State income tax faces a fight

WASHINGTON — It is the Columbia River’s version of the Boston Tea Party.

U.S. Sen. Maria Cantwell and U.S. Rep. Brian Baird, both Washington Democrats, trumpeted their state’s claim of taxation without representation by announcing plans to introduce a bill that would prohibit states from taxing the income of nonresidents.

Washington doesn’t have an income tax, but Washingtonians who work in Oregon must pay its income taxes.

The proposal resonates not only in Washington but also in the seven other states that do not tax wages but share borders with states that do.

When the Washington Democrats introduce the bill this week, however, they will face strong opposition in Congress, mainly because most states have income taxes and don’t share Washington’s concerns. Also, Congress often is reluctant to regulate state taxation.

“It stands a chance, but it’s hard to pass something like this because a lot of people at the federal level do not want to interfere in what are local affairs,” said former U.S. Rep. Bill Frenzel, a Minnesota Republican who sits on President Bush’s tax reform panel.

Cantwell and Baird have reignited a deep-rooted debate: Should states tax people who don’t vote there or qualify for in-state college tuition? Regardless of the bill’s fate, they hope to solve their state’s problem.

“We think we’ve identified an issue that is unfair and is contrary to some fundamental principles of our country,” Baird said. “Whether or not this bill passes — we’d like to see it pass — the states could still do something about it. Washington and Oregon could work together to address the problem.”

Because Oregon and Washington have different systems for taxing individuals — Oregon has only an income tax, and Washington has only a sales tax — finding common ground also may be difficult.

The different tax structures and the presence of two dense cities that share a border magnify the interstate tax dispute in the Northwest.

“It’s got to be most intense in Oregon and Washington,” said Harley Duncan, executive director of the Federation of Tax Administrators, an association of state tax officials.

At a campaign stop at a Vancouver commuter bus stop, Baird said, his constituents complained about the inequity.

“They said, ‘I’m paying sales tax in Washington state, income tax in Oregon. I can’t send my kids to Oregon colleges for in-state tuition. I pay out-of-state prices for Oregon hunting and fishing licenses. I’m not eligible for Oregon basic health. But I pay full taxes,’ ” Baird said.

Baird and Cantwell have found support for their proposal from FreedomWorks, a conservative group that fights tax increases.

“It’s unfair to tax Washingtonians who can’t actually access any of the services and have no representation,” said Russ Walker, state director of FreedomWorks/Oregon.

According to Oregon’s Department of Revenue, Washington residents paid a total of about $158 million in Oregon income taxes in 2003.

Deals with neighboring states

States may tax the income of both nonresidents who work inside their borders and of residents who work outside their state. When two states have income taxes, the amount that employees pay to the state where they work is typically credited to the taxes they owe in their state of residence.

“It’s the longstanding principle that if two neighboring states have income taxes, and someone who lives in one and works in another, the state that has the first right to tax that income is the state where the person works, not where the person lives,” said Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities, a liberal think tank. “This bill just proposes to upend longstanding state tax policy.”

Because Washington does not have an income tax, it does not receive money from Oregonians who work there.

Critics of Baird’s bill say the answer to the inequity is simple, and it doesn’t require an act of Congress. Instead, Washington should enact an income tax, said Richard Pomp, a tax law professor at the University of Connecticut.

“This is another harebrained proposal by a state asking Congress to rescue it from the consequences of its own actions,” Pomp said.

Facing a big hurdle

Many states with large congressional delegations have relatively high income taxes, presenting a big challenge for Baird and Cantwell.

“The bill will get attention, but it won’t go anywhere,” said James Edward Maule, a tax law professor at Villanova University. “California, New York, Massachusetts, Illinois, Ohio, Michigan — these are states with high income-tax rates that are surrounded by states with lower income-tax rates.”

Some adjoining states, such as Virginia and Maryland, have agreements to not tax the income of the other state’s residents. The bill would not apply to states with such voluntary agreements.

Baird questioned the level of opposition the bill could face because some states already have tax agreements.

The main support, Baird said, probably would come from the other states that don’t have income taxes and share borders with income-tax states.

“We’re going to look at the map and see where we may have some allies,” Baird said.

Some see few commuters

In some states without income taxes, however, the issue isn’t at the forefront because few people commute across their borders.

Florida, for example, does not have an income tax, but bordering Georgia and Alabama do. John Hallman, Florida’s state director of FreedomWorks, said the issue hasn’t been on his radar.

“I’d have to question how many Florida residents are crossing the state lines to work,” Hallman said.

Texas, another large state without an income tax, hasn’t been very active on the issue, mainly because most of its larger cities don’t border income-tax states. In Texarkana, Texas, residents who work across the state line in Arkansas are not subject to that state’s income tax.

New Hampshire, which doesn’t tax wages, may be Washington state’s closest ally in Congress. Former Sen. Bob Smith of New Hampshire introduced a similar proposal in 2001 because residents of his state were taxed for working in neighboring Maine, Massachusetts and Vermont. The bill never received a hearing.

Baird said it could take years for the bill to pass in Congress. “I think it would be extraordinarily optimistic to think it would go through in this session,” he said.

Hopes for bistate agreement

Baird expressed hopes the debate could spark a voluntary agreement between Oregon and Washington that addresses interstate taxation. Such an agreement could range from allowing in-state Oregon tuition for Washington residents to changing the way nonresidents are taxed.

“One of our premises is there are other states that are examples of how neighboring states can work together to try to find reasonable compromise that takes care of residents from both states,” Baird said. “If they can do it back East as friends and neighbors, then why can’t we do it here in the Northwest?”

But it may be difficult to persuade Oregon to alter its taxation of Washingtonians. Unlike the East Coast states that agreed not to tax each other’s residents, the Northwest is different because only one of the states has an income tax.

Walker, of FreedomWorks, said that in 2001, he tried to find an Oregon legislator to propose a bill that would exempt Washington residents from Oregon taxation.

“I found no one in the Legislature that would be supportive,” Walker said. “Not a single person.”

Jeff Kosseff: 503-294-7605; jeff.kosseff@newhouse.com

Become a Freedom Team Member

Make an impact in your community by becoming a Freedom Team member!

Join Us Today