state Supreme Court.
King County's Forward Thrust bond package in 1968 was another landmark event in Washington state public finance. County voters approved $356 million worth of civic projects, including the cleaning of polluted Lake Washington, parks, recreational facilities, and the Kingdome (the domed stadium that was built in 1976 and imploded in 2000). To finance the Kingdome, the county would receive 2 percent of state sales tax on lodging, the first time -- but not the last -- that a "hotel-motel" tax would be adopted to bankroll a quasi-public sports facility. The Seattle Mariners' and Seattle Seahawks' new parks enjoyed similar public tax assistance, in 1995 and 2000 respectively.
Economy Sours
The state in the late 1960s and early 1970s was in the throes of another Depression, with unemployment in Seattle at 13.8 percent in 1972. The 1969 Legislature passed another joint resolution for another constitutional amendment for an income tax and it was supported by Dan Evans (1925-2024), one of the state's most popular governors, who served from 1965 to 1977. The voters again said no, 673,446 to 309,882.
In 1965, in an effort to streamline and update the tax collection system, the Legislature abolished the three-member Tax Commission and created the state Department of Revenue, with the change effective in 1967.
Evans appointed not one but three Tax Advisory Councils -- in 1966, 1968, and 1971. All recommended personal and corporate income taxes, among other reforms. The 1966 council said "major changes were needed in the state constitution," noting "a total and complete statewide disregard ... of the existing 40-mill limit law" (Report of Tax Advisory Council, 1966).
In 1971, annual increases in local property taxes were limited to 6 percent, and in 1972 a constitutional amendment passed that limited regular property tax levies to 1 percent. Another income tax amendment was proposed in 1973 and again defeated by a 3-to-1 margin.
Budget Crisis
Governor John Spellman (1926-2018) created another Tax Advisory Council in 1982, when the state again was economically distressed. It also recommended personal and corporate income taxes, but the Legislature took no action on either issue.
Governor Booth Gardner (1936-2013) followed Spellman and in 1988 appointed the Governor's Committee on Washington's Financial Future. It offered two options, one with an income tax, but neither one was adopted or offered to the voters.
Over the recent years, various patches were applied, to address immediate concerns.
A constitutional amendment in 1968 allowed current-use assessment of open space, agricultural, and timber lands, aimed at curbing urban sprawl.
A court decision in 1969 required assessment of property at 50 percent of value, ending decades-long controversy over tax-assessment rates -- until 1975, when assessments increased to 100 percent of market value.
The sales tax was removed from food in 1978, then temporarily reinstated during the recession-driven budget crisis in 1982-1983.
Soon after taking office in January 1993, Governor Mike Lowry (1939-2017) was excoriated for even suggesting that an income tax might be feasible as he grappled with a $2 billion shortfall in projected state revenue. State Senator Pam Roach, R-Auburn, spearheaded campaigns for a pair of initiatives that fall. Initiative 601 capped the growth in state spending according to a formula based on inflation and population growth, while Initiative 602 would have rolled back virtually all taxes. The former passed narrowly, but has since been undermined by subsequent initiatives and statutes.
Facing the first "Bush Recession," Governor Lowry won changes to B&O tax rates and deferments to attract high-tech businesses along with passage of a comprehensive "Basic Health" care plan. His proposal to raise gas taxes found no traction in the Legislature.
Governor Gary Locke (b. 1950) took office in 1997, blessed with a growing economy. Biennial State revenues rose past $20 billion, thanks to the dot-com bubble. But then, in 2000, they plunged when that bubble burst. The resulting recession has hit the high-tech-heavy Puget Sound region hard.
Taxpayer Revolt
Taxpayers in Washington and other states also were increasingly disgruntled by what they perceived as onerous or unfair taxes and the lack of political will to solve the problems. Tim Eyman, a Mukilteo watch salesman and self-styled "populist," took full advantage of citizen discontent.
