Ranked second from the bottom in a new report, the state’s tax system makes it tough for taxpayers to find out just how much they’re coughing up to the government. Oregon’s system ranks as the most transparent of all.
Quick: How much did you pay in taxes last year?
Unless you’re procrastinating until the 15th, you know exactly how much you forked over to the IRS.
But what about state and local taxes — how much did they add up to?
Don’t feel bad if you don’t know, says local economist Dick Conway. Practically nobody in Washington does.
Conway has worked as an economist and forecaster for business and government for more than 30 years. In 2001, he served on a committee commissioned by the state Legislature to examine Washington’s tax system and how well it functions. He’s continued that research on his own ever since.
In a report released last month, Conway devised a system for ranking the 50 states on the “transparency” of their tax structure — in other words, how easily folks can tell how much they pay in total taxes.
Washington ranked 49th out of 50.
The state scored 0.550 on Conway’s scale, which means that our taxes are 55 percent transparent. Oregon has the nation’s most transparent tax, at 76.7 percent.
There’s no standard definition of tax transparency, so Conway used his own judgment to assess the level of transparency of major types of taxes, and scored them accordingly.
Income tax gets a perfect score because when you do your taxes, you find out exactly what you pay. True, that might hurt, but at least you know.
Property taxes score a little lower. If you’re an owner, it’s a completely transparent tax: You receive a bill each year. But property tax gets docked because lots of people don’t own their home. Renters typically have no idea what portion of their rent goes to pay the tax on their unit.
Sales and excise taxes are considered less transparent in Conway’s system. It’s true, of course, that you get a receipt each time you buy a taxable item. But how many of us keep a record of the tax paid on every purchase at the cafe or corner store, and add them all up at the end of the year?
Taxes on business, including Washington’s business-and-occupation (B&O) tax, receive the lowest score for transparency. These taxes typically get passed on to consumers in the form of higher prices, Conway says, so you wind up paying them without realizing it.
The reason Washington scored so poorly in Conway’s ranking is because we rely heavily on more “opaque” taxes, like sales, excise and B&O taxes, which make up about 79 percent of the state’s tax revenue, according to the most recent census data.
And of course, Washington has no income tax, the most transparent type. In No. 1 Oregon, three-quarters of state revenue comes from income tax.
But why should Washington taxpayers care about our lack of transparency?
“In economics in general, transparency is important. Everybody should know what they’re paying so they can figure out if it’s a good deal or not,” Conway said.
“That goes for our tax system, too. Are taxes too high or too low? Are you paying your fair share, or are you paying an unfair share?”
Washingtonians can’t answer those questions.
Meanwhile, we rely increasingly on low-transparency sales taxes. Just this past week, Seattle Mayor Ed Murray scrapped plans for a property tax to help the homeless, and instead will seek a countywide sales-tax increase.
“The poor helping the poor” is how Conway summed up that plan. Sales taxes, of course, are regressive: Since everyone pays the same rate, it takes a bigger chunk out of a poor person’s income.
Conway’s dream tax system for Washington would be a 10.5 percent personal income tax, and the elimination of all other taxes — no more property, sales or business taxes.
That would reverse our current system, which heavily burdens the poor and lets the wealthy off easy, he says. Plus, it would adequately fund state operations, something we currently fall short on.
And it would make Washington the most tax-transparent state in Conway’s system.
“If people don’t know what they’re paying — especially low-income people — they don’t know how badly they’re being screwed,” he said.
“We don’t even know how bad our current tax system is.”