In Our View: State tax system desperately needs overhaul

Discussions about tax policy inevitably fall into the black hole that is “fairness”: One person’s fairness is another’s oppressive government overreach. While most people can agree that everybody should “pay their fair share,” the definition of “fair share” can vary wildly.

So, the Legislature is wandering into rocky territory with bills that would levy additional taxes on the wealthy.

House Bill 1406, dubbed a “billionaire tax,” would create a levy on “extraordinary financial intangible assets.” It would tax items such as cash, publicly traded options, futures contracts, and stocks and bonds. It would not tax income — because a state income tax is unconstitutional in Washington.

With our state being home to Jeff Bezos and Bill Gates — most recently regarded as two of the world’s four richest people — this could have a significant impact. The first billion in assets would be exempt; a tax of 1 percent would be placed on the remaining wealth. For the record, Forbes assessed Bezos’ worth at $192.4 billion as of last week.

According to the state Department of Revenue, about 100 Washington residents have assets in excess of $1 billion. Rep. Noel Frame, D-Seattle, said: “It actually really isn’t about them, it’s about the working people of Washington who right now are disproportionately paying for community investments like public education, public health, you name it. This is about equity in the tax code.”

Another proposal, which passed out of a Senate committee on Wednesday, would create a capital gains tax. It would place a tax rate of 7 percent on the sale of stocks, bonds and other assets for individuals and couples who make in excess of $250,000 on such sales.

Gov. Jay Inslee long has supported a capital gains tax, arguing that it makes people pay for paperwork, rather than their sweat equity. But critics long have said that a capital gains tax amounts to an income tax which, again, is unconstitutional in Washington. (That quirk of state law, by the way, is the result of state Supreme Court rulings in the 1930s.)

Passage of a capital gains tax undoubtedly would face a stern court challenge.

The point of all this is that Washington is in desperate need of an overhaul to its tax system. Being heavily reliant on sales tax, our state routinely is ranked as having the nation’s most regressive tax policy, with low-income households paying a larger share of taxes than in other states.

As Meg Wiehe of the progressive-leaning Institute on Taxation and Economic Policy said in 2018: “While state and local taxes can’t eliminate income inequality, well-designed systems can help lessen the problem. Meanwhile, it’s clear that steeply regressive systems only make it worse.”

Overall, according to WalletHub.com’s 2020 analysis, Washington ranks 29th in burden from state and local taxes and fees. Close to the middle seems a good place to be, but the prohibition of a state income tax gives lawmakers few options when it becomes necessary to raise additional revenue.

That requires creativity, which is the impetus for attempts at passing a wealth tax and a capital gains tax. The coronavirus pandemic has upended the state’s economy and revenue streams, but there remains a need to fund vital state programs.

When a Washington resident can accumulate nearly $200 billion in wealth, a tax on billionaires seems a reasonable benefit for the public good. But a capital gains tax is more dicey without overturning the constitutional prohibition on income taxes.

The proposals warrant consideration. But are they fair? Well, that is in the eye of the beholder.