Washington state’s upside-down tax code is even more racist than you think

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Washington state’s upside-down tax code is even more racist than you think

Lawmakers can’t stall on reforming a system that channels income to wealthy white households

By Andy Nicholas and Margaret Babayan - February 10, 2021

Lawmakers in Olympia are finally listening to communities and rightly focusing on addressing racial disparities that have permeated our state economy and institutions for far too long. They must act immediately to reform many areas of public policy – from policing to housing, health care to employment – that serve to oppress Black, Indigenous, and people of color (BIPOC) in Washington state. To move Washington toward racial justice, lawmakers must also tackle our racist, upside-down tax code. New analysis from the Institute on Taxation and Economic Policy (ITEP)[1] shows the disturbing degree to which Washington’s upside-down state and local tax code perpetuates institutional racism and economic inequality.

The good news is that lawmakers have the tools and policies to chart a more just course for our state. They should act immediately to approve taxes on extraordinary profits from the sale of high-end financial assets, or capital gains, and concentrated billionaire wealth. They should also pass an updated Working Families Tax Credit/Recovery Rebate, raise taxes on millionaire estate transfers, and tax salaries of CEOs and other highly paid corporate employees. By enacting these reforms, lawmakers would help build a more just tax code in which wealthy white households finally pay their fair share to support the common good.

Washington’s tax code harms people with low incomes and communities of color

For decades, Washingtonians have been saddled with the most regressive state and local tax code in the nation. The chart below shows that the poorest fifth of households pay six times more in taxes as a share of their incomes than richest 1% of residents. That’s unacceptable. People with lower and moderate incomes shouldn’t shoulder a greater responsibility for funding public investments that benefit us all, especially while COVID-19 and the recession ravages communities across our state.

Click on image to enlarge.
Chart that shows that people with the lowest incomes pay the most in state and local taxes as a share of income

And due to generations of discriminatory public policies, too many BIPOC residents have been forced into the lower-income, higher-taxed tiers of the state population. As a result, most BIPOC groups in Washington pay higher overall state and local tax rates compared to white households and the state as whole. While the effective tax rate for white households is 0.1 percentage points lower than the statewide average rate of 7.7%, the average rate among Black households is 0.4 percentage points higher than the rest of the state (see chart below).

Click on below images to enlarge.
Chart that shows that most communities of color pay the highest state and local effective tax rates in Washington

The disparity is even larger among Hispanic[2] and American Indian/Alaska Native households. The average tax rate among these households is 0.7 percentage points higher than the statewide average. Hawaiian/Pacific Islander residents and those who identify as being of multiple races also face significantly higher average tax rates (0.6 percentage points and 0.1 percentage points, respectively) compared to the statewide average.

While these differences may seem small, they can amount to hundreds of dollars per year that would otherwise be spent on meeting basic necessities, like food, child care, and transportation. Among lower- and moderate-income households of color that are already pushing against racist barriers to opportunity, these higher tax rates can mean the difference between making ends meet and being pushed into poverty or homelessness.

Washington’s tax code is making rich white people richer

The degree to which wealthy white households, the major beneficiaries of institutional racism, get a special deal under Washington’s state and local tax code cannot be overstated. While the richest 20% of white households claim nearly half of all the income generated in Washington state, they contribute less than one-third of the taxes that support schools, health care, infrastructure, and other investments that support the common good.[3]

What’s more, Washington’s upside-down tax code actually channels post-tax income upwards, from lower- and middle-income residents of all races to wealthy white households. Before Washington state and local taxesare applied, the average income among white households is 20.6% higher than the rest of the state (see table below). That disparity rises to 21% higher after taxes are taken into account.

Click on image to enlarge.

 

The tax code has the exact opposite impact on many BIPOC residents. Before Washington state and local taxes are applied, average income among Black Washingtonians is 25.5% lower than the rest of the state, again as a result of institutional racism. After taxes are factored in, Black residents’ average income falls even further, to 25.9% below the statewide average. Similarly, American Indian/Alaskan Native households’ average income before taxes is 38.1% lower than the rest of the state, but 38.6% lower after taxes are applied. And it’s much the same pattern for residents who are Hispanic, Hawaiian/Pacific Islander, and people of multiple races. Each group sees inequitable and unjust pre-tax income gaps only worsen after Washington state and local taxes are considered.

While the richest 20% of white households claim nearly half of all the income generated in Washington state, they contribute less than one-third of the taxes that support schools, health care, infrastructure, and other investments that support the common good.

Lawmakers must take action this session

Under the current system, wealthy white Washingtonians aren’t paying their fair share in state and local taxes. That forces everyone else, especially BIPOC, to foot the bill for investments in public programs that benefit us all. In addition to the many other anti-racist reforms lawmakers need to prioritize this legislative session, they need to make real progress toward rebalancing Washington’s upside-down tax code in 2021.

The hopeful news is there are options on the table this session to make our tax code less racist. Lawmakers must:

  • Enact a capital gains tax (House Bill 1496/Senate Bill 5096) to ensure that extraordinary profits are helping to pay for critical public programs like early learning.
  • Finally fund an updated Working Families Tax Credit, or Recovery Rebate (House Bill 1297/Senate Bill 5387) to put cash back in the pockets of the people who are most struggling to make ends, including undocumented workers.
  • Implement a wealth tax (House Bill 1406) to ensure that the billionaires who continue to profit off this pandemic finally pay their share toward supporting our communities.
  • Make the estate tax more equitable (House Bill 1465) by exempting small estates, reducing estate taxes on medium estates, and increasing the tax on larger estates.
  • Tax on the salaries of CEOs and other highly paid corporate employees to, once again, make sure wealthy people are paying their share of state and local taxes.

These reforms would go a long way in making our tax code more equitable.

[1] An explanation of the methodology used to derive these estimates is available here.

[2] Per language used in source data.

[3] Per Institute on Taxation and Economic Policy (ITEP) analysis, white households in the top 20% claim 45.9% of the state’s income, but pay only 31.5% of statewide taxes.

[4] Budget & Policy Center analysis of IPUMS USA microdata, American Community Survey, 2019 1 year sample.