In the run-up to the 2015 legislative session, some top Democrats have grown fond of comparing Washington’s tax code to a junky old car.
Democratic Gov. Jay Inslee has called the sales-tax-dependent structure “a jalopy.” The chair of the House Finance Committee, Reuven Carlyle, D-Seattle, compares it to “a Ford Pinto in a Tesla world.”
There is some data to back up the Pinto argument. Over the past several decades, as the economy has shifted from manufactured goods to services and Internet sales, the sales tax — the principal source of money for the state budget — has captured a declining share of the economy.
In 1991, Washington ranked ninth among the states in combined state and local tax burden as a percentage of personal income. By 2012, the most recent year for which data were available, the state ranked 35th.
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“The revenue base for the state of Washington is shrinking even while the economy is growing,” Inslee told reporters last week. Moreover, the system has been ranked nationally as the most unfair to the poor.
Some top Republicans agree the state tax engine is not the most powerful or fair. But don’t expect lawmakers to swap the jalopy for a Tesla anytime soon.
While there will be a debate in the coming months over raising taxes — Inslee has proposed new levies on carbon pollution and capital gains, and raising taxes on cigarettes and bottled water — a systematic tax overhaul in the legislative session that begins Monday is unlikely.
Sen. Andy Hill, the Redmond Republican who chairs the Senate Ways and Means Committee, told a crowd at a Washington Policy Center conference in Bellevue last week “there is lots to hate” about the state’s tax code — in particular the business-and-occupation (B&O) tax, which applies to gross receipts.
Hill said lawmakers for years have been “band-aiding and scaffolding our existing system” to reduce volatility through measures like the state rainy-day fund.
But Hill waved off any thought of the 2015 Legislature pursuing a tax-system rewrite. “I deal in political realities: What can we change. What can we fix,” he said in an interview. “I don’t think we’re at a point where we can do that.”
Voters won’t trust any push for “tax reform” they view as merely an excuse to grow government — or impose a state income tax — Hill added, so any restructuring plan should be revenue neutral.
“If your argument is that our tax system is broken, then don’t use that as an excuse to get more money. That’s what scares people off,” Hill said.
Enough revenue now?
Republicans, who hold a majority in the state Senate, enter the 2015 session saying tax increases should be a last resort. They argue that the state tax structure, despite any flaws, is producing enough revenue to maintain existing services and devote substantial new funding to K-12 education, as demanded by the state Supreme Court’s McCleary ruling.
The state expects to bring in an additional $3 billion over the 2015-17 biennium through increased tax collections due to economic growth — without raising taxes.
Inslee argues that’s not enough. His proposed $39 billion budget would raise taxes to grow spending by $5 billion, or about 15 percent over the current biennial budget.
In making that proposal, Inslee reneged on his repeated insistence during the 2012 election campaign that tax increases would not be needed to abide by the McCleary decision and fund other needs.
Since taking office, Inslee has increasingly echoed critics who have long argued the tax code is unfair and inadequate, creating a “structural deficit” that will only worsen in the coming decades.
Dick Conway, a Seattle economist and co-founder of The Puget Sound Economic Forecaster, recently completed a study comparing Washington’s tax system to those of other states on measures including fairness, adequacy and stability. His conclusion: “Washington has the worst state and local tax system in the nation.”
Washington’s budget relies heavily on the sales tax, which accounts for nearly half the revenue for the state general-fund budget for schools, social services, prisons and other needs. The state budget gets a smaller amount, about 20 percent, from the B&O tax and about 12 percent from the property tax, with lesser hauls from real-estate and utility taxes and other fees.
If the state had merely maintained personal-income taxation percentages at the national average, Conway estimates state and local government would have collected an additional $14 billion between fiscal years 2005 and 2011.
Further, due to reliance on a relatively high sales tax, Washington has ranked as the most regressive state tax system in the nation, according to the Institute on Taxation and Economic Policy (ITEP), a Washington, D.C.-based nonprofit that advocates for progressive tax policies.
The poorest 20 percent of state residents pay nearly 17 percent of their income in taxes, compared with 2.8 percent paid by the wealthiest 1 percent, and 4.7 percent by the next-wealthiest 4 percent, according to ITEP.
“Part of the problem is that the voters are getting screwed on this and they don’t know it,” Conway said.
If that sounds like an argument for a state income tax, well, that’s something Conway has supported for a long time.
But Washington voters have repeatedly rejected efforts to impose an income tax. Most recently, in 2010, an initiative that would have imposed an income tax on the wealthiest Washingtonians, while lowering property and business taxes, was rejected by 64 percent of voters.
Broaden sales tax?
Scott Drenkard, economist and manager of state projects for the Tax Foundation, a pro-business Washington, D.C.-based policy think tank, said Washington is like many states struggling with tax systems constructed in the 1930s.
“Washington is in the same boat with every state that levies the sales tax, in that it doesn’t apply comprehensively to services, which have grown so much,” Drenkard said.
But he suggested lawmakers, rather than seeking to impose an income tax which has proved unpopular, should look to expanding the sales-tax base by applying it to services. “If the sales tax is going to continue as a state levy it will have to be adjusted for a 21st-century economy,” Drenkard said.
Inslee last week did not appear enthusiastic about “the same old, same old” proposals to tweak the state’s existing taxes. “It’s just not right, because it makes a very unfair tax system even more unfair,” he said.
Carlyle, the House Finance Committee chair, hopes to spur what he’s been calling a “courageous conversation” about the tax code this year. That includes bringing more transparency to the more than 600 tax exemptions on the books.
“The lack of intellectual rigor and analysis ” that has been applied in enacting and renewing many of those tax breaks, Carlyle argues, “is stunning.”
But in a divided government, with hundreds of lobbyists paid to preserve tax breaks and prevent any new tax on their employers — not to mention possible citizen initiatives that would be filed challenging new taxes — inertia may rule.
So that Pinto? Count on the Legislature to try to squeeze at least a few thousand more miles out of it.