Washington: Who Wants to Be a Millionaire?
I'm writing this on Corporate Tax filing day, so it’s a perfect time to celebrate taxing the rich!
Okay, I'll admit: this column is not a celebration.
Rather, it's a post-mortem of tax policy & an ensuing prediction related to the State of Washington's recently approved income tax initiative that targets those who make over a million dollars in a year.
If you haven’t peeked over the fence at your neighbor, fellow Oregonian, you should because the State of Washington just dropped a whopper. And if you examine recent history & existing conditions, it may lead you to what might happen next.
Fixing Our Broken System Thru Taxing the Rich (Robinhood Approves)
In case you missed it, Washington’s Governor, Bob Ferguson, announced the State would be passing their millionaire tax. The cliff notes: anyone “making” over $1m will be taxed at 9.9%--an income tax in a state that already features a set of significant sales taxes (county, city, & state that depends where you visit) but has never had an income tax. The bill is estimated to generate $3.4 billion in annual revenue.
Lawmakers debated for over 24 hours, and you can find video clips and photos of supporters of the tax hugging and celebrating when they finally got it passed.
There were/are plenty of Washingtonians that wanted to “tax the rich—they can afford it", sentiments that were creatively represented by the slogan “Blue collar over Billionaires.”
“We have to fix our tax code, and we have it do it now”, state Rep Emily Alvarado said. Fixing things in the Seattle area, it appears, has not been a strong suit of her and her fellow representatives. Losing 37,000 jobs in the last 5 years in Seattle’s downtown area and witnessing 1/3 of the offices become vacant won't prove that there is strong leadership in place who knows how to fix much, including the crime & taxes that are pushing businesses away.
Of course, this is more complex than tax policy, and she isn't solely to blame. But it's obvious that providing a climate of supporting businesses & their growth, to then achieve a growth in tax revenue, is not a focus in Downtown Seattle. Increasing the taxes on who is left is.
Downtown Seattle is a massive case study in what happens when you don't address core problems. So, while fixing the tax code should be a huge priority in the state, I’d ask where there’s proof anyone is seeking to actually identify & fix the root issues?
It's obviously not in the plan to consult state voters to consider an income tax. Washingtonians have rejected income taxes 11 times in the last 90 years (by an average of 73.7% against to 26.3% for), so they don't seem to have an appetite for income tax. On this recent one, out of almost 100,000 unique participants submitting testimony, the cons were 10 to 1 over the advocates.
But it doesn't matter what the constituents prefer this time.
“I don’t think anyone that is signing in, in support or opposition, is reading the bill. So, I think you got to take it for what it’s worth….so we’ll take it with a grain of salt” said Senator Manka Dhingra from the 45th district in Redmond.
They know better than you, democracy be damned.
One Person’s Property….is the State's Fortune?
This is where this simple-minded bloke became interested and alarmed.
First, you should know that the State of Washington is one of the only states that considers “income” as “property” (1933 Culliton vs Chase). Because of that, there are limitations on general or graduated income taxes and it is one of the main reasons there is no income tax in the State of Washington today.
Just two years ago, the State of Washington Legislation doubled down to that assurance for Washington State residents, passing a broadbrush, no income tax bill, banning state and localities from adding income tax. It was passed 76-21 in the House and 38-11 in the Senate.
They must not have pinky swore.
And all it took was 2 years to create & pass the millionaire income tax.
The about-face was all in the spirit of balancing the “unfair tax system and making life more affordable for Washington families and small business owners” said Bob Ferguson, Governor of the State.
While making life more affordable is a noble pursuit that we all agree with, acts of nobility shouldn't be jettisoned in that pursuit, and at a foundational level of leadership, a former litigator & 12-year Attorney General shouldn't be seeking ways to circumvent the laws of the state he's been entrusted to govern.
I'd also pose that he may not be the best person to understand ripples of tax policy in the private sector since he doesn't appear to have owned a small business. And quite possibly it may not turn out the way he thinks.
This current tax has been passed under a technicality, as the 2024 ban on income tax was statutory, not constitutional. That means the Legislature could (and did) bypass or limit it for this purpose.
Us commoners call this a “loophole.”
