Budget & Tax

How money walks: Washington

December 19, 2018

Trent England, Curtis Shelton

How Money Walks is a project that tracks the migration of income between all 50 states. Using IRS data, How Money Walks shows how states have gained or lost wealth between 1992 and 2016. These data provide evidence about the effects of tax policy on where people choose to live.

Washington state is the outlier among the nine states with no income tax. Most of the others are “red states,” like Texas and Florida. Two—Nevada and New Hampshire—could be considered “purple.” But Washington is the lone liberal state in the bunch. This makes it a unique battleground for tax policy and an example of how the inability to tax income acts as a limit on government.

Washington state enjoyed $19 billion of annual adjusted gross income moving into the state from 1992 to 2016. It gained the most wealth from California, which has the highest income tax rate in the country. California has lost—on net—$58.63 billion in annual adjusted gross income from wealth migration—$7.32 billion to Washington alone.

Washington differs from the first two states we looked at, Florida and Texas, with lower rankings for competitiveness based on policy variables. According to the Tax Foundation’s 2019 State Business Tax Climate Index, which compares states’ tax structures, Washington ranked 20th. Washington is in the bottom half (37th) in Rich States, Poor States, which ranks each state on its economic competitiveness.

Even without an income tax, Washington has a higher tax burden than Oklahoma by about half a percentage point. The Evergreen State has higher sales and property taxes than Oklahoma, imposes heavy business taxes, and has one of the highest gas taxes in the country. The liberal politicians who run the state are desperate to add a progressive income tax to the mix, but voters have repeatedly turned them down. A vote of the people is necessary because the Washington Constitution prohibits unequal taxation.

Why does Washington state remain highly competitive even with a higher overall tax burden? Why is a state with weather that causes depression winning away income from California?

Not all taxes are created equal. An income tax is, quite literally, a penalty on work. One of the silliest phrases in tax debates is “sin tax,” which is used to specify those taxes intended to reduce a certain behavior while implying that other taxes have no such effect. On the margin, there is no question that gas taxes reduce driving, sales taxes reduce sales, property taxes reduce real estate investment, and income taxes reduce income earning—or convince people to move elsewhere.