Published by EH.NET (October 2003)

Phil Roberts, A Penny for the Governor, A Dollar for Uncle Sam: Income Taxation in Washington. Seattle: University of Washington Press, 2002. xii + 198 pp. $35 (cloth), ISBN: 0-295-98251-9.

Reviewed for EH.NET by Terri A. Sexton, Department of Economics, California State University, Sacramento.

During the past year, virtually every state has been searching for the appropriate mix of tax increases and spending cuts to close a budget deficit. If there has been one lesson learned in the current fiscal crisis, it is the danger of relying too heavily on one or a few sources of revenue. Diversity is the key to survival. Yet there are twelve states that have eschewed one or more of the major taxes in their arsenal. Washington is one of nine states that does not impose a broad-based individual income tax. In A Penny for the Governor, A Dollar for Uncle Sam, Phil Roberts explores the connections between politics and tax policy as he examines how state income taxes have been resisted in Washington throughout its history.

He describes the Washington experience with the Federal Civil War Income Tax (1861-1873) as a period of opposition in which compliance was voluntary and administration was “inefficient and largely ineffectual against evasion.” In contrast, the tax met less opposition in Oregon where there was less turnover of assessors and collectors, and the administration of the tax was more uniform and efficient. Also, the tax was administered by Oregon natives as opposed to “outsiders,” as was the case in Washington.

Attitudes had changed by 1894 when a federal income tax was reintroduced as part of the tariff bill. Washingtonians supported the tax because it was to be levied at a flat 2% rate on incomes above $4,000 and was thus viewed as a “rich man’s” tax that would affect few Washingtonians (0.7% of the state population). This attempt at a federal tax was declared unconstitutional by the U.S. Supreme Court in April 1895, and therefore overturned before it was ever implemented. In 1911 the Federal Income Tax Amendment to the U.S. Constitution garnered nearly universal support from Washingtonians who felt that residents of the eastern states would bear a larger burden from the tax while westerners would benefit from lower tariffs and the federal buildup of coastal defenses.

Meantime, Roberts points out, property taxes in Washington were increasing dramatically due to both rising values and higher rates. Between 1912 and 1925 support for a state income tax began to mount in rural Washington as farmers sought alternative revenues that could provide property tax relief. A state income tax bill was introduced in the 1929 legislative session and passed the Senate with broad support of rural senators but died in the House which was dominated by urban legislators who favored a sales tax. In 1930 a “Blue Ribbon” tax commission recommended a graduated personal income tax and a flat rate net income tax on business to provide property tax relief. In 1931 a 1% sales tax bill died, while a personal income tax bill and a corporate income tax bill passed both the House and Senate only to be vetoed by then Governor Hartley. At the time, the Attorney General advised him that both income tax bills were unconstitutional.

In 1932, the Washington State Grange, an organization of rural residents, formed a coalition with urban labor organizations, school teachers, and unhappy urban property owners to pass an income tax initiative with more than 70% voter support. A 40 mill property tax limit was also passed. Although the new income tax plan was signed into law in December of 1932, it was soon challenged in the courts by several Seattle businessmen. The income tax was struck down in September 1933 because it violated the Fourteenth Amendment, which required all direct taxes to be uniform on all categories of property. “Property” was defined to include net income and therefore a graduated income tax schedule was deemed unconstitutional.

The 1933 legislature passed an excise tax bill which imposed a tax of 2% of the net sales price of many items. The proceeds of this tax far exceeded those anticipated from the various income tax proposals under consideration. This took much of the pressure off the legislature to pass an income tax measure. The growth in property tax burdens had been arrested and replaced with essentially a sales tax.

Income tax proponents tried again in 1935 but once again the income tax was rejected as unconstitutional by the state Supreme Court. A 1936 ballot initiative that would amend the constitution to allow an income tax was defeated in a landslide vote. As Roberts describes, proponents of the tax had grown weary and economic conditions had begun to improve. Importantly, rural property owners had already received the property tax relief they had sought so support for the income tax had weakened and was no longer well organized. In fact, the initiative lost most heavily in the eastern rural counties.

A constitutional amendment to allow an income tax was again defeated 2 to 1 in 1938 while an amendment that made permanent the property tax limit won 2 to 1. As in 1936, the strongest support for the income tax was found in urban areas and more populous counties. The sales tax had taken the place of the property tax for financing state government, thus eliminating the need for an income tax.

In 1951 as part of a budget compromise, a 4% corporate income tax passed through the legislature but, for the third time in 18 years, the Washington Supreme Court rejected any form of income tax. A constitutional amendment to allow an income tax was again defeated in 1970 and an income tax proposal in 1973 suffered the worst electoral defeat in state history. Another ballot measure in 1975 was also defeated.

Roberts provides the play-by-play, identifying all of the political participants and dissecting each of the voting outcomes. The politics of Washington’s avoidance of state income taxation are clearly presented and extremely well documented. As an economist, however, I am left to wonder what their revenue history and future revenue prospects look like.

Terri A. Sexton is the associate director of The Center for State and Local Taxation at the University of California, Davis. She is co-author (with Arthur O’Sullivan and Steven M. Sheffrin) of Property Taxes and Tax Revolts: The Legacy of Proposition 13 (Cambridge University Press, 1995).