University of Washington economist Jacob Vigdor writes (of Washington), “We don’t spend very much because, in the grand scheme of things, we don’t tax very much. In a recent analysis by the Federal Reserve Bank of Minneapolis, Washington ranked 48th in terms of the net state and local tax rate.”

This is the paper he cites. First, the ranking reflects the average tax and transfer rate (total estimated state tax revenue less transfers divided by state income) in 2015/2016. Thus, it is an estimate from before Washington enacted major new taxes, like the capital gains tax or the many taxes adopted in 2019.

Additionally, even if Washington has a low average tax rate, revenue collections are high compared to other states. According to data from the Census Bureau, Washington’s state and local taxes per capita in 2022 (the most recent year of data) ranked 14^th highest in the country. Washington’s state and local spending per capita ranked 15^th highest.

Note, too, that taxes paid by businesses in Washington are the 10^th highest in the nation (on a per-employee basis) and the Tax Foundation ranks Washington’s tax competitiveness as the nation’s sixth worst.

The paper from the Federal Reserve Bank of Minneapolis is very interesting, though. It studies state and local fiscal progressivity. Although it finds that Washington’s average tax rate was comparatively low in 2015/2016, it also finds that Washington’s tax and transfer structure ranks in the middle of the states on progressivity.

We often hear that Washington has one of the most regressive tax structures in the country. That claim is based on an ITEP study. As we wrote in our critique of the ITEP study, ITEP overestimates consumption spending by lower-income taxpayers, overestimates the degree to which our B&O tax is shifted onto lower-income taxpayers, and ignores the steeply progressive federal tax system. Further, ITEP ignores the impact of transfer payments (e.g., Medicaid, SNAP benefits, workers’ compensation).

The Federal Reserve study improves on ITEP by including transfers in its measure. It’s unclear to me how, exactly, the Federal Reserve study accounts for the B&O tax. The study notes that its model underestimates taxes paid (compared to data from the Census, with business tax estimates from Ernst & Young) for states like Washington. As a result, the average tax rates for Washington are probably underestimated (see page 84 of the study pdf).

Some notable findings:

• “Property taxes are especially regressive. In fact, if they did not levy property taxes, almost all states would have progressive tax and transfer systems.”
• “Given our incidence model, business taxes are regressive, where this regressivity is driven primarily by the fact that part of business taxes raises consumer prices. Those higher prices – just like a sales tax – fall disproportionately on lower income households.”
• People move to less progressive states: “While low tax progressivity appears to be a draw for all movers, it appears to be a particularity salient driver of destination choices for higher income movers. The one percent of moving households with the highest incomes are especially drawn to less progressive states.”

Ultimately, measures of regressivity tell us nothing about the adequacy of revenues, nor do they reflect well-being. As Kriss wrote last year, the ITEP study showed that the average before-tax income of households in the bottom 20% of the income distribution in Washington is the 4^th highest in the country. The average after-tax income of those households in Washington is 5^th highest.