The Billionaire Dilemma

A Washington state bill proposes hitting the very, very, very rich with a new type of tax — but is it legal?

BY DANIEL WALTERS

It’s arguably Washington state’s most lucrative untapped natural resource: the wild billionaire.

The billionaires rankings in Forbes shows that Washington state has the third-, fifthand eighth-richest people in the world — Bill Gates, Jeff Bezos and Steve Ballmer. No other state has two residents in the top 10.

Amazon’s Bezos alone has a net worth of $120 billion — enough to cover Spokane’s entire city budget for a century.

“It’s an unfathomable amount of money,” says state Sen. Noel Frame, a Seattle Democrat.

By contrast, she sees Washington’s history of relying on the sales tax, a regressive tax that leans on the poor and rewards the rich, as “a major blemish on our record as a progressive state.”

But Frame, the kind of legislator who writes “tax nerd” in her Twitter bio, believes she has a potential solution to this kind of unfairness. And no, she’s not floating a new proposal to tax the paychecks of the wealthy.

Instead, she’s proposing hitting their bank accounts and stock portfolios with a wealth tax.

Senate Bill 5486, which she sponsored, proposes targeting the state’s wealthiest residents with a 1 percent yearly tax on their financial assets, like the money they keep in their checking, savings, or investment accounts.

And when we say “wealthiest,” we do mean the wealthiest. Someone’s first $250 million in assets are exempted from the tax.

“Frankly, the middle class is already subject to a wealth tax,” Frame says. “That’s the property tax on their home.”

In theory, taxing Bezos’ 10 percent stock ownership of Amazon, a trillion-dollar company, could net the state a cool billion.

But, to be clear, the tax wouldn’t apply to physical assets — if they dump their fortune into, say, paintings or yachts or Beanie Babies, it doesn’t apply.

The number crunchers in Olympia estimate 700 taxpayers across the state would be hit — the 700 that can most afford it. And it would raise over $3.1 billion a year. Frame’s bill would split that bounty between accounts focused on disabilities, education, housing and a new “taxpayer justice account” to, in effect, pay the taxes of less-rich Washington state residents.

But there’s just one problem. Even if legislators pass the bill into law, the law might be illegal.

“This is unconstitutional in Washington,” says Jason Mercier, director of the Center for Government Reform at the conservative Washington Policy Center, which generally stumps against any new taxes.

There’s a reason, beyond political unpopularity, why Washington is one of the handful of states without a graduated income tax. The state constitution has long had a provision stating that “all taxes shall be uniform upon the same class of property.”

And attempts to argue that income taxes aren’t actually taxes on “property” have repeatedly been swatted down. (The latest attempt to label a capital gains tax as an “excise tax” is before the state Supreme Court.)

But here, there’s no hiding it. The words “narrowly tailored property tax on extreme wealth” are literally in the title of the bill.

So how can Frame’s wealth tax get around that pesky “uniformity” provision?

Sure, the state can’t charge different types of taxpayers different tax rates for the same type of property, Frame acknowledges.

But what they can do, she says, is to create tax exemptions, like the property tax exemptions on the books for multifamily housing.

Mercier, with the Washington Policy Center, doesn’t buy it. You can get exemptions for certain categories of property, he says. You can’t just get an exemption for the first $250 million, he says.

“If what they’re saying is true, why haven’t they proposed a 1 percent income tax with a $10 million exemption?” Mercier says.

Either way, the bill doesn’t look poised to pass, at least not yet. State Senate Majority Leader Andy Billig, a Spokane Democrat, says he’s philosophically supportive.

“I believe our tax code is broken,” Billig says.

But he acknowledges that it may make sense to wait until the Supreme Court rules on the capital gains tax before trying to pass this one. If it does succeed, Washington would be the first state with a wealth tax. But without other examples to look to, Billig is cautious about the potential unintended consequences.

“For instance, people could move,” Billig says.

And while most people don’t move simply to avoid taxes, this is a new type of tax, heavily concentrated on just a few people who could live almost anywhere they want.

If Bezos leaves the state, suddenly the state would lose almost a third of its tax revenue from the wealthy tax stream. In fact, some of the state’s richest may already be quietly claiming residency elsewhere, Frame says.

And so yes, Frame knows the legal hurdles the state will face if she passes her bill.

“We’re gonna get sued every time we ask the wealthy to pay what they owe,” Frame says. “This is the history of the United States tax code. Rich people always seem to try to get out of paying taxes.” n danielw@inlander.com