A Washington State Income Tax-again?

• Publication year: 1992

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 16, No. 2WINTER 1993

ARTICLES

A Washington State Income Tax-Again?

Hugh D. Spitzer(fn*)

I. Introduction

Washington State has twice had a graduated personal net income tax,(fn1) and at least four times the state has had some form of graduated corporate net income tax.(fn2) Each of those measures was passed by the Washington State Legislature or by popular initiative between 1929 and 1935. Each time, however, the Washington State Supreme Court declared either that the enactment violated the Fourteenth Amendment to the United States Constitution(fn3) or that the income tax was a property tax and thus violated the Washington State Constitution's requirement that all taxes be uniform upon the same class of property.(fn4) Repeated attempts to amend the state constitution to permit those taxes failed,(fn5) leaving the state with an unusual tax system that has not changed in basic structure since 1935.

Washington's tax system relies principally on a gross receipts business and occupations tax (the "B and O tax"),(fn6) on property and leasehold excise taxes,(fn7) and on retail sales and use taxes.(fn8) Although Washington State and its local governments are supported by at least fifty-six different taxes,(fn9) in 1988, 48.1% of Washington state and local tax revenues were from either retail sales or use and B and O taxes (over twice the national average of 23.9%); 28.5% of state and local revenues were from property taxes (compared with a national average of 29.9%); and various other sources made up the difference.(fn10) Nationwide, income taxes generate over a quarter of state and local tax revenues (26.3% in 1988), but Washington is one of only four states with neither a corporate nor a personal net income tax.(fn11)

Washington's tax structure is frequently criticized for being regressive,(fn12) discriminating in favor of the low-volume, high profit industries to the detriment of high-volume, low-profit businesses, such as retail enterprises.(fn13) Washington's tax structure is also criticized for being too volatile and elastic, causing plunges in state tax revenue during recessions.(fn14) Washington's tax structure costs residents a valuable federal income tax deduction available to people in the forty-three states that levy an income tax.(fn15) The tax structure encourages Washingtonians to pursue cross-border purchases that evade the state's high retail sales tax.(fn16) And the state's tax structure is plagued by uncertainty because of the susceptibility of the B and O tax to periodic legal attacks on interstate commerce grounds.(fn17) Still, some observers maintain that Washington has a fundamentally stable system, a system with taxes that are not particularly high overall,(fn18) a system where businesses, not individuals, bear a disproportionate share of the initial tax burden,(fn19) and a system where the status quo tilts toward aerospace, timber, aluminum and other large, integrated industries, which is a positive benefit to the economic well-being of the state's residents.(fn20)

This Article does not debate whether Washington's existing tax structure is sound or whether an income tax is the right solution to any inadequacies in the state's system of taxation. Instead, this Article shows how, because of changes in key rulings of the United States Supreme Court and in other state court rulings on the character of income taxes, Washington's legislature could now implement a graduated net income tax on both individuals and businesses. The Article concludes that such a net income tax measure could lawfully be enacted by today's legislature without amending the state's constitution.

First, this Article reviews the history of Culliton v. Chase(fn21) and Washington's other key 1930s anti-income tax cases, and describes the social and economic forces that led to the adoption of Washington State income taxes as well as the successful legal attacks on those measures that followed. Second, this Article illuminates the social and legal philosophies underpinning the various opinions in Culliton and shows that a key misunderstanding (or misconstruing) of "net income"-as a static asset ("property") rather than a concept measuring an activity or flow-caused the court to eviscerate a new, liberal voter-approved constitutional provision and change it back into a restrictive version. This Article then outlines how since the early 1930s the United States Supreme Court has gradually reversed or altered the cases relied on by the Culliton majority, and how other state courts in the country that had a similar view of income as property (inaccurately labeled in Culliton as the "overwhelming weight of judicial authority"(fn22)) have revised their interpretations, leaving only Washington and perhaps one other state(fn23) with a tax system that has been accurately described as "rather unique."(fn24)

This evaluation of Culliton and its sister decisions is not the first. Indeed, as soon as Culliton was handed down it came under sharp academic attack,(fn25) and that case and its progeny have been critiqued on several other occasions, often persuasively.(fn26) But changes in the United States Supreme Court's view of certain issues that formed the underpinnings of Washington's income tax cases, as well as a change in what now clearly is the "overwhelming weight of judicial authority"(fn27) in other states, makes the time ripe for a reevaluation of whether a graduated net income tax is currently permissible under Washington's constitution. Such a tax may or may not be good policy, but that is a determination for legislators to make, not judges or scholars.

II. Tax Uniformity Clauses: A Clash of Economic Interests

Taxation is generally viewed as a fundamental, necessary, and sovereign power of government,(fn28) but there is rarely unanimous agreement on who should bear the taxation burden and how taxation should be applied.(fn29) Taxes on property, both real and personal, have played a key role in financing state and local government in America since before the American Revolution.(fn30) When the states were first established, six of them adopted constitutional provisions that, in effect, required every person to carry his "fair share" of the tax burden.(fn31) Some of those provisions read as though they were lifted directly from John Locke, as perhaps they were.(fn32) But not all states had constitutional clauses requiring that taxes on property be "uniform" or "equal." In 1834, just nine of twenty-four states (38%) had such provisions, but by the eve of the Civil War, that number had jumped to twenty-three out of thirty-four states (68%).(fn33) While one commentator has labeled the origin of such provisions "obscure,"(fn34) the call for uniform taxation clauses appears to have been regularly included among the demands of the Jacksonian democratic movement.(fn35)

In the United States, the first half of the nineteenth century saw an explosion of manufacturing and transportation, the creation of much new wealth, and an increase in the disparity between rich and poor. This caused a backlash from the small farmers and independent craftspeople who formed a majority of the population, but who saw their lives and welfare challenged by the industrial enterprises; they saw transportation companies and financial institutions dominating the young nation's economy.(fn36) Along with attacks on licensed monopolies, demands for broadened suffrage, and pressure for universal and inexpensive public education, equal taxation of all property was a typical platform plank of Jacksonian political groups.(fn37) These groups were critical of tax exemptions and special low tax rates received by canals, railroads, and other key actors in the industrial expansion.(fn38) A movement for "uniformity and universality" resulted, insisting that all property should be taxed, and taxed equally: commercial, industrial, and financial property as well as agricultural land.(fn39)

Among the many legacies of this political movement was the increase in uniformity-of-taxation clauses throughout the American states. By the end of the nineteenth century, forty-one of the forty-five states (91%) had some sort of uniformity clause, including the new state of Washington that entered the union in 1889.(fn40) There was a wide variety of constitutional uniformity provisions to choose from. Professor Newhouse has identified twelve distinct categories of language requiring uniformity or equality of taxation, which he has labeled Type I through Type XII, roughly in order of their development historically.(fn41) As discussed below, the differences among these types of uniformity clauses are critical to the proper interpretation of their meaning.(fn42)

Picking from forms then common among other states, Washington started with a combination Type V clause ("All property shall be taxed in proportion to its value") and a Type X clause ("The legislature shall provide by law for a uniform and equal rate of assessment and taxation").(fn43) Adopted as part of Washington's constitution in 1889, Article VII, Section 1, stated: All property in the state, not exempt under the laws of the United States, or under this Constitution, shall be taxed in proportion to its value, to be ascertained as provided by law.(fn44) Article VII, Section 2, stated:The legislature shall provide by law a...