Who Pays? Studies Reveal State’s Upside Down Tax System

There’s been a lot of talk recently about who is paying taxes. The issue has played a prominent role in the presidential race, with a focus predominantly on who pays federal income tax. Of course, this is only a piece of the whole tax puzzle. Two recent studies show that in Washington State low and middle-income families pay much higher state and local tax rates than the state’s wealthiest residents – and it’s not even close.

An updated study by the Institute on Taxation and Economic Policy (ITEP) shows that Washington has the most backward tax system in the country. In Washington State, a worker making the minimum wage will pay over 17 percent of his or her income in state and local taxes. In contrast, an individual making more than one million dollars a year pays less than three percent. In other words, the low-income worker can expect to pay more than six times what his or her wealthy counterpart is paying in state and local taxes. When comparing this gap to other states Washington is unfortunately alone at the top, with Florida a distant second.

Adding an important layer to this picture is a recent report released by the state’s Office of Financial Management, which confirms ITEP’s findings on our regressive tax system and also provides an analysis of income and wealth distribution in the state. According to the report, between 2005 and 2009 almost 55 percent of total state income went to the top fifth of income earners (those making roughly $100,000 per year or more), while the bottom fifth (those making less than $20,000 per year) saw less than two percent of total wages earned. Even more striking, more than half of the wealth in the state was held by the top five percent, while the bottom 10 percent actually had a negative net worth.

These studies underscore the need to reform our broken revenue system to ensure that we can make the investments that will lead to a more prosperous state for all of us. In particular we should enact a modest excise tax on capital gains and fully fund the Working Families Tax Rebate. Pursuing these policies would go a long way in generating new revenue for job-creating investments in education and health care, and other public services, while also providing a significant financial boost to hundreds of thousands of hard working Washington families.