Who Wants to be a Washington Millionaire?
Part 1 of a 2-Part Column looking at the Mad-Scrambling Tax Policies in the PNW.
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 2-part column is anything but a celebration.
Rather, it's a post-mortem of tax policies in the Pacific Northwest & 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 Washington just dropped a whopper. And if you examine recent history & existing conditions, it may lead you to what could happen next.
Fixing Our Broken System Thru Taxing the Rich
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 any kind of 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 prefered 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 both 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 change direction and then hatch, write & 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.
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 hasn't owned a small business).
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 every day of the week, but in a modern-day full of alternate universes, Washington landed in one.
It was a banner year of some epic tax increases in WA, on the heels of the pandemic no less.
But this new 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 for an automatic, democratic process.
Your only hope is a legal challenge or acquiring hundreds of thousands of signatures in a short time to get this on the ballot for repeal.
Washington residents: they knew you had voted down income taxes 11 times so here’s the end around that will rely on you being resourceful. It’s the perfect play to call in the waning minutes of the tax revenue Super Bowl with little time on the clock. 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.
The harsh reality is if you live on it, earn it, or die with it: be ready to pay more to the state.
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?
That's the definition of malpractice, so it may be time to find a new Doctor.
And if we’re not careful, the leaky valve could cause a catastrophic outcome.
A Truly Systemic Issue
First, this tax is a key component to tax pyramiding—spending a taxed dollar on more taxes—and combining a sales tax with an income tax is prolific tax extraction (the best example of tax pyramiding is a gross receipts tax, and these tax strategies are equal parts lucrative, regressive & risky long-term--much more on that in Part 2).
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 in many creative forms & fashions.
The medicine has been slowly killing the patient because we issue the wrong medicine to cure the true sickness no one wants to acknowledge, and these prescribed financial potions are marred in tax layering, a byproduct of misguided policies that contradict each other. When combined with Federal economic policy failures, it hits the consumer in the ways of pass-through tax and inflation, leading to a formidable struggle for many.
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/wars pushing up inflation & interest rates, we better hang onto our seats. Many of us already are, and just as we all are having to analyze/reduce our personal expenses to survive tight times, 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 will be popping up over the next 3 years, and that combined with tax policies being enacted at a feverish pace, the state could quickly approach a precarious, reactive position as they see the consequences unfold.
Don't count on that added revenue yet, Washington.
The Fundamentals of Tax Increase Strategies: Rinse & Repeat
New taxes are frequently presented in the same way this one was: the current tax code is regressive, the wealthy don’t pay their fair share, and we need the money for the vital services.
A lot of this is true. 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 often is.
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 for the 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.
Instead, they'd rather provide some feel-good virtue amidst all the chaos by promising to send mailbox money to redistribute wealth to “working families”. That’s always an available option in the glad-handed playbook, regardless of global impacts, because who doesn’t like to support people that need it? Never mind these folks want to ensure the “work” availability that is necessary to be considered a “working family”.
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 they'll be forced 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.
So, Oregon & Washington enacted gross receipts taxes to collect money at the business level before it trickles down through expenses and down to the business owner's K-1.
These states have yet to find a tax they didn't love and they love taxing business owners at the beginning AND at the end....both in the business chain and, sadly enough, life.
The States have pushed small businesses and their owners to the limit, and as Washington looks to take another 9.9%, they're 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 the owners 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 a company amidst increasing economic pressures. With their backs against the wall and this much money on the line, you better believe they’ll make drastic decisions.
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?
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 fall so short of expectations that the “necessity clause” will be enacted to lower the earnings 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.
And if this last week is any indication....there's not much they want you to be able to do about it.