Washington State Senate Introduces Progressive Income Tax Bill 6559

Establishes a state income tax.
Reduces the state sales tax.
Eliminates the state property tax.
Takes effect January 1, 2018, if the proposed amendment to Article VII of the state Constitution, authorizing income taxes, is approved by the voters at a general election held in November 2016.

SB 6559, titled AN ACT Relating to progressive income tax, has been introduced in the Senate. The Office of Financial Management has identified this bill as requiring a ten-year projection of increased cost to the taxpayers or affected fee payers. Democrat Senator Maralyn Chase is the Prime Sponsor.

Ten-year projection:

Subject to voter approval, this legislation will:

 - Impose a personal income tax, 

 - Reduce the state sales tax rate, and

 - Eliminate the state property tax levy for schools.

Parts II through X - Imposing a Personal Income Tax

 

An income tax is imposed on all taxable income of resident individuals, estates, and trusts and on all individuals, estates, and trusts deriving income from sources in Washington for each taxable year, based on the type of return filed and the amount of taxable income.

 

The tax does not apply to corporations.  However, partners of partnerships and shareholders of S corporations are subject to tax in their separate or individual capacities.

 

The income tax has a graduated three-rate structure with rates of 2.2 percent, 3.5 percent and 6.0 percent.  To illustrate the rate structure, the marginal rates for married couples filing jointly are shown below:

 

TAXABLE INCOME                             TAX RATE

0 - $ 49,900                                      2.2 percent of taxable income

$ 49,001 - $120,650                         $1,098 plus 3.5 percent of the excess over $49,900

$120,651 - over                                $3,574 plus 6.0 percent of the excess over $120,650

 

The taxable income brackets for heads of households are set at 75 percent of the brackets for joint returns.  For single filers and married couples filing separately, the bracket amounts are one-half of the joint return amounts.

 

For individuals, the tax is based on federal adjusted gross income ("AGI") with certain modifications (e.g., income from municipal bonds issued by other states is added back).  A standard deduction of $5,000 is provided for single filers.  Joint returns with only one income are allowed a deduction of $7,000; if both spouses have taxable income the deduction is increased up to $10,000.  For head of household, the standard deduction is $7,000. 

 

In addition, a personal exemption of $2,900 for each exemption claimed under the federal income tax is provided; additional exemptions are provided for elderly and blind persons.  Section 410 requires the dollar amount of the standard deductions and personal exemptions to be indexed for inflation.

 

Provisions are included for allocating and apportioning income to this state.  A credit is also allowed for the amount of any state business and occupation or public utility taxes paid by an individual operating a business as a sole proprietor.

 

The bill establishes a system for employer withholding and payment of estimated income tax, including penalties for failure to pay and crimes for evasion.  Return filing provisions are included that require tax returns to be filed at the same time federal income tax returns are filed.  If an adjustment is made by the taxpayer to his or her federal income tax return, the taxpayer must file an adjusted return with the state of Washington within 30 days.  If an adjustment is made by the Internal Revenue Service, an adjustment must be made by the taxpayer to the state of Washington income tax return within 90 days.

 

The bill provides the Department of Revenue (Department) with rule-making authority to administer and enforce the income tax.  The rules to the extent possible must follow the Internal Revenue Code and regulations and rulings of the Treasury Department with respect to the federal income tax.

 

The bill gives the Board of Tax Appeals jurisdiction over appeals related to income tax.

 

The personal income tax is contingent upon approval by the voters of a constitutional amendment at the general election in November 2016.  If the voters approve the amendment, then the income tax would take effect January 1, 2018.  The first actual payment of income tax for income earned during calendar year 2018 would be due on April 17, 2018 (although withholding and estimated payments would be due during 2018).

 

PART XI - Reducing the State Sales Tax

 

This section reduces the state sales tax rate to 3.5 percent effective April 15, 2016, unless the Legislature refers to the ballot for a vote a constitutional amendment requiring two-thirds legislative approval or voter approval to raise taxes and majority legislative approval for fee increases.

 

Part XII - Eliminating the State Property Tax

 

Currently, the state levies a property tax for the support of the common schools.  A portion of the state levy is deposited into the student achievement fund.  Also, the State Treasurer transfers money from the taxes collected from the state levy to the general fund for payment on bonds issued for common school construction.

 

The aggregate of all regular levies, including the state levy and excluding ports and public utility districts, is limited to 1 percent of the true and fair value in money.  

 

Contingent on the ratification of the income tax amendment, this proposal eliminates the state levy beginning with taxes levied for collection in 2018.  The proposal replaces the portion of the state levy that is deposited into the student achievement fund with a portion of the state income tax.

 

Also, this proposal reduces the one-percent levy limit to 0.64 percent of the true and fair value in money

 

This proposal also eliminates the transfer by the State Treasurer of money from the state levy to the general fund for payment on bonds issued for common school construction.

 

If the proposed amendment to Article VII of the state Constitution authorizing income taxes is submitted, approved and ratified by the voters at a general election held in November 2016, then the provisions of this bill take effect as noted above.  If the proposed amendment is not approved and ratified, the entire act is null and void.