The use of loopholes in Washington tax policy is not anything new. Take 2021 for example, where then Governor Jay Inslee found a narrow exemption to pass a new capital gains tax by calling it an “excise tax.” That's an income tax. It was a year of some epic tax increases in WA, on the heels of the pandemic no less.
But this one gets even more alarming when looking closer.
This bill is exempt from any referendum process: opponents can’t gather signatures to suspend the law and force a voter referendum to approve or reject it at the ballot box because they snuck in a “necessity clause” to this bill, staving off any future challenges by the public because it’s been labeled “necessary for the support of the state government and its existing public institutions.” This is closing future "loopholes" and not allowing a democratic process.
Washington residents: they knew you had voted down income taxes 11 times so here’s the end around. It’s the perfect play to call in the waning minutes of the tax revenue Super Bowl. It’s your government’s Philly special, and you’re the Patriots.
The crazy thing? It’s not like Washington hasn’t been increasing revenue for their government to spend. We’re not even one year removed from Washington’s largest tax increase in State History, estimated to capture $12.5 billion over 4 years ($4,000 per house hold if you calculate the average), one that raises taxes through property tax, gas, new business tax, an expansion in sales tax, an increase in the death tax and higher capital gains taxes.
And, late last year, they also upped the B&O (Gross Receipts Tax) as well. Governor Ferguson's office has been on a heater.
If you live on it, earn it, or die with it: be ready to pay more to the state from all levels.
The fundamental issue at hand is that what these politicians are recognizing in principle is correct: the tax system is broken. Let's be honest, though: their predecessors broke the tax vehicle, and they aren't equipped with the appropriate experience or training to fix it. They only know how to add to it.
I’d argue something even more egregious may be at play: they are actually taking advantage of it because no one is looking closely at the diagnosis to determine the best prescribed path. That is where we should start.
It’s like we’re taking a heart condition to a foot doctor to fix. Sure, if we run more, we’ll lower our blood pressure, but is that really fixing the core issue that is a bad aortic valve?
And if we’re not careful, that leaky valve could cause a catastrophic outcome.
That's malpractice, so it may be time to find a new Doctor.
A Truly Systemic Issue
First, this tax is a key component to tax pyramiding—spending a taxed dollar on more taxes, and the best example of tax pyramiding are Gross Receipts Taxes. Both Oregon & Washington have them already, and these tax strategies are equal parts lucrative, regressive & risky long-term.
The biggest negative impacts, from what I've witnessed, is that it erodes the same issue of affordability it is designed to help. (*Note: More on that below. Disclosure: I'm only personally familiar with impacts from Oregon's Corporate Activity Tax, but I presume there've been similar impacts in WA).
Sure, Washington needs more money as affordability and homelessness issues persist, but the answer is not always in increasing what comes in the door, and it appears that they're trying to fix it all almost exclusively with revenue generation measures.
This is where the medicine has been slowly killing the patient because we issue the wrong medicine to the true sickness that we aren’t acknowledging, and these prescribed financial cures are marred in tax layering, a byproduct of misguided policies that contradict each other, hitting the consumer in the ways of pass-through tax and inflation. When combined with Federal economic policy failures, it’s a formidable struggle for many.
And this doesn’t factor the elephant in the room that's sitting squarely on our future: AI impacts to job loss. That, combined with a Covid hangover, tariffs and war impacts on inflation & interest rates that promise to stunt growth, we better hang onto our seats.
But many of us already are, and just as we all are having to analyze/reduce our personal expenses to survive tight times and plan for potential degradation of future earnings, our government must too. Their solution? Temporary reductions, since a new honeypot of money is coming.
The State is kicking the can down the road until the windfall arrives, but the scary truth is that they/we have no idea what potholes in the road will be popping up over the next 3 years, and that combined with untrammeled tax policies being enacted at a feverish pace, the state will be in a precarious, reactive position as they see the consequences unfold.
The Fundamentals of Tax Increase Strategies: Rinse & Repeat
Let’s get back to new taxes: they are frequently presented in the same way this one was: our current tax code is regressive, the wealthy don’t pay their fair share, and we need the money for the vital services.
Some of this is true. A lot of it, actually. But as in everything, the devil feeds on the obscurity of the details, and years later, the burden will likely be carried by the middle class as it frequently is already.
This is as predictable as the PNW rain in March.
