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Washington State currently has the most regressive tax code of any state. That means that relative to the residents of other states, lower income Washington residents pay a higher portion of their income in taxes compared to higher income residents. Specifically, the lowest twenty percent of Washingtonians by income spend around six times as much as a share of their income on state and local taxes than the wealthiest one percent. That imbalance makes Washington State’s tax code a significant issue in the state’s politics. However, fixing that imbalance is complicated by a provision of the Washington State Constitution that requires uniform taxation of the same class of property. The provision has been found by the State Supreme Court to mean that a graduated income tax, perhaps the most apparent policy solution to the regressive nature of the tax code, is unconstitutional. This article describes the history of and arguments about the constitutionality of graduated income taxes in the state of Washington. It then addresses an alternative policy, a capital gains tax recently passed by the Washington State Legislature, and concludes with where policymakers can go from here.

As presently amended, Article VII of the Washington State Constitution, which concerns revenue and taxation, stipulates that “[a]ll taxes shall be uniform upon the same class of property.” While seemingly innocuous, this line creates constitutional issues for progressive taxation in Washington. The central issue stems from Culliton v. Chase, a 1933 case brought to the Washington State Supreme Court, in which the Court ruled that a graduated income tax was unconstitutional under the Washington State Constitution. Due to that uniformity requirement for taxes on property, determining whether an income tax was a property tax or excise tax was central to the Court’s decision. If an income tax is found to be a property tax, then the requirement would apply, making the graduated income tax unconstitutional in the Court’s eyes. The majority opinion in Culliton used Aberdeen Savings & Loan Assn. v. Chase as a precedent to find that income is property, and therefore that the graduated income tax at issue in Culliton was unconstitutional. Aberdeen concerned a different tax rate between savings and loan associations and banks organized as corporations. However, rather than focusing on the income as property argument that Culliton cites it for, Aberdeen focused on equal protection as the basis for the challenge to the different tax rate at issue in the case. That means Culliton depends on a precedent that, by the argument of the cited document, did not make the determination that the Culliton opinion needed. While the initiative at issue in Culliton contained a reference to taxing incomes as incomes specifically and not as property, that was not enough for the Court to find that the graduated income tax was not a property tax that violated the uniformity requirement of the State Constitution.

The Washington State Supreme Court’s decision in Culliton has cast a long shadow over the discussion of changes to Washington’s tax code today. A recent example is the 2019 Court of Appeals case Kunath v. City of Seattle, which concerned an income tax on high-income residents enacted by the City of Seattle that taxed all income above $250,000 at a fixed rate of 2.25 percent. The Kunath opinion’s analysis of the constitutionality of Seattle’s tax was a reiteration of the Culliton precedent. The Kunath opinion was based upon the same argument that income is property and therefore subject to the uniformity requirement, reinforcing the importance of Culliton as a precedent. In the words of the Kunath court, “Article VII, section 1 of our constitution, as interpreted by Culliton, considers income to be intangible property, so a tax on income is a tax on property. Arguments to the contrary can be resolved only by our Supreme Court.” Since then the State Supreme Court has not reviewed Kunath, leaving Culliton as its word on the matter. However, to dispel the common claim that any income tax is unconstitutional, the Kunath opinion explicitly does allow for a flat income tax. A flat tax would not violate the uniformity requirement because it is by definition uniform. While that distinction between the legality of a flat and graduated income tax is important, in practice a non-graduated income tax is an unlikely policy outcome. Republicans tend to oppose income taxes in general, while Democrats would likely have the goal to make the tax code more progressive if they were to implement an income tax. A flat income tax serves neither interest.

A discussion of the issue and constitutionality of an income tax in Washington would not be complete without discussing the alternative policy of a capital gains tax. During the 2021 regular session, the Washington State Legislature passed SB 5096 into law. The bill imposes a seven percent tax on capital gains with a $250,000 standard deduction and some exceptions including real estate, retirement accounts, livestock, fisheries, and qualified family-owned small businesses. According to the intent section of the bill, SB 5096 was intended as an improvement on Washington’s regressive tax code as only around one in a thousand Washingtonians have the level of capital gains necessary to be taxed under SB 5096. However, SB 5096 is also facing legal challenges similar in substance to the challenges that would be expected against an income tax. If the courts determine that the capital gains tax in SB 5096 is a form of income tax, then it would likely face the same fate as the Seattle income tax in Kunath v. City of Seattle. Both SB 5096 and the Seattle income tax act as a progressive tax despite the constitutional requirement for uniformity by only taxing income or capital gains above a certain level. However, this creates the potential for SB 5096 to be struck down on the grounds of the uniformity requirement as the Court of Appeals in Kunath found this approach to be unconstitutional without the Supreme Court revisiting Culliton. Another legal argument against the constitutionality of SB 5096 focuses on a line from section two of Article VII of the State Constitution that states “the aggregate of all tax levies upon real and personal property by the state and all taxing districts now existing or hereafter created, shall not in any year exceed one percent of the true and fair value of such property.” This argument claims that SB 5096 is unconstitutional because it raises the tax on capital gains beyond the one percent limit. It is worth noting that the line in the State Constitution references property, which means using it in a case or opinion requires the same premise that capital gains are income and that income is property necessary for SB 5096 being unconstitutional under the uniformity requirement. The Legislature claims in the bill that SB 5096 is an excise tax, similar to the initiative in Culliton claiming it was not a property tax in an attempt to avoid these requirements. In theory, this would stop the uniformity requirement from applying. However, opponents of SB 5096 disagree which leaves the matter to the courts to decide. Due to the recency of SB 5096, these lawsuits are ongoing. The next development in these issues will likely be a final decision on the constitutionality of SB 5096. If the courts find SB 5096 constitutional, then the Legislature will have succeeded in finding a method of taxing wealthy individuals specifically that is constitutional and will also have taken a concrete step towards a more progressive tax code. However, regardless of the legal outcome for SB 5096, the legislature will still need to continue to navigate the uniformity requirement if it desires to make Washington’s tax code more progressive in the future. Whether or not SB 5096 is found unconstitutional, its focus on taxing assets that only the relatively wealthy possess is a path that the Legislature can still follow. By taxing targeted assets, the Legislature can implement a more progressive taxation system. However, the Legislature would need to be careful about what taxes it implements. That approach risks those targeted by the taxes taking their business elsewhere or simply causing the substitution of the consumption of one type of good for another. The other difficulty the Legislature would face is political. Despite the narrow share of Washingtonians that it would tax, over sixty percent of Washington voters voted for SB 5096 to be repealed in a non-binding advisory vote during the 2021 general election. Opposition to income taxes is a common theme of Washington Republicans’ politics, and that opposition would apply to alternative proposals from the Legislature as well. Those pitfalls reiterate the difficulty of creating a progressive tax code in a state bound by the uniformity requirement and Culliton. In order to make Washington’s tax code more progressive, it will require either voters or the courts to change their minds to allow non-uniform taxation or careful and ongoing work from the Legislature.