Tag Archives: McCleary Decision

McCleary: A Major Opportunity For Washington State

by John Stafford

McClearyThe McCleary decision (McCleary vs. State of Washington, 2012) is one of the most momentous events for public policy in modern state history.  It asserts that the state is failing in its paramount duty:  “…to make ample provision for the education of all children residing within its borders” (Washington State Constitution, Article IX, section 1).  This decision calls for a major increase in funding for K-12 education – roughly $4.5 billion per biennium by 2018.  The upcoming legislative session will be dominated by negotiations on how to meet this demand.  This article offers seven observations on McCleary.

  1. The McCLeary decision represents a direct indictment of Washington State governance.  High income states tend to spend more per pupil on education – but not Washington State.  We are 44th in the nation in per pupil spending as a percentage of personal income.  The state’s courts have ruled repeatedly that public education is not appropriately funded (e.g., 1977, 1978, 1983, 2007, 2009).  Moreover, citizens have voted for increases in educational funding (e.g., I-728 and I-732 in 2000).  For a variety of reasons, these efforts have not led to sufficient reform.  Thus, despite repeated judicial interventions and citizen initiatives, the state’s educational financing system remains dysfunctional.  Worse, prior to McCLeary, there were no consequential plans afoot from the governor or the Legislature to address this glaring problem.
  2. The McCLeary decision represents an indirect indictment of Washington State’s taxation system.  The biggest factor driving inadequate education funding is a poorly designed tax system.  With no personal income tax, constraints on property tax increases and a corporate tax code filled with exemptions, Washington operates at a severe competitive disadvantage relative to other states.  In my last article (“Washington State’s Broken Tax System,” September 2, 2014), I noted that between 1995 and 2011, Washington fell from 11th to 37th in tax revenue as a percent of personal income.  A broken tax system leads to a broken educational financing system.  Period.
  3. Holding the Legislature in contempt of court is entirely appropriate.  Despite a court order to develop a funding plan by April, 2014, the Legislature did nothing.  Thus, the Supreme Court’s decision to find the Legislature in contempt is appropriate.  I disagree with the former Washington governors who argued against the ruling for two reasons:  their argument was an after-the-fact attempt to defer a contempt finding rather than a before-the-fact effort to change the compliance deadline; and the Court’s directive for the Legislature to develop a funding plan for McCleary prior to the 2015 session was both reasonable and desirable.
  4. There is no easy way to fund McCLeary.  In the upcoming legislative session, there will be large claims for extra funding for K-12 education, higher education and the state transportation budget.  The improving economy will provide some additional revenue, but not nearly enough to meet these demands.  Thus, a tax increase and/or spending cuts will be mandatory.  Citizens (and the Court) should be wary of accounting gimmickry, whereby funds are taken from a non-education account and moved into education in order to comply with McCleary, leaving the raided accounts to be backfilled later.  Many analysts (including retiring Senator Adam Kline) claim that several hundred million dollars of the initial wave of McCleary funding was “achieved” in this manner.
  5. I-1351 should be rejected.  This initiative calls for a reduction in class sizes.  This is an important endeavor, as Washington State has average class sizes that are among the highest in the nation.  However, the initiative should be rejected for fiscal reasons:  the money necessary to finance it is considerable (several billion dollars per biennium); this funding is incremental to McCleary; and no one in the state has any idea how to pay for it.  I-1351 is exactly the right initiative at exactly the wrong time.  The focus should be entirely on McCleary.
  6. McLeary should provide the impetus to overhaul the state’s tax system.  A confluence of factors make this an ideal time to modify Washington State’s tax system:  the current system is broken (as noted above); McCleary requires significant additional funding that the current system is not well-equipped to provide; and the improvement in economic conditions makes tax reform more viable.  A restructuring should include a combination of strategies (e.g., a major repeal of corporate tax breaks, an income tax on higher income earners, a capital gains tax, a reduction in regressive taxes, etc.),  leading to a modest net tax increase.  An inferior approach is the mere tweaking of the existing system – with Democrats working for the closing of several tax loopholes and Republicans calling for “education first, other priorities later” (which is, of course, code for cutting social programs to pay for McCleary).
  7. McCleary represents an opportunity to rethink public education in Washington State.  Anytime an institution (in this case the education system) is infused with a substantial amount of additional funding, an opportunity exists to redesign the system.  The McCleary funding can support significant new investment in early learning; efforts to more tightly integrate early learning, K-12, and higher education (rather than managing them as separate, standalone entities); and other reforms.  McCleary should not just be about educational finance; it should be about education system design.