His first initiative, I-200, in 1998 had nothing to do with taxes, however. It challenged affirmative action -- "equal opportunity" hiring, contracting, and school admissions in higher education and government. But he had trouble collecting signatures and enlisted John Carlson, a conservative talk-show host and later gubernatorial candidate, to take over the campaign. The initiative passed.
Also in 1998, Eyman tried but failed to collect signatures for an initiative to eliminate the state's high but progressive motor vehicle excise tax. The next year, however, he tried again, again working with John Carlson. Despite the opposition of every major institution -- a rare consensus of opinion among politicians, governments, the media, business big and small, environmentalists, civic groups, and labor -- voters approve I-695, which repealed the motor vehicle excise tax and mandated a flat $30 tab fee. The initiative was challenged and the state Supreme Court ruled it unconstitutional because it had two subjects -- the tax rollback and the $30 tab.
But the Legislature, with the blessing of Governor Gary Locke (b. 1950), bowed to voter revolt and instituted the $30 fee. Many criticized Locke and the Legislature for failing to reduce the unpopular fee earlier, and, thereby, for fueling Eyman's movement.
In 2000, two Eyman-sponsored initiatives made the general election ballot: I-722, which would cap property taxes at 1 percent, and I-745, an attack on public transit that would require 90 percent of all transportation funding to be earmarked for roads. The transportation initiative was supported by such groups as the asphalt pavers' union. Unlike the motor vehicle tax initiative, which used volunteers to obtain signatures, I-722 and I-745 employed paid signature gatherers, a practice that remains controversial. The property tax initiative was vigorously opposed by many of the same groups that fought the motor vehicle tax measure, who claimed again that it would devastate state finances. Voters approved the property tax limit, however, but soundly defeated the transportation initiative.
More to Smoke
Voters also approved boosting the cigarette tax rate from $0.825 to $1.425.
The next offering from Eyman's political action committee, Permanent Offense, was Initiative 776, in 2002. He called it "Son of 695" and it was designed to reduce the auto tab fee to $30, eliminate the $15 road improvement fee in King, Pierce, and Douglas counties, and erase Sound Transit's 0.3 percent motor vehicle excise tax in parts of King, Pierce, and Snohomish counties. It was a statewide initiative, though it affected citizens in only four counties. It passed with 51.5 percent of the vote, but was immediately appealed. Three months later, King County Superior Court Judge Mary Yu declared I-776 unconstitutional, again because it addressed two subjects, "setting fees at $30 and encouraging a public revote on Sound Transit's light rail system" (Post-Intelligencer, February 11, 2003).
In October 2003, however, the state Supreme Court reversed Yu and upheld I-776, 6-3. The state was in the process of mailing road-improvement-tax refunds to vehicle owners (as of August, 30, 2004), but the Sound Transit issue remained tied up in the courts.
Earlier in 2003, Eyman tried to launch two more initiatives, but both failed to earn a ballot spot: I-807, which would have required a two-thirds vote in the Legislature to raise taxes or fees; and I-267, which would have transferred more than $700 million a year from the general fund to highways and roads.
Tax Cut Initiative Fails
In 2004, Eyman sponsored yet another initiative -- 864 -- which mandated cutting by 25 percent all local property tax levies not approved by voters, but it failed to collect enough signatures. Initiative 892, another Eyman endeavor that would expand nontribal gambling, was bankrolled by the gambling industry and paid signature gatherers collected enough of them to make the ballot.
The state experienced robust growth in the last quarter-century, as the Puget Sound region emerged as a high-tech bonanza. The work force nearly doubled -- from 1.74 million in 1978 (124,000 unemployed) to 3.19 million in 2004 (192,000 unemployed).
But the state's economy whipsawed from miserable -- when the jobless rate peaked at 12.5 percent in November 1982 -- to flush in 1990 (jobless rate 4.7 percent), to struggling after the dot-com bust. The unemployment rate rose to 7.7 percent of the work force in mid-2003, before beginning to slowly fall.
