“Washington has the most unfair state and local tax system in the country.” That’s how the Institute on Taxation & Economic Policy (ITEP) describes our state in their 2015 Who Pays? report. With its heavy reliance on sales tax, Washington is a textbook example of a regressive tax state in which families with the lowest incomes pay the highest proportion of their incomes in state and local taxes.
Source: Institute on Taxation & Economic Policy, Who Pays: A Distributional Analysis of the Tax Systems in All Fifty States (2015), based on 2012 income levels.
Low-income earners in neighboring states do not bear such a heavy tax burden. The share of income paid in state and local taxes by Washington’s lowest income quintile is more than double the rates in Idaho and Oregon. Conversely the share of income paid for state and local taxes by the richest 1% of Idaho and Oregon residents is 2.5 times greater than that paid by Washington’s top 1%.
Income taxes are usually progressive, meaning that high-income earners are taxed at a higher rate than low-income earners. The federal government imposes a progressive income tax, and so do most states. As one of only 9 states without an income tax, Washington relies heavily on flat-rate sales and excise taxes to pay for government services.
These taxes take a bigger chunk out of lower-income budgets because everyone, regardless of income, pays the same rate. Low-income and high-income buyers of a $30,000 car in Seattle, for example, will pay the same $2,970 in taxes (9.6% sales tax + 0.3% excise tax). Similarly, flat-rate excise taxes are built into everyone’s bills for gas, utilities, telephone, internet, tobacco and alcohol products.
Washington’s sales and excise taxes are 61 percent above the national average. According to the ITEP, “The poorest 20 percent of Washington taxpayers (earning an average income of $11,900 in 2012) actually face the highest overall state and local tax bill in the entire country, at 16.8 percent of income.”
How can Washington spread its tax burden more fairly?
The ITEP report and a companion document describe several effective state tax strategies to reduce the share of taxes paid by low- and moderate-income families:
- Fund Washington’s Earned Income Tax Credit. Federal Earned Income Tax Credits (EITCs) benefit low- to moderate-income working people, particularly those with children, by reducing the amount of tax owed or refunding taxes paid. In addition to federal EITCs, more than half of the states offer EITCs to reduce the burden of regressive state and local taxes on working families. In 2008, Washington was the first state without an income tax to pass legislation for a state EITC. However, an estimated 500,000 working families in the state have yet to benefit from the credit, as it has not been funded by the legislature.
- Expand property tax “circuit breaker” credit to all ages. Current program only protects elderly or disabled taxpayers from property-tax overload.
- Create refundable low-income credits. A policy that complements state EITCs, these credits would include older adults and adults without children – groups typically excluded from EITCs.
- Create child-related tax credits similar to the federal income tax credit that helps offset child care expenses.
- Establish a state income tax.
The report was produced by the Institute on Taxation and Economic Policy (ITEP). For more on income and wealth inequality, see Communities Count’s latest Data Spotlight plus updates of national median wealth trends, mean wealth trends, race/ethnicity wealth trends, and mean and median race/ethnicity wealth trends by age.