Look at How Little Washington Taxes We Pay

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Donald Trump may be too much of a chicken to talk about his taxes, but I’m not. Our total federal income tax bill for 2016 was $16,805 on an adjusted gross income of $120,140, for an effective tax rate of just under 14 percent. Using the methods I detailed in my last post, let’s see how our Washington taxes compare.

  • Property taxes: our share of property taxes on the apartment we rent was $1,382. We also own a duplex but both units are rented to tenants, and I consider them to be paying for the property taxes with their rent; it’s essentially a business expense. When the taxes go up, I raise the rent accordingly. In case you disagree with my analysis, though, the building had about $4200 in property taxes last year.
  • Car tab fees: about $350 for two vehicles.
  • Tolls: $150.
  • Fuel taxes: about $105.
  • Sales taxes: the biggest exclusion from our income was for our substantial savings and investments totaling $34,600, not counting pre-tax retirement accounts. The state will never tax us on this money unless we sell those index fund shares and spend the proceeds on something taxable in the state. Anyway, subtracting all our sales tax exclusions from our income left about $33,000 that could have had sales taxes applied. Of that, about $2,700 was sales taxes.

Adding up all of the above, our total Washington state and local taxes comes to $4,687. That makes our effective Washington state tax rate a measly 3.9 percent.

Let’s Discuss…

I computed all these numbers to paint a clearer picture on how arbitrary and unfair the state’s tax code is. Many organizations with the same goal are citing numbers from a recent Institute on Taxation and Economic Policy (ITEP) report [1] but these miss a lot of details of why sales and property taxes are so unfair.

A new Pew poll [2] suggests that 60 percent of Americans are concerned “a lot” by a sense that “some wealthy people don’t pay their fair share.” If Washingtonians want to make sure everyone is paying their “fair share,” using sales and property taxes to do it is a terrible choice. People like us can rake in gobs of money from high-paying jobs while living in small apartments and pay the same amount of tax as their retired or student neighbors. We can spend our money on lavish out-of-state vacations and pricey organic groceries, or pour savings into investment accounts with the state collecting absolutely nothing from these extravagances. And as far as our investments go, don’t be so certain we will pay Washington in sales taxes when we take that money out; we could move to another state before then. The 2015 ITEP report estimated that Washingtonians in the top 5 percent (family income $197,000 to $507,000) pay only 4.6 percent of their income in taxes, yet by my calculations we managed to pay an even smaller rate with less income.

Just for kicks, how much would we have paid in taxes in another state? Idaho, our nearest red-state neighbor, has a rather flat 7.4 percent income tax and a 6 percent sales tax. I am greatly oversimplifying the math by ignoring income tax rules on deductions/exemptions, but a quick calculation suggests we would have paid about $11,000 in sales and income taxes in Idaho. That hypothetical $60,000 earner I used last time with $20,000 of sales-taxed spending would pay about $5,500; that’s roughly half of what we would pay for half the income. This is much closer to something resembling fairness.

How Can We Fix This?

It should be clear that the state needs to raise revenue with better kinds of taxes. So what are the options, and would they make us pay our fair share?

  • Tax capital gains? We had no capital gains income last year. Such a tax would eventually affect us, though, as long as the exemption is not too high. This hints at the largest problem with capital gains taxes; they are sporadic and subject highly to how the economy is doing. I still support the idea of implementing a capital gains tax, as long as it is paired with a rainy-day fund to decrease volatility in revenues. [3]
  • Tax dividends and interest? We earned about $2,900 in interest and dividends in 2016, so taxing these would make us pay a bit more. Those who are opposed to an income tax should at least consider this. Two states—New Hampshire and Tennessee—tax interest and dividends without taxing other forms of income.
  • Tax carbon? Carbon taxes are regressive, so it’s unlikely we would pay our fair share if a carbon tax was used to pay for general state services. This is just another form of consumption tax like sales, and would be subject to many of the largest loopholes that miss our assets currently.
  • Tax income? Yep. This is the only way to force us to pay up. Contrary to popular belief, an income tax should not be unconstitutional. [4] An income tax is unpopular and controversial here; I would support one if it was partially offset by a reduction in those unfair sales taxes.
  • Tax wealth? While I am intrigued by wealth taxes at an academic level, they would be extremely difficult to implement in practice. How this would affect us greatly depends on implementation. The tax would need to be age-based to include us today since our net worth is not extraordinary when compared to middle class Americans 10 or 20 years older than us. In any case, I doubt such a tax could ever work at the state level.

We are considering ways to atone for our unintentional tax-dodging. Many services in the state are harmed because of insufficient revenue, and giving to outside groups cannot repair all of the damage. I hope more visibility on the problems with our state’s tax policies can help bring about change.

Learn more:

  1. Washington State and Local Taxes in 2015 by income level (ITEP)
  2. Top Frustrations With Tax System: Sense That Corporations, Wealthy Don’t Pay Their Fair Share (Pew Research)
  3. Capital Gains Tax + Rainy Day Fund = Greater Economic Stability (Budget and Policy Center)
  4. Tax Alternatives for Washington State: A Report to the Legislature. Appendix B: Income Tax Constitutional Issues (Washington Department of Revenue, Nov 2002)

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