Public-Private Partnering
In an effort to mitigate these economic waves, to create more jobs and sales-tax-generating business activity, state and local governments increasingly have partnered with private entities in the form of exemptions, deferrals, exclusions, deductions, and differential rates. In the early years of the state, eastern-owned railroad, timber, and utility companies argued that tax equalization -- paying their share of taxes -- would cost jobs. Tax breaks in recent years for various businesses are similarly justified by the promise of more jobs or more business activity, but the amount of taxes avoided due to some of these subsidies -- and their accelerating use -- has become a more controversial aspect of the state's tax system in recent years.
A state Department of Revenue report estimated the amount avoided by taxpayers in the 1999-2001 biennium at $46 billion. For the 2003-2005 biennium it will be $64.7 billion, but about $13 billion could be recovered if questionable exemptions were repealed, said Don Taylor, revenue analysis manager at the state Department of Revenue.
Exemptions have been patched on until there are now more than 400 of them, including: commercial vessels, sales to Alaska and Hawaii, gun sales, gas to heat chicken houses, radio-TV broadcasting, and boxing/wrestling matches.
Among the higher-profile and more controversial recent public-private partnership actions were the Seattle Mariners and Seattle Seahawks stadiums. "They're owned by a public agency," the Department of Revenue's Taylor said, "but with the lease arrangements they have, it's becoming kind of blurred."
Tax and other benefits accorded The Boeing Company in late 2003 to build its 7E7 Dreamliner in Everett -- $3.2 billion in tax breaks alone, reported the Seattle Weekly -- also were controversial. In 2004, tax incentives were extended for high-tech firms, rural development, and aluminum smelters.
Another Study
In 2002 Governor Locke commissioned the Washington Tax Structure Study Committee, chaired by Bill Gates Sr., to again study the state's tax system. Again it was found wanting. Despite continuing tweaking over the years, the state tax system remains "flawed" and "among the worst in the nation" (Gates Report).
Echoing the decades-old criticism, Gates said, "the current structure is extremely regressive, with low- and middle-income households paying a higher percentage of their incomes in taxes than upper-income households."
A 3.8 percent flat income tax was among several recommendations in the Gates Committee's report, but it received only passing attention.
The state's 2003 tax revenue came from sales/use taxes (48.6 percent); B&O tax (15.7 percent); state property tax (12.1 percent); selective sales taxes (11.4 percent); real estate excise tax (4.2 percent); other taxes and receipts (8 percent).
In a report issued on August 18, 2004, the state Department of Revenue said state and local tax burdens in Washington state were at the lowest level since 1981, citing United States Census Bureau figures from 2002. The drop was attributed to tax cuts and the lingering recession. The tax burden relative to income ranked 32nd highest among the states.
State and local taxes were $100.90 per $1,000 personal income in fiscal year 2002, compared with $107.53 in fiscal year 2000.
Census data also found that Washington state property taxes dropped from $35.39 per $1,000 personal income in 2000 to $29.94 in 2002, reducing the state's property-tax ranking to 28th highest from 18th highest. The U.S. figure dropped from $32.52 in 2000 to $32.07 in 2002.
Another Income Tax Proposal
In August 2004, King County Executive Ron Sims, a Democratic candidate for governor, issued another call for an income tax in his campaign platform. His plan would levy income taxes from 4 to 10 percent, with the maximum rate applying to annual incomes of $100,000 or more. It also eliminates the state sales tax (currently 6 percent) and all B&O taxes on business receipts, and deducts a "homestead" exemption of $100,000 from the assessed value of every primary residence. Because state income taxes may be deducted from federal income taxes (unlike property taxes and most sales taxes), Sims' analysis estimates that his plan would reduce taxes for 80 percent of households while generating some $700 million in additional state revenue annually.
Although conventional wisdom views state income tax plans as acts of political suicide, the Sims proposal has stimulated much editorial interest and debate. Regardless of his fate in the fall 2004 elections, Sims has demonstrated that comprehensive tax reform is not a taboo subject. As history shows, it never really was.
