The middle-class families in that state are in for a rude awakening.
First, the tax isn’t likely to collect anywhere near $3.7 billion, as the wealthy figure out ways to hide their income or just pack up and leave for places that don’t treat them like slot machines.
That’s been the case with other “tax the rich” schemes. A paper published by the National Bureau of Economic Research found that the revenues from California’s 2012 tax-the-rich scheme generated about half as much new revenue as expected.
Already, Starbucks founder Howard Schultz announced plans to relocate from Washington to Florida (which has no income tax).
As Nathan Goldman put it in Forbes, “The question now arises of whether more will follow and if Washington is equipped to financially handle a mass exodus of high earners out of its state.”
Where is the state going to go to make up the shortfall? History has the answer.
When the federal government first imposed an income tax in 1913, it was very much like a millionaire’s tax.
The law included a $3,000 personal exemption, which is equal to roughly $100,000 today. And even then, the rate was a mere 1% up to $20,000 (or $670,000 in today’s money). And the seven tax brackets topped out at 7% on incomes that in today’s dollars would exceed $17 million.
Just five years later, the personal exemption had been cut down to $1,000, the lowest bracket had been hiked to 6%, and there were 49 more tax brackets, with the top one set at 77%
Federal income tax rates and exemptions have bounced around ever since, but we’ve never come close to returning to those initial levels.
And each time the top rate was hiked to “soak the rich,” it was used as cover to raise taxes on the middle class. When George H.W. Bush raised the top rate in 1990, he also raised taxes on things like beer, cigarettes, and gasoline. Bill Clinton and Joe Biden performed the same trick when they raised taxes on the rich. In contrast, when Ronald Reagan, George W. Bush and Donald Trump cut the top tax rate, they also slashed taxes for the middle class.
The story is much the same in states that imposed income taxes on the promise that they would be modest and would mainly target the rich.
New York’s initial 1919 tax rate, for example, was 3% on incomes over $50,000 – which effectively made it a millionaire’s tax in today’s dollars. Today, New Yorkers pay 4% on income above the $1,000 personal exemption, and 9.65% on incomes above $1 million.
Once in place, income taxes inevitably start to metastasize after lawmakers realize how much money is there to be had.
Gov. Ferguson might think the state’s new income tax is “historic,” but Washingtonians will soon find out they’ve just been taught a very expensive history lesson.
— Written by the I&I Editorial Board
I & I Editorial Board
The Issues and Insights Editorial Board has decades of experience in journalism, commentary and public policy.