The main argument for this tax is that it’s for funding the state’s Education Legacy Trust Account, which in part funds childcare, the same benefit segment that just last year suffered from significant allegations of illegitimate daycares using loopholes to syphon millions of dollars from the fund, followed by the State kind of being contrite, admitting to overpayments in the millions (miraculously, little word on the fraud part to date).
On the heels of overpayments & potential fraud, Washington is now passing a tax to generate more revenue towards these same programs that may be leaking money out the back door.
Unfortunately, rarely is managing the budget about cutting the programs that aren’t working or admitting to fraud or backdoor dealings. The word “accountability” does not often exist in the politician’s dictionary--this is party agnostic, as we continue to see this from the very top of our Federal Government all the way down to the front lines of our local governance.
But what we can do to provide some feel-good virtue amidst all the chaos?
Politicians will promise to send mailbox money to redistribute wealth to “working families”. That’s always an available option in the playbook, regardless of global impacts, because who doesn’t like to support people that need it? Never mind that they want the “work” availability that is necessary to be considered a “working family”, and I fear that will become further in question in the coming months because of the steps being taken.
At least we can bank on one thing with this new income tax: Washingtonians will be able to invest in better hygiene with the new tradeoff in the tax bill. While this new bill may stink, the residents won't.
“Fairness to Small Business Owners”
What’s a small business these days? It’s not as small as you think....or as Bob Ferguson thinks. And those small businesses he wants the millionaire tax to benefit from in overall “fairness”?
They’re going to be some of the hardest hit and as they are the employers, and they'll look down to cut the bottom line to afford it.
For those that don’t own a small business, let me make sure you understand how this all works for owners of LLCs or S-Corps: business owners are not allowed to carry over reserves for rainy days, as end-of-year profit or loss flows through to their tax return via a K-1. So, if you have a good year, you can’t hold any profits for future years. Or, worse yet, you had perceived profit on the books but that money isn’t sitting in an account (there are lots of reasons this can happen, which I don’t go into). It’s completely profit in the government’s eyes, and they shall take their portion regardless of how much money you have on hand—it’s what your Company’s PNL shows.
Many business owners end up spending money, sometimes foolishly, at the end of the year so the money isn’t in the account so they can find ways to reinvest into the business without tax implications. Sometimes, they end up buying equipment that they don’t really need, vehicles they can depreciate, and/or max out retirement contributions, then get a hit with whatever is left as an owner or shareholder.
You take another 9.9% from those folks, and they are going to consider doing one of two things: lay someone off (or many, pending overall tax volume from this tax), or find a way to get out of State…personally, or worse, as a company.
As a result, job numbers will be impacted and so will overall revenue collected as they leave and their tax contributions go with them. The bad news for Washington is that there are a few years before the revenue starts coming in…just enough time for business owners to come up with their strategy to leave the state and act on it.
These companies are already exhausting their avenues to try and be sure to use the peaks to even out the valleys in what is a roller coaster owning companies with increasing economic pressures, so with their backs against the wall you better believe they’ll get resourceful with this much money on the line.
Not convinced? Let’s talk real world future for a minute.
In the age of AI layoffs and corporate downsizing currently sweeping tech driven communities (especially Seattle), the government is taking a gamble that may push some current companies out while simultaneously degrading the long-standing reputation that the State of Washington provides a fruitful ground for technology founders. Do you believe that entrepreneurs who have a big idea will want to set up shop here? I don't.
Tech has provided billions to the State’s coffers, but will it continue? I’m not sure it can. As Washington brings this tax to life, you’ll see large companies pare down their presence or leave all together because not only are the founders and high paid execs going to consider leaving, successful companies will also know it will be hard to recruit high-earning talent and they’ll leave, too (see Amazon, Boeing & Starbucks trends). From how they handle crime in Seattle to tax policy on employers, the State will continue to see harsh impacts from not protecting their largest tax base.
It also may hit our beloved Seattle Seahawks.
Down the road, if this all ends up becoming a bad idea in hindsight, the Government won't ever admit it. They'll just continue to prescribe more medicine to treat the ailments they caused.
I’ll speculate that the impacts from the next few years will be so devastating that the “necessity clause” will be enacted to lower the threshold. And if they don't want to have any kind of blood on their hands or a "I-told-you-so" moment, they'll find a different way to enact a different tax that acts similarly.
