Meet the definition of insanity. Bob Ferguson, the Democratic governor of Washington, yesterday signed into law the state’s first-ever income tax: a “millionaires’ tax” of 9.9 percent on adjusted gross income above $1 million. Overnight, Washington has gone from boasting no income tax to having the fifth-highest top marginal rate in the nation, tied with Oregon.
Given its progressive politics, it’s shocking that Washington did not already have an income tax. That is thanks to a 1933 decision by the Washington Supreme Court, which held that a progressive income tax violated the state’s constitution. In nearly a century since then, voters rejected all subsequent efforts to enact an income tax.
Washington politicians have thus been saved from themselves from enacting the blue-state fiscal model that is failing nationwide. The Wall Street Journal has a report on how blue and red states are increasingly apart on their fiscal priorities. To finance swelling public budgets, blue states have raised the top income-tax rates. Red states, meanwhile, have used higher receipts and spending restraint to slash income taxes.
The result is a great divergence between states trying to attract businesses and high earners and those trying to squeeze them for revenue. Many Democratic states are facing structural deficits as federal transfers dry up but spending on welfare and public services outpaces their population growth plus inflation. Because curbing spending is anathema to progressives, they must instead search for new revenue sources to plug the gaps.
That is what Washington is doing now. From the Journal:
The biggest motivation for the tax was the fallout from last year’s major federal tax-and-spending law. That legislation will cost Washington roughly $2 billion to $3 billion over the next three years, said Joe Fitzgibbon, the Democratic majority leader in Washington’s House of Representatives.
“We value having millionaires and billionaires here. We value the jobs that the tech sector and biotech and aerospace and agriculture” bring, he said. “But we also think that those very highest-income earners can do more to support the things that we need for our state to be a good place to live.”
Fitzgibbon is right that Washington is a prominent hub of technology, aerospace, and agriculture, and that these industries are fueled by the millionaires his tax targets. It never crosses his mind, however, that Washington might be so economically successful because, up to this point, it did not tax success. Would Amazon, Microsoft, Starbucks, Costco, and other premier companies have chosen to headquarter in Washington if the state didn’t have zero income tax? Would Boeing have built the world’s largest factory there?
We can see how high earners and capital owners react to different state tax environments. The Journal notes in an editorial that IRS data show how money is pouring out of high-tax blue states and into low-tax red states:
California lost on net $11.9 billion, mostly to Texas, Nevada and Arizona. Other big losers include New York ($9.9 billion), Illinois ($6 billion), Massachusetts ($4 billion), New Jersey ($2.6 billion), Maryland ($1.8 billion) and Minnesota ($1.5 billion).
These states impose hefty progressive income taxes that wallop high earners, businesses and the upper middle class. While the top state-and-local rate in New York City is 14.8%, individuals who make over $215,400 pay a punishing 10.7%. Minnesota’s 9.85% top rate, which hits at $203,151, is the highest in the Midwest. It also imposes a 1% tax on investment income exceeding $1 million.
By comparison, all states without an income tax besides Alaska gained income from interstate migration, including Florida ($20.6 billion), Texas ($5.5 billion), Tennessee ($2.8 billion) and Nevada ($1.5 billion). Other big AGI gainers include South Carolina ($4.1 billion), North Carolina ($3.9 billion) and Arizona ($2.8 billion).
Still, Democratic lawmakers could argue that even if some wealthy people leave because of higher income taxes, those taxes improve the lives of most residents by funding generous social services and public goods. If blue states truly offered a better deal, we should expect to at least see people — if not income — moving from low-tax to high-tax states to enjoy the benefits. But that is not what’s happening.
The largest blue states — California, New York, and Illinois — have seen hundreds of thousands of residents flee over the past five years. Many red states, by contrast, have seen explosive growth: Texas’s population is up by 2.6 million, Florida’s by 1.9 million, and the South as a whole by 7.6 million. As NR noted in a February editorial: “Over the 2020–25 period, the red states gained 3.3 million people by net internal migration; the purple states gained half a million, while the blue states lost 3.8 million.” Americans are voting with their feet, choosing the red-state fiscal model over the blue-state alternative.
In the national competition for talent and investment, Washington was blessed to be one of just nine states with no income tax. That was likely a major reason Washington was the blue state with the highest population growth since 2020 — the eighth-highest among all states, nestled between Tennessee and Utah. Democratic leaders could see which fiscal policies people flocked toward and which ones they fled. It is amazing — but not surprising — that they have chosen to abandon the former model for the latter.