The myth of Washington’s tax burden, by the numbers – GeekWire

[Editor’s Note: Sales consultant and former startup founder Ron Davis is a candidate for the Washington state Legislature, who has written for GeekWire previously on startup sales hiring practices. GeekWire publishes guest opinion pieces representing a range of perspectives. The views expressed are those of the author.]

If you tune into the local conversation about Washington state taxes on LinkedIn, you might think that Olympia is on the verge of snuffing out Seattle’s regional economy with extreme taxation. There are exceptions, but most of these posts are long on rhetoric, short on rigor. Given Washington’s pressing needs, we should do better. And given our community’s capacity for data-driven thinking, we can do better. 

Contrary to popular myths, our taxes are relatively low, haven’t exploded skyward, and are nowhere near the point of creating serious damage to the commercial sphere.

Washington taxes are low

Let’s consider why a conservative economist recently called Washington a “tax haven, like the Cayman Islands,” when it comes to the rich. First, we only recently even reached the halfway point among states when it comes to taxes as a share of its economy, and our taxes are actually down from a few years ago. We have lower taxes than every other deep blue state, and nine red states too, including Kansas, Kentucky, Utah and West Virginia.

Second, our taxes disproportionately coddle the rich, while simultaneously stiffing working families. Until recently, Washington was the most regressively taxed state in the union, which meant that the poor pay a much bigger share of their income than the rich. Thanks to the tax on capital gains windfalls over $250,000 in a year, we are now only the second most regressively taxed — just above Florida. 

Currently, the top 1% of Washington earners pay 4% of their income in state and local taxes — less than either Texas or Idaho. The national average is 7.2%, nearly twice as much as Washington. In Massachusetts, California and New York, the top 1% pay 9%, 12% and 14% of their income. On the other end of the spectrum, the bottom fifth of earners in the Evergreen State pay through the nose — 13.8% of their income. The national average is 11.4%. Low income families ARE overtaxed relative to their peers in other states, but this does not figure into the discussions on LinkedIn.

Let’s remember the national and global context as well. United States taxes, including state and local, are far lower than most rich countries — 32nd out of 38 in the OECD. We pay 25%, while the rich Danes, Dutch, Japanese and Austrians, or the fast-growing Spanish and Poles, all pay 35%-43%. No wonder our life expectancy, inequality, healthcare coverage and infrastructure are so poor! The only countries* with taxes lower than ours in the OECD are Costa Rica, Turkey, Colombia, Chile and Mexico.

In other words, the notion of a tax burden — especially for the rich, especially in Washington state — is a myth.

Washington’s budget growth is sustainable

One often hears hyperventilating claims about the growth in Washington’s budget. It is true that if Washington’s budget had grown at exactly the rate as the population and general inflation combined over the last decade, it would be 29% lower. But as any public finance economist can tell you, that information is close to useless. 

Cost disease means that services inflation in both the public and private sectors is higher than overall inflation. Since government work is service-intensive, government costs go up faster than general inflation. Governments build stuff, too — so they buy lots of land and land also gets expensive faster in growing economies. This is why the cost of keeping government services flat usually increases much faster than inflation. Ergo, economists instead look at how much of our state income (GDP) taxes take up.

You might think we’ve run up spending in the last few years at an unsustainable rate. Think again. In 2019, taxes were 10.6% of our economy. Today they are 8.47%. Perhaps we should look back to the depths of recession-era austerity, in 2010? It was 9.9%. Taxes as a share of our economy have shrunk. They are flat from 25 years ago, and down from the 1970s, 1980s and 1990s. 

And if you think GDP numbers are somehow distorted or are not representative of individual experiences, the same analysis holds true of personal income. Taxes are lower, and our economy boomed when our taxes were higher.

The millionaire tax won’t hurt the economy or prompt a mass exodus

In conversations online, for all the talk about tax flight and comparative disadvantage vibes, there is surprisingly little discussion in our community about the real, measured, economic impact of higher taxes on the wealthy. So what does the cold, hard, evidence say?

Well, setting aside the question of whether retaining every last wealthy person is the highest goal of public policy, the evidence is pretty darn clear that the wealthy on balance are nowhere near as price-sensitive as we are told. In fact, millionaires move less than everyone else. 

Researchers estimate that eliminating all tax differences between the states would reduce national millionaire migrations by only about 250 families per year — out of roughly 12,000 total. Regions like ours are “sticky,” as the product people say.

Moreover, studies suggest that when the wealthy do move, they mostly move to other high-tax jurisdictions! Certainly some people cite taxes when they move to Wyoming and some people buy extra homes and play domiciling games to avoid taxes. But the macro, net effect appears to be pretty negligible.

Unfortunately, studies of millions of people seem to have little impact on people’s beliefs when “everyone they know” is “thinking” about moving. 

So let’s put this in terms of some specific stories. New Jersey raised taxes on the rich and Massachusetts raised taxes on millionaires. New York raised taxes on the rich twice, and so did California. In every one of those cases, businesspeople predicted an economic apocalypse, and talked about how the people they knew were leaving. Then the number of rich people in all those places increased markedly. In fact, in California — where taxes went up a lot — their “market share” of U.S. millionaires even increased.

It’s almost as if “the economy” is an immensely complex emergent phenomena, instead of a simple equation where prosperity is perfectly inversely correlated with rich people’s taxes or commentator’s vibes about them.

It’s a serious problem that these kinds of facts so rarely figure into pronouncements about the imminent demise of our local economy every time we do something like raise the minimum wage, labor standards, or taxes. While there is plenty of room for discussion about the right kind and level of taxation, it is time we stopped having a discussion that is just devoid of basic empiricism. 

Washington taxes aren’t high, haven’t spiked, and raising them on the wealthy doesn’t risk economic ruin. This community built world-changing companies by following evidence wherever it leads. It’s time we demand the same standard from our political discourse.

* Ireland is officially on this list, but its tax rate is seriously distorted, because GDP is massively inflated by companies shifting profits there on paper for tax purposes. Ireland has addressed this distortion with a gross national income number and this puts their true tax rate between 35% and 40%.

Note: I used these population numbers, budget history and this inflation calculator.