How Washington's tax system mirrors a century of change

A century ago, property and gas taxes kept state governments afloat. Today, state capitals depend on your paycheck and your purchases.

The big picture: Newly released U.S. Census Bureau data spanning 123 years shows a dramatic reversal in how states raise tax revenue.

• This massive shift ties state budgets directly to wage growth and consumer spending, rather than fixed assets. It makes state governments more vulnerable to economic downturns, inflation and consumer habits.

State of play: Washington state historically hasn't had an income tax, relying largely on sales taxes, gas taxes and property taxes to fund state services.

• But that, too, is changing.
• A new state tax on annual incomes over $1 million is set to take effect in 2028 — although opponents are actively trying to overturn it at the ballot box and in court.
• Washington also enacted a capital gains tax that took effect in 2022, applying to certain high-value investment profits.

By the numbers: Nationally, an Axios analysis of U.S. Census Bureau data shows a complete reversal in how states collect revenue.

• Then: In 1934, property and motor fuel taxes were the lifeblood of state governments, making up over 42% of all state tax revenue. Income taxes accounted for a mere 6.5%.
• Now: Last year, individual income and general sales taxes generated a combined $992.6 billion — roughly 65% of the $1.53 trillion in total state tax revenue collected.
• The drop: State property taxes now make up less than 2% of total state revenue, bringing in just $25.4 billion nationwide.

Between the lines: As the physical economy shifted to a service and digital economy, lawmakers followed the money, pivoting their tax codes to target everyday transactions and wages, the census data shows.

• In Washington, some major state initiatives that rely on payroll taxes have been enacted in the past decade, including Washington's paid family leave and long-term care programs.
• Seattle's JumpStart payroll tax on large companies with highly paid employees took effect in 2021.

Zoom out: As states have come to rely on income and sales taxes, they're increasingly vulnerable to recessions and slowdowns in consumer spending.

Yes, but: Local municipalities still rely heavily on property taxes to fund schools, police, and fire departments.

Also: Federal dollars also make up a massive share of state revenue.

Between the lines: The century-long pivot away from property taxes and toward sales taxes has deepened racial and economic inequality across the U.S., according to tax policy researchers.

• Because lower-income families spend a larger share of their income on basic necessities, sales and consumption taxes are inherently regressive.
• Wealth used to be tied to land and physical goods, but is now generated through human capital, payrolls, and retail consumption.

The bottom line: Today's state tax systems depend more on what people earn and spend than on what they own, making state budgets more vulnerable to economic swings.