Seattle’s New Income Tax Bodes Ill for the City’s Economy

By Philip H. DeVoe

Wednesday, September 13, 2017

Signs reading “Step Forward for Progressive Taxation,” “Trump-proof Seattle | Tax the Rich,” and “Tax the Rich, House the Homeless” adorned a June city council hearing in Seattle. Those brandishing the signs were proponents of the resolution up for discussion, an income tax on the city’s highest earners. What began as a proposal for a 1.5 percent tax on individuals with an annual income surpassing $250,000 and household income surpassing $500,000 had by that time been hiked to 2 percent, to the glee of the tax’s supporters and the ire of its opponents. When the ordinance passed in July, it had risen to 2.25 percent.

The proceeding must have been familiar to Seattleites present for the $15 minimum-wage debate in 2014. In both cases, adherents of the policy up for discussion used its absence as evidence of its necessity. Both times, too, the policies’ supporters ignored warnings about the effects the changes would have on the city’s economy. Studies conducted since Seattle’s new minimum wage began to be gradually phased in have shown those warnings to be correct. In June, a National Bureau of Economic Research study found that the costs, such as fewer hours/less take home pay, lost jobs, incurred by low-wage workers as a result of the hike have outweighed the benefits by a ratio of three to one.

The outlook for the latest proposal looks equally bleak. The new income tax would threaten not just the low earners supposedly unaffected by it, but the city and state’s now-booming economy as a whole. Yet city councilmembers haven’t attempted to answer arguments about the economic downsides of their proposal, or even make a case for why an income tax is necessary: They see a redistributive income tax as a self-evident good. “We’re here to tax the rich,” proclaimed councilmember Kshama Sawant, the bill’s sponsor, who was instrumental in the $15 minimum-wage legislation, at the council’s vote on the tax. Then-mayor Ed Murray said that his “progressive city” had hit upon “a new formula for fairness.” (Murray resigned Tuesday after the fifth allegation of child-sex abuse, which he denies, was lodged against him.) The sole intent of the ordnance, as the resolution produced in the June meeting put it, is to “target[] high-income households.”

While other cities, states, and the federal government often levy taxes to raise revenue, the Seattle income tax doesn’t seem designed to raise much revenue at all. In fact, during a town hall with other mayoral candidates in April, Murray explained that he plans to use the revenue generated by the tax to lower other taxes. The Seattle Times reported, though, that the income tax won’t be completely revenue neutral, “because some of the new revenue would be set aside to backfill potential cuts in federal funding by the Trump administration.”

But what is the cost of progress for progress’s sake? Rob McKenna, a former attorney general of Washington State, told National Review that the cost will probably be higher than Sawant expects. For one, the city income tax likely foreshadows a push for a statewide one, after which a corporate tax may very well follow. Such a tax on business, impacting mega-companies who flocked to Washington for its population density and lack of corporate and income tax, McKenna compares to “killing the golden goose.” By attempting to squeeze more money out of Boeing and Amazon, just two examples of Washington’s many corporate golden geese, state officials may push these job-creators and revenue-generators into other high-population, corporate-tax-free states like Texas or Ohio.

McKenna’s primary concern, however, is more immediate. Even if no corporate tax follows, the current income tax poses a threat to Seattle businesses: “I’m already worried about how our companies can compete for talent. An income tax is like a pay cut for anyone who wants to work there.” Just as the $15 minimum wage did, the income tax will likely have unintended consequences that hurt the people the policy was intended to help. As Steve Ballmer, former CEO of Microsoft, another mega-corporation based in the Seattle area, bluntly put it in a May radio interview, “There would be fewer jobs [in Seattle] with an income tax than without an income tax.”

But lost jobs and businesses leaving Washington wouldn’t be the end of Seattle’s woes. While the tax currently looks like it affects only the top tax bracket, in fact it already threatens the wealth of some lower earners who would see capital gains taxed. (Think of long-time middle-class Seattle residents, for example, who sell their house hoping to fund their retirement, only to discover they owe a tax on the proceeds.) Many Seattle residents are worried that the council will eventually extend it down to lower earners, following a trajectory typical of income taxes originally designed to affect only those at the top.

What might save Seattle from this disastrous financial policy is the Washington state constitution, however, which states, “All taxes shall be uniform upon the same class or property.” In 1933, 1935, and 1936, the Washington supreme court ruled a graduated income tax unconstitutional under this uniformity clause. Since the new ordinance passed, three lawsuits have been filed against the city of Seattle, by the Opportunity for All Coalition, a non-profit founded to fight the tax in court; the Freedom Foundation, a Washington-based free-market think tank; and a private citizen. All cite the legal precedent and the constitutional clause in their fight to overturn the tax, and many have said they have a good chance of winning the legal battle.

For a strongly blue state, Washington is steeped in conservative tradition, and their constitution actually magnifies many of the values of the U.S. Constitution. Their protection of the right to bear arms, for example, omits the “militia” language found in the federal Constitution. According to McKenna, Washington’s achieving statehood only in 1889 — more than 30 years after California and Oregon — gave its legislators time to learn from the successes of the U.S. Constitution. Today, Washington is a state with people who want big government but with a constitution designed to guard against it.

Even most of Washington’s people don’t want an income tax, though. The last attempt to implement a graduated income tax failed when 64 percent of voters voted “no” on a ballot measure in 2010. The measure lost even in King County, which includes Seattle and Washington’s largest metropolitan area. So while determined Washington legislators could propose a constitutional amendment to allow them to implement a statewide income tax, the people of Washington appear not to be interested. Once again, progressive policy is racing ahead of the people.

Given the expected negative economic effects, unconstitutionality, and a lack of popular support, one might wonder why the Seattle city council is so determined to implement an income tax. Perhaps it’s simpler than it seems. Perhaps Seattle’s legislators want Washington to catch up with the other consistently blue states. In passing a $15 minimum wage, then a tax on the wealthy, Seattle is marking the state with the sign of progress, removing doubt that Washington is a liberal paradise. But at what cost?