“Ten states—Washington, Texas, Florida, South Dakota, Nevada, Tennessee, Pennsylvania, Illinois, Oklahoma and Wyoming—are particularly regressive, with upside-down tax systems that ask the most of those with the least.
“These ‘Terrible Ten’ states tax their poorest residents—those in the bottom 20 percent of the income scale—at rates up to six times higher than the wealthy. Middle-income families in these states pay a rate up to four times higher as a share of their income than the wealthiest families.”—Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, 6th Edition. Institute on Taxation & Economic Policy, October 2018
It may seem surprising to see Washington state, generally known for its progressiveness, on that list. But it’s not just on the list; it’s at the very top. According to the Institute on Taxation & Economic Policy, Washington State has the most regressive tax structure in the United States. The comparison between the wealthiest and poorest Washingtonians is stark: while the wealthiest 1 percent of families pay 3 percent of their income in taxes, the poorest 20 percent pay almost 18 percent.
Existing alongside this stark reality is the fact that Washington state’s residents are largely supportive of affordable housing. Washington State’s Housing Trust Fund, an early national benchmark when it was created in 1986, was at an historic high of $200 million per biennium just prior to the recession. Although it has decreased to less than $100 million post-recession, it has helped to build or preserve nearly 47,000 affordable units statewide.
For many years, Seattle was the only city in the country whose residents taxed themselves with a housing levy. That levy has now funded over 13,000 affordable apartments for seniors, low- and moderate-wage-earning workers, and formerly homeless individuals and families. It has provided homeownership assistance to more than 900 first-time low-income homebuyers and given emergency rental assistance to more than 6,500 households. Seattle voters have renewed that levy multiple times since 1981. In 2016, voters doubled the levy to $290 million over seven years.
This sounds wonderful, but the problem is that like much of the state’s revenue, it relies on sales and property taxes—both regressive taxation forms that are hardest on those who struggle the most. They put the livelihoods and housing security of vulnerable low-income families at even greater risk, and as they do, they exacerbate a widening gap between affordable housing need and the affordable housing available.
With growth on steroids in western Washington, the gap has become staggering. The King County Regional Affordable Housing Task Force announced that we need an additional 156,000 affordable homes to serve everyone who is currently experiencing homelessness or who is dangerously housing cost-burdened. The projected gap widens to 244,000 homes by the year 2040.
Clearly, we need to scale up the output. The dilemma for advocates is how to ask city and county elected officials to significantly increase public resources for housing when their only current choices are regressive tax tools. Voters are increasingly clear about their tax fatigue. And implementing an effective property-tax ballot initiative can cost over half a million dollars.
In 2017, the City of Seattle passed an income tax on households with total income above $250,000 for individuals or $500,000 for married couples. This was quickly met with lawsuits and a ruling that it violated current law. Since 1932, statewide income tax proposals have failed nine times.
The fates of education and transportation in Washington State are intertwined with its taxation problem as well. Historically, education has been markedly underfunded and regional public transportation has not come close to keeping pace with growth.
In response, the Washington State Supreme Court ruled in 2012 that the state legislature must adequately fund education. Voters approved “Sound Transit 3,” a $54 billion regional transportation project. Unfortunately, revenue sources for these needed investments are limited to significantly increased property and car licensing taxes. Property owners of all incomes are reeling from the shock and, of course, escrow accounts for low-income homebuyers needed a huge payment boost.
The affordable housing and homelessness crisis is not just a Seattle problem or a Puget Sound phenomenon. Cities throughout the state are affected, and so perhaps the magnitude and the universality of the need can drive legislative change. Washington state’s capacity for innovation should be brought to bear on a regressive tax structure that perpetuates inequity in our housing, social services, mental health, education, transportation, and infrastructure systems.
At a recent board of directors retreat of the Housing Development Consortium of Seattle-King County, where I work, we questioned the feasibility of continuing to press elected officials to add more property and sales taxes. Our members understand that it isn’t enough to shrug and say, “but it’s all we have to work with.” Comprehensive tax reform is going to take collaboration between advocates and other sectors. We are encouraging our circle of influence to join these efforts.
When it comes to “upside-down taxes” that exacerbate the affordable housing problem, it’s hard to beat the property tax — which is actually two very different taxes.
First, it’s a tax on building values. This makes it more expensive to construct, improve and maintain buildings. As we know from Econ 101, increasing the cost of production results in less production and higher prices. Most property taxes are in the range of 1% to 2%. But these taxes are paid each and every year that an improvement adds value to the property. In a low-inflation environment, the economic impact on a long-lived asset is similar to a one-time sales tax of between 10% and 20% on construction labor and materials. That’s a barrier to affordable housing.
Second, it’s a tax on land values. This 1% to 2% annual tax means that between 80% and 90% of publicly-created land values end up as windfalls to landowners. This is the fuel for land speculation, a parasitic activity that creates nothing of value but which inflates the price of land — particularly at prime locations. This is part of the economic motivation for sprawl which seeks cheaper, but more remote locations for development.
The bottom line is that people who construct and improve property must pay higher taxes while those who allow buildings to deteriorate are rewarded with lower taxes. Responsible property owners who maintain their buildings pay more taxes than their irresponsible neighbors who own vacant lots and boarded-up buildings, even though the cost of maintaining streets, sidewalks, sewer, etc. is the same for both vacant and development properties. (Vacant properties might actually cost more due to crime and arson that often take place there.)
The good news is that some communities have turned this upside-down tax right-side up. This communities have reduced the tax rate applied to privately-created building values while increasing the rate applied to publicly-created land value. The lower rate on buildings makes them cheaper to construct, improve and maintain. Surprisingly, the higher rate on land value helps keep land prices more affordable by reducing the profits from land speculation. Thus, by shifting the tax off of buildings and onto land, these communities can make both buildings and land more affordable without any increase in spending or any loss in revenue. And while property taxes are not directly related to household income, the value of land is more correlated with wealth than the ownership of buildings. So this tax shift does make the property tax more progressive.
For more info, see http://solidgroundcampaign.org/blog/want-affordable-housing-look-land .