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    Washington’s Proposed Income Tax Will Stifle Economic Growth

    11/01/2010

    Washington State is often listed as one of the best places to live, retire and open a business. Home to some of the fastest-growing industries in the nation, Washington was ranked by Forbes as the second best state for businesses in 2009. Furthermore, Washington was recently featured on U.S News and Reports’ list of the five best states to build a nest egg. But all that could change soon.

    Washington’s absence of an income tax is a large selling point that has attracted a great deal of entrepreneurs and productive citizens to the state. Many of these successful residents have migrated from states with high income tax burdens. However, there is a statewide proposition, Initiative 1098, on the November ballot that would impose a 5 percent income tax on individuals earning over $200,000 or $400,000 for married couples. Any individual making over $500,000 or couple earning $1,000,000 will be forced to pay an additional four percent surcharge.

    If passed, Washington would suddenly go from having no income tax to imposing the eighth highest rate in the country. After two years, the law would allow the legislature to extend the income tax to nearly all residents. Keep in mind that the federal income tax once only applied to the rich. Today, the federal income tax is levied on Americans of all incomes. As we’ve seen from other states that have adopted income taxes in the past few decades, these tax hikes will crumble the economy.

    In fact, states with no income taxes have far more job growth and economic gains than those with income taxes—especially those with high income tax rates. According to the American Legislative Exchange Council, the nine states without income taxes had an average job growth of 18.2 percent over the past decade. Conversely, the nine states that have a high income tax rate experienced a mere 8.4 percent rise in jobs. Income taxes discourage work and investment while infringing on individual liberty.

    In various ways, the wealthy residents are the most responsive to shifting tax rates. Unlike the rest of us, the rich are likely to own more than one house. If Washington introduces a steep income tax, many wealthy residents will simply pack up and leave or at least file taxes in a different state. That’s exactly what happened in Maryland. Governor Martin O’Malley raised income tax levels on wealthy households to 6.25 percent from 4.75 percent in 2008. In the end, Maryland’s millionaire income tax back fired. It is estimated that Maryland lost $1 billion because one-third of its wealthy residents moved or filed their taxes in other states with lower tax burdens.

    Washington should learn from other states’ mistakes. Simply, soak-the-rich policies have never worked in anyone’s favor. Washington’s proposed income tax will also encourage job-creating businesses to go elsewhere to escape high taxes. As an unintended consequence, all of the 11 states that have introduced income taxes within the past 50 years have seen their share of U.S output decline.

    Unfortunately, a few prominent billionaires are supportive of tax hikes on the rich. Notably, wealthy lawyer Bill Gates Sr. states that “rich people aren’t paying enough.”  He has personally contributed $500,000 to promote Initiative 1098 to force citizens in Washington to surrender more of their hard-earned money to their government.

    Bill Gates Sr. should live and lead by example. As economist Mark Skousen said “the triumph of persuasion over force is the sign of a civilized society.” If Bill Gates Sr. strongly believes that the rich do not pay enough in taxes, he should cut a check to the Washington State Government and peacefully encourage others to do the same. However, he has chosen to use the power of the government to coerce others to pay more money against their will.

    If passed, the new income tax may deter Americans from investing in Washington. Punishing the rich through higher taxes will ultimately hurt everyone in the state. If you want less of something, you tax it. Why would Washingtonians want less income? By forcing productive citizens to turn over nine percent of their investments to the state government, countless jobs will be destroyed or never created.

    Instead, state residents should be free to spend or donate their hard-earned money in anyway that they desire. After all, individuals in the private sector spend their money in a more efficient manner than government bureaucrats. Washingtonians who want more jobs and economic growth will vote against Initiative 1098 to preserve the state’s competitive income tax rate of zero.