The Gross Receipts Ruse
I will be closely watching Oregon to see if they follow suit and enact a "millionaire's tax" because these states are often bedfellows when it comes to tax policy making, even if their fundamental structures are different.
Both states make questionable decisions in tax policy, and neither will admit it and if your voter preference lands within their political spectrum, you likely won’t, either. We see this play out in our political arena today almost as a rule rather than the exception: believe your chosen team without question, where facts often become mere opinions and opinions are frequently quoted as facts.
File under "philosophical differences” if nothing else.
Speaking of philosophical differences, I have a massive one with my home state.
If you’re from Oregon, possibly you know about Oregon’s Corporate Activity Tax ("CAT"), one that went into effect a couple of months before Covid? I sure do. It was one of the reasons I chose to leave the business of building new custom homes.
Watching our government repeatedly and negatively impact the industry showed me that I could no longer be a businessman, an advocate for my profession AND watch out for my customers all at the same time. I saw the writing on the wall then: public policy was going to filter through every fabric of what I did with so much negative impacts and there was not a single thing I could do about it.
I saw enough in 20 years in the business and knew that all these moves on the macro level would fundamentally alter affordability of homes on the micro, and when paired with misguided land use policy making, it would be the death knell to helping control costs for those who want to build or buy a home (and that was before Covid).
That is where we've landed today.
Oregon residents would never approve a sales tax, so the State of Oregon found their end around (their "Philly-Special" loophole) with the Corporate Activity Tax. The CAT did one thing extremely well: added costs to goods and services like a sales tax without a vote of the people, and it has brought in massive revenue as a result.
The State of Oregon has had record revenue, collecting what is almost double the amount of annual tax receipts over an 8-year period (*note: 2024 had a trigger to the kicker refund of $5b).
As part of that, the CAT has created $6.5 billion over a 5-year period, all for Education. But 6 years later? It’s not enough.
(Washington's gross receipts tax ("B&O")? $7 billion annually. Wowza!)
It’s concerning that such a massive bill fully dedicated to education initiatives still couldn’t keep up with the need, and Oregon now must consider tapping into their rainy-day fund to preserve even the basic essentials for the State's schools.
When it was passed, the CAT was positioned to make large corporations pay their fair share. Guess what? It hit us small business owners, and the sneaky poison is that it continues to steal from affordability. With over a billion dollars annually, there is no putting that genie back in the bottle.
Once it was enacted I immediately started seeing the impacts to construction: every Oregon company involved in the production or distribution of any of the goods and services added a “CAT” surcharge to their invoice, including some restaurants.
I sat in astonishment when I added up a bill I got from our electrician: the electrician added .57% CAT surcharge on his entire bill—parts and labor—and his supplier had added that same surcharge. When added to our cost-plus contract (where we add our fee to all invoices), no longer was that tax .57%. It was a ninja-level tax where every level of distribution added it, a snowball rolling downhill that resulted in 4-5x the original .57% rate on a good & service.
This markup is happening throughout every business in the State of Oregon, and the tax on gross receipts has become a gross secret: the taxing multiple layers of distribution with a gross tax was by design, and the covert, backend sales tax seeped into the cracks without almost everyone not seeing it. But it’s there, and it’s a significant contributor towards the growth of unaffordable housing as a result.
In tax policy, we frequently ignore that we help one crisis by impacting another.
Washington will soon be in the same place: they will trade one tax revenue for losses in revenue in other areas, and it will trickle down to those it was designed to help: the lower & middle classes. If revenue doesn't increase because tax revenue is down they will be forced to raise more taxes, such as the overall sales tax rate, and the business owners will pass on their new taxes in other ways at the same time.
This is the way it has always been and will always be. Someone will foot the bill and it likely will be you.
Unintended Consequences to Affordability--A Shining Example
Speaking of impacts to the consumer and in real estate in specifics, let's look at another example of policy makers creating their own mess and prescribing inadequate fixes that only exacerbates the issue.
The City of Eugene, OR had not expanded their Urban Growth Boundary for single family residential growth since 1984, and a 20-year land supply is required by Oregon law.
After multiple inquiries from the State, the City began a program called “Envision Eugene”, a convoluted process of identifying need for land that commenced when I was President of the Home Builders of Lane County.
