Our tax history: Seventy years ago, voters wanted an income tax

By Drew DeSilver
Seattle Times business reporter

	Gov. C.D. Martin saw income tax as a solution to plunging property-tax revenue during the Depression.

Today's tax system is, in its essential features, the same one that was hurriedly thrown together nearly 70 years ago, after the state Supreme Court — by one vote — threw out an income-tax initiative that had received overwhelming support at the polls.

And despite several attempts since then to revamp the system — the most recent being a report from a committee led by Bill Gates Sr. — institutional and political factors make it very difficult to change.

"They had to put it in very quickly, otherwise state government would have had to start shutting things down," said Phil Roberts, a University of Wyoming historian and author of a new book on income taxation in Washington state.

"(Gov. C.D.) Martin was talking about cuts in the university, the colleges, the ferries and other transportation activities," he said. "The counties and cities and school districts were screaming for help."

Until the Depression, government in Washington, as in most states, was funded largely by property taxes. But the Depression exposed the weakness of that system: Neither farmers nor unemployed city dwellers could pay their taxes, and state and local governments had no other significant revenue sources.

By the early 1930s almost 30 percent of all Washington tax bills were delinquent, said tax historian and former Revenue Department official Don Burrows. Thousands of Washingtonians were losing their homes and farms for nonpayment of taxes.

Washington lawmakers passed an income tax in 1931, but then-Gov. Roland Hartley vetoed it. A year later, voters overwhelmingly approved two initiatives: Initiative 64, limiting property taxes to 2 percent of assessed value, was approved by 61 percent of voters; and Initiative 69, creating a graduated income tax (one with higher rates on higher incomes), won 71 percent of the vote.

The votes had barely been counted before two Seattle businessmen, insurance agent William Culliton and gas-station owner Earl McHale, challenged the income tax. A Thurston County judge threw out the tax as "wholly unconstitutional," and on Sept. 8, 1933, the state Supreme Court agreed.
 

	Bill Gates Sr. led the state Tax Structure Study Committee, which this week recommended a state income tax.

In a 5-4 ruling, the court said income was property, and as such was subject to the constitutional requirement that all property be taxed uniformly. In short, graduated rates were out.

"The administration (of Gov. Martin) was stunned," Roberts said. "I think even the Taxpayers Association was stunned."

After the Thurston County ruling, the Legislature had hurriedly adopted an emergency business-activities tax. But lawmakers weren't willing to give up the idea of a graduated income tax: They placed a constitutional amendment allowing one on the 1934 ballot.

By then, however, the New Deal had eased the sense of crisis, and I-64's 2 percent limit had lifted much of the property-tax burden. Voters rejected the income-tax amendment, 43 percent to 57 percent.

The 1935 Legislature passed the Revenue Act, setting the structure of the tax system as it exists today. The sales tax was set at 2 percent; the business-activities tax was transformed into the business-and-occupation (B&O) and public-utilities taxes. New excise taxes were laid on cigarettes, liquor and wine.