A Concise History of Washington’s Tax Structure

Report | August 1, 2002 | By Jason Smith

Executive Summary

Key Findings

Since 1935, the retail sales tax, business and occupation tax, and property tax have been the major sources of Washington state revenues.

  • Since 1935, legislators have raised the retail sales tax rate eight times. Meanwhile, citizen initiatives have limited property and other taxes.
  • Due to the absence of a graduated income tax and a heavy reliance on the sales tax, Washington state’s tax system has evolved to the point of being rated the most regressive tax system in the country.
  • Although voters defeated income tax measures 7 times between 1935 and 1982, today’s climate may be right for major changes in Washington’s tax structure.

Washington state’s basic tax structure has remained for the most part unchanged since the passage of the Revenue Act of 1935. From the beginning of statehood in 1889 until the Revenue Act of 1935, Washington’s tax structure was predominantly reliant upon property taxes. With the passage of the Revenue Act of 1935, state government in Washington began to focus more on a variety of excise taxes for generating revenue. Most notably, the retail sales and use tax and the business and occupation (B&O) tax were Key Findings permanently implemented, and to this day continue to be the major sources of state government revenue. Lawmakers have consistently struggled to find new sources of tax revenue as voters increasingly choose to limit property taxes and selective excise taxes. Numerous attempts to implement a personal net income or corporate net income tax have been stymied by the state Supreme Court’s narrow interpretation of the state constitution’s tax uniformity clause. In fact, the Washington Supreme Court ruled a 1932 income tax initiative approved by voters as unconstitutional. Consequently, any attempt to implement a net income tax in Washington has been assumed to require a constitutional amendment. Since 1935 voters have rejected various ballot initiatives and constitutional amendments aimed at implementing a personal or corporate income tax in Washington.

Washington state’s current public finance structure relies more heavily than that of other states on the retail sales and use tax as a source of public revenue. Washington is one of seven states that does not levy a state income tax. It is anticipated that in the current 2001-03 biennium, retail sales and use taxes will account for 56% of total state general fund tax revenues.  Business and occupation taxes (B&O) and property taxes will account for 18% and 11% of the total respectively. The remaining 15% of total general fund revenues will originate from real estate excise taxes and other miscellaneous tax, license and fee revenues.

Sales taxes are regressive taxes. As a result of Washington’s overwhelming reliance on the retail sales tax, it is ranked as having the most regressive tax system in the country. According to a 1996 study by the Institute on Taxation and Economic Policy and Citizens for Tax Justice, Washington families in the lowest 20% income bracket pay 17% of their income in taxes while Washington families in the top 1% income bracket pay only 3.6% of their income in taxes. For comparison purposes, in California, a state that has property taxes, sales taxes, and graduated income taxes, families in the lowest 20% income bracket pay 12% of their income in taxes while families in the top 1% income bracket pay 11.6% of their income in taxes.


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