 

The total, net ten-year cost to tax and fee payers of the outlined tax structure changes is indeterminate. is indeterminate. The Department of Revenue (Department) is unable to predict if the Legislature will refer to the ballot for a vote a constitutional amendment requiring two-thirds legislative approval or voter approval to raise taxes and majority legislative approval for fee increases.  The Department has provided the fiscal impact on different sections and possible outcomes below:

Parts II through X - Imposing a Personal Income Tax

 

ASSUMPTIONS

- For income earned in 2018, the total estimated federal adjusted gross income (AGI) is $271 billion.

- This bill provides for modifications to federal AGI.  These additions and subtractions to income amount to an additional $700 million added to federal AGI.

- From this modified federal AGI, a standard deduction and personal exemptions are deducted to calculate taxable income.  Taxable income for 2018 is an estimated $236 billion.

- The credit for Business and Occupation tax and Public Utility tax paid by individuals are $200 million and $4 million, respectively.

- 2018 Income attributed to trusts and estates is $2 billion.

- Income sourced from a different state and earned by Washington residents is roughly equal to income earned by non-residents and sourced to Washington.

- Compliance:

   - 90 percent revenue collections in Tax Year 2018, and

   - 95 percent revenue collections in Tax Year 2019 and thereafter.

 

DATA SOURCES

- Federal income tax returns for tax year 2013

- Economic and Revenue Forecast Council’s November 2015 forecast

- Department of Revenue excise tax returns.

 

REVENUE ESTIMATES 

Parts II through X increase state revenues by an estimated $7.8 billion in the five months of impacted collections in Fiscal Year 2018, and by $12.2 billion in Fiscal Year 2019, the first full year of impacted collections.

 

TOTAL REVENUE IMPACT - Personal Income Tax:

 

      State Government (cash basis, $000):    

           FY 2016 -      $                0            

           FY 2017 -      $                0            

           FY 2018 -      $   7,849,362 

           FY 2019 -      $ 12,160,365  

           FY 2020 -      $ 12,704,509  

           FY 2021 -      $ 13,253,952

 

 

PART XI: Reducing the State Sales Tax

 

The revenue impact of this section is indeterminate. We are not able to determine if the legislature will or will not take action. However, the Department has provided the fiscal impact on possible outcomes below:

 

OUTCOME 1: The legislature takes action and sends a vote to the people. In this outcome this section results in no revenue impact to taxes administered by the Department of Revenue.

 

OUTCOME 2: The legislature does not take action. The state sales tax rate decreases from 6.5 percent to 3.5 percent. Assumption and estimates are provided below.

 

ASSUMPTIONS

- The increase in the business and occupation tax and local government revenue is due to the increase in taxable sales due to the lower tax rate (elasticity).

- The state sales tax rate is 6.5 percent.

 

DATA SOURCES

- Washington State Economic and Revenue Forecast Council November 2015 forecast.

- Department of Revenue (Department) excise tax return data.

- Elasticity was calculated based on Department data.

 

REVENUE ESTIMATES 

Part XI with Outcome 2 decreases state revenues by an estimated $477.8 million in the 1.5 months of impacted collections in Fiscal Year 2016, and by $4.4 billion in Fiscal Year 2017, the first full year of impacted collections. This proposal also increases local revenues by an estimated $13.3 million in the 1.5 months of impacted collections in Fiscal Year 2016, and by $121.3 million in Fiscal Year 2017, the first full year of impacted collections.

 

TOTAL REVENUE IMPACT - Retail Sales/Use Tax: 

 

      State Government (cash basis, $000):    

           FY 2016 -     ($    477,849) 

           FY 2017 -     ($ 4,375,780)  

           FY 2018 -     ($ 4,613,632)  

           FY 2019 -     ($ 4,823,155)  

           FY 2020 -     ($ 5,062,637)  

           FY 2021 -     ($ 5,300,643)  

            

      Local Government, if applicable (cash basis, $000):           

           FY 2016 -      $   13,250     

           FY 2017 -      $ 121,332      

           FY 2018 -      $ 127,927      

           FY 2019 -      $ 133,737      

           FY 2020 -      $ 140,377      

           FY 2021 -      $ 146,977

 

 

PART XII: Eliminating the State Property Tax

 

ASSUMPTIONS

- Based on current property tax data, reducing the constitutional rate limit to 0.64 percent would result in a loss to local levies through reduced levying capacity.

 

DATA SOURCES

- Economic and Revenue Forecast Council’s November 2015 forecast      

- State Property Tax Levy Model      

 

REVENUE ESTIMATES 

Part XII decreases state revenues by an estimated $1.1 billion in the 6 months of impacted collections in Fiscal Year 2018, and by $2.2 billion in Fiscal Year 2019, the first full year of impacted collections. This bill also decreases local revenues because the constitutional rate limit is reduced to 0.64 percent.  Local Government loss is indeterminate since local taxing jurisdiction rates are unknown for taxes collected in Fiscal Year 2018 and beyond.

 

TOTAL REVENUE IMPACT - State Property Tax:: 

 

      State Government (cash basis, $000):    

           FY 2016 -      $               0 

           FY 2017 -      $               0 

           FY 2018 -     ($ 1,141,649)  

           FY 2019 -     ($ 2,209,097)  

           FY 2020 -     ($ 2,270,633)  

           FY 2021 -     ($ 2,333,708)  

 

      Local Government, if applicable (cash basis, $000): Indeterminate


Legislative Bill Information Website: http://apps.leg.wa.gov/billinfo/