That was 2010ish, when everyone in any kind of real estate business was being financially suffocated without any kind of fresh air on the horizon. There was hope of a brighter day, and we knew when that come, we desperately needed land inventory for land supply to catch up. It was our lifeblood, and our community hadn’t stopped growing even though our household earnings & housing supply had.
Unfortunately, we knew it was a longshot considering the City of Eugene was vocal that it preferred not to expand. So, after 7 years, they miraculously found proof of a 20-year land supply.
Label me shocked.
From my seat, it was a process marred with misrepresentation & a total lack of good faith, where land conservation groups closely worked with the city to identify land they could identify as “potentially dividable”, even if it didn’t conform to developable standards. They ended up deciding to only expand the UGB for other uses outside of residential and here we are, 42 years since the last expansion, still waiting for viable expansion to deliver SFD parcels to build upon.
A decade removed and following principles we learned in Econ 101 class, supply has lagged demand, and costs have quickly risen as a result.
Over the last 15 years, builders have slowly exited the market, with an estimated only 20% of the new, SFD builders in Eugene active in 2010 being active today, and very few subdivisions or property has emerged to build on. It has left public building permit offices underperforming in revenue, subcontractors closing or consolidating, and very little new single-family dwellings being constructed.
This has been happening statewide. And now, the State of Oregon as a whole is in a full-fledged housing crisis, and now both the city and state have finally been acknowledging a lack of supply is the biggest issue. We're reaping what has been sowed over public policy and after taking the construction industry for granted when new taxes were needed.
The need for housing still persists in Eugene and Oregon in general, so rather than attempt to find cure the cause, we do the same thing we always do: try and teat the symptom and ignore the cause.
Our Cities and State resorts to strategies like adding excise fees to new construction (already heavily cost burdened), they create state policy to add more multifamily density while often ignoring sound siting policies, and they also authorize overriding prior planning principles to allow for low-income housing be placed in areas where commercial zoning had already been created, misrepresenting community planning promises and contradicting state planning initiatives related to walkablility in the process.
They can’t feasibly look at the residential construction industry any longer for money because they've effectively put the Golden Goose on life support through over-regulating and under-prioritizing. To help cure the issues stemming from our anti-growth mentality, we hope re-emphasizing density will fix the issue and spur new building, and it also opens the door for people to hatch desperate measures like this cockamamie program proposal:
Locally to Eugene, there are dozen examples of the cause and effect—from unrelenting increases of cost due to overreaching state building codes, to skyrocketing costs of SDC fees, and from prolific protesting/legal challenges to land creation to the City of Eugene to allowing for the empowerment of neighborhood organizations in the planning application fees, they've had significant hand in manifesting unaffordability and the lack of built supply.
The question is if leadership has any idea they've had a hand (or two) in this all, and that they have failed to dig into real solutions to the fundamental issues that plague affordability and long-term stability. It gets back to the very beginning point: not solving the root issue causes unintended consequences that become systemic, the same thing we'll see in the State of Washington with their new series of taxes.
While I'd give these states a solid D- in tax policy they do get an "A" in one class: creativity of types of taxes. Oregon leads the charge, but WA is up there, too.
Washington & Oregon: Something’s Gotta Change
While the recipes for Washington and Oregon are different, the dish is the same to their tax and spend policy: galivant under a guise of helping the low and middle class, and then simultaneously make it impossible for them to see that the impacts will hit them the hardest in the end.
Should these unintended consequences be blamed on good-natured politicians featuring virtuous optimism, poor math skills or woeful ignorance? Or something more diabolical? You be the judge.
But I’ll guarantee you this: the $1m threshold is just the beginning for Washington. And the list of high-earners and corporations leaving the state will be the reason, you just won’t hear that from your government when it happens.
In a time with so much economic pressure, the solution lies in truly examining the state’s finances, reviewing what’s working and what isn’t, and adjusting. It's gotta be non-partisan (good luck finding that).
Meanwhile, there has to be a fundamental understanding and focus by these states to what they can do to support growth of the private sector for future benefit of tax revenue growth rather than continue going back to the well and saddling added taxes. The well may end up running dry.
Ultimately, we all deserve better, and possibly the first step in fixing this all is acknowledgment at what is truly plaguing our States’ policy making.
After all, the first step to recovery is admitting the problem.