Temporary tax increases will do little to provide long-term stability for state finances. With citizens strapped with debt, high unemployment and fear of losing their jobs, the state faces a structural deficit that could take years to work out under the weak recovery that optimistic economists foresee.
From a purely political calculation, majority Democrats in Olympia should have stuck with the tax limitations of Initiative 960. Let voters see how they liked living with the nasty and brutish transformation of state services. Talk about an object lesson about the consequences of the Eyman initiative factory.
From a purely economic standpoint, Washington’s revenue model is an inefficient mess, saved only by the fiscal disasters in so many other states. But there’s not the political will to begin serious reform. In today’s polarized environment, even agreeing on reform would prove difficult. One person’s fairness is another’s socialism, and so on.
So as the Legislature stumbles toward a temporary tax increase this week, it has achieved neither outcome and yet, if the conventional wisdom holds true, the Democrats will be severely caned at the polls in November.
Maybe. Oregon is raising taxes on high earners and corporations. But in that case, voters themselves had the say and the measure was clear. Here, a dog’s breakfast of temporary hikes is moving ahead with little coherent narrative articulated by political leaders, especially the governor. Some tax loopholes need to be closed and some modest increases will have little negative effect; others risk tipping fragile small businesses over the edge. And continued cuts will still be necessary to address a $2.8 billion deficit.
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Worst of all, these taxes will do little to provide long-term stability for state finances. With citizens strapped with debt, high unemployment and fear of losing their jobs, the state faces a structural deficit that could take years to work out under the weak recovery that optimistic economists foresee.
According to the Pew Center on the States, the Great Recession has left most states in a deeper hole than in the five years it took them to recover from the 2001 downturn. Indeed, in many cases the fiscal situation is worse than at any time since the Great Depression.
Donald Boyd, a senior fellow at the Nelson Rockefeller Institute of Government, makes the point that even in a normal recovery, tax revenues require three to five years to attain their prior peak. With a “slow-growth economic recovery, fiscal recovery can take longer still.”
Much help has come from the federal stimulus, but it will start to trail off after this year, leaving policymakers in Olympia without that safety net.
Unfortunately for the arguments of anti-tax advocates, demand for government services rises in recessions. It’s also clear, from a look around the world, that government must do some things very well to create the foundation for a competitive economy. Among them: infrastructure for transportation, education and research. Public employees are convenient whipping boys until we need them. In such an environment, how much spending is too much?
For the record, Washington ranks ninth-best in the nation for its “business tax climate,” according to the Tax Foundation. But the ranking is misleading because of the lack of an income tax. It comes in 33rd in the corporate tax rate. Businesses complain that the state’s business-and-occupation tax is overly complicated and arbitrary.
All this should make for a serious statewide conversation. Meanwhile, the Great Disruption grinds ahead. China isn’t waiting for us. And Americans face a future where even the basic government services they long took for granted are in doubt. This may be heaven for some acolytes of Ayn Rand. But she wrote fiction.
Jon Talton: email@example.com