It is (Past) Time to Raise Taxes in Washington State

by John Stafford

The State Legislature, now in its second special session, is at an impasse over the issue of taxation.  The original Democratic-controlled House budget called for a tax increase of roughly $1.5 billion, an amount that has been reduced to about $600 million in their revised budget proposal.  The original Republican-controlled Senate budget called for no new taxes, and this position has been maintained in their revised budget proposal.  Six factors support the view that a tax increase is necessary for Washington State.

First, Washington State has an inadequate mix of tax sources.  Washington is one of nine states without an income tax, one of seven states without a capital gains tax, and one of six states without a business tax on profits (revenues are taxed instead).  This business tax on revenues breeds complexity and exemptions – we are a national “leader” with 655.

Second, Washington State has become a low-tax state relative to its personal income.  Higher income states tend to spend more in taxes than lower income states, because they can afford it.  But this is not the case in Washington, which has the 12th highest income per capita in the nation.  Between 1995 and 2012, Washington’s state and local tax revenue per $1,000 of personal income fell 24% — from $120 to $91.  This dropped Washington from the 11th highest ranked to the 14th lowest rank in the nation in taxation level relative to income – an astonishing drop of 25 ranks in 17 years.

Third, this low-tax status leads to an under-provision of services.  For example, Washington State is 44th in the nation in K-12 spending per pupil as a percentage of personal income.  Our state has also been plagued by inadequate mental health capacity, inadequate foster care oversight, declining welfare (TANF) payments, etc.

Fourth, Washington State has the most regressive tax system in the nation.  The poorest 20% of residents pay a state and local tax rate of 16.8% — seven times higher than the 2.4% paid by the richest 1% of residents.  Accordingly, the Institute for Taxation and Economic Policy ranks Washington State’s tax system as the least fair in the nation.  In addition (and often overlooked), the aforementioned business tax – by taxing revenues instead of profits – is also inherently regressive, as it forces unprofitable businesses (often startups) to pay taxes that would be paid by profitable businesses in other states.

Fifth, our system delivers a double-blow to the poor.  Low taxation levels means that the state provides a diminished safety net for the poor; and it then requires the poor to pay a disproportional percentage of their income to finance it.  It is not surprising that Washington State is one of only three states where the poverty rate has actually increased since the end of the Great Recession.

Sixth, operating the state on an insufficient revenue stream is inefficient.  The under-provision of services leads to expensive lawsuits (state and federal).  The McCleary decision (calling for more K-12 spending), for example, is essentially an indictment of Washington’s tax system, not its education system.  Moreover, the Senate attempt to create a budget without new taxes must rely on “budget sweeps” (where funds are removed from other accounts and put into the General Fund), which are inefficient, non-sustainable and in some cases possibly illegal.

The Republican arguments for not raising taxes have been circular.  During the Great Recession, when the state’s tax receipts were falling, it was deemed critical to not raise taxes to ensure that the economy was not damaged.  Now, during the economic recovery when tax receipts are increasing, “residents expect us to live within our means.”  Under this “logic”, it is always wrong to raise taxes.  The objective of tax policy is not to never raise taxes, but instead to achieve a reasonable level of taxation to fund the state’s necessary services – early learning, K-12 education, higher education, transportation, public safety, the courts, human services, etc.  And in this objective, Washington State is failing miserably.

In the special sessions, several proposals for new taxes that would simultaneously increase Washington’s taxation level and decrease its regressivity have been discussed:  a carbon tax (via a cap-and-trade system), an increase in the B&O tax for select service businesses, and a capital gains tax on wealthy individuals.  It is increasingly clear that the first two options will not be moving forward, leaving the capital gains tax as the only remaining vehicle for tax reform in Washington State during this legislative session.  This proposal should be implemented.  It is time to begin moving Washington State into a healthier tax position.

John Stafford is a substitute teacher for Seattle Public Schools and a former management consultant in corporate strategy.  He recently completed a run for State Senate in the 37th District.  He is writing a monthly article on public policy for the South Seattle Emerald.

 

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