The Legislature can address the McCleary requirements using one of two philosophical approaches.  The first is a narrow, partisan approach that sees McCleary as a burdensome problem to be begrudgingly solved using incremental adjustments to the existing system.  The second is an expansive approach that sees McCleary as a unique opportunity to simultaneously restructure three major and persistent state problem areas – tax policy, tax level and education system design.  The adoption of this second approach will require powerful leadership and bipartisan support – attributes that thus far have not emerged.  Indeed, all initial indications – the approach to generating the first $1 billion in McCleary funding; the failure of the parties to meet to develop an April, 2014 funding plan; and current rhetorical posturing (the depressing “close some loopholes” versus “education first” debate) – indicate that the narrow approach will be pursued — to the immense detriment of the state.  Rahm Emanuel stated that, “you never want a serious crisis to go to waste.”  The McCleary challenge provides a rare opportunity for Washington State to restructure its troublesome tax policy, tax level and education system.  One hopes that this occasion is not squandered.

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.

Washington State’s Broken Tax System

by John Stafford

Washington State has a dysfunctional tax system – arguably the nation’s worst.  It is critical to understand the mechanisms by which this flawed tax system adversely impacts progressive public policy development in our state.

Washington is one of just seven states with no personal income tax.  This leads to an excessive reliance on the highly regressive sales tax.  It is also one of just three states that tax corporations based on their revenues (the business and occupancy, or “B&O” tax) rather than their profits.  This penalizes unprofitable firms (often start-ups), who would not pay taxes until they were profitable in other states.  And Washington is the only state in the nation that uses both of these inferior approaches.

This taxation system has numerous drawbacks.  First, as is commonly known, Washington has the most regressive tax system in the country.  Washington’s poorest 20% pay 16.9% of their income in state and local taxes, compared to 2.8% for the top 1% — a ratio of six, the worst in the nation (source:  Institute on Taxation and Economic Policy).  The business tax is regressive as well.  The conservative Washington Policy Center writes:   “The problem is that the base includes unprofitable businesses, so if you readjusted the base to exclude unprofitable businesses, those who are profitable would see their tax rates rise.” The business tax structure also contains numerous exemptions, whose benefits are skewed toward large, profitable firms with lobbying clout.  Second, it is the regressive nature of Washington’s tax system that precipitates the ongoing stream of voter initiatives to limit tax increases (e.g., I-695, I-747, I-960, I-1033, I-1053, etc.) as lower and middle class citizens seek to limit the burden placed on them by the regressive system.  Even though some initiatives fail and others are overturned, the movement-at-large is influential.  The Economic Opportunity Institute comments on this connection between regressivity and tax reduction:  “…the disproportionately high tax burden placed on middle and low income families by Washington’s regressive tax system has led many to support tax cutting initiatives that hobble state and local government.”  Third, and consequently, Washington State has become a low taxation state.  Higher income states tend to have higher state and local taxes per capita.  But this is no longer true in Washington State.  Despite being a high income state (13th in the nation), Washington fell from 11th to 37th place in state and local taxes as a percentage of personal income between 1995 and 2011 (source:  Washington State Office of Financial Management).

This decline in tax position is hindering the state’s ability to adequately fund its most important obligations – a recurring phenomenon that is on constant display in our daily news.  Washington’s K-12 education spending per pupil as a percent of personal income is 44th in the nation.  This has brought forth the State Supreme Court’s McCleary decision, calling for a significant increase in spending.  Predictably, Washington’s legislators are having a difficult time complying with this decision.  Washington is 49th in the nation in mental health treatment capacity.  This has also triggered a judicial intervention.  Higher Education suffered major reductions in state funding during the Great Recession, which gave rise to the second highest tuition increases in the country.  State employees and teachers have forgone cost-of-living wage increases for years.  And so on.

Washington State is generally seen as one of the most progressive states in the nation, and yet it has the most regressive tax structure in the nation.  It becomes important to ask:  is this merely an ironic dichotomy, or is there more to it than that?  Here, it is worth noting a loose parallel between national and state tax dynamics.  In Washington D.C., a common conservative tactic is to reduce taxes in order to deprive the government of the funding needed for liberal programs (“starving the beast”).  In a more roundabout way, Washington State’s tax structure engenders a similar dynamic.  A poorly designed tax structure drives intense regressivity, which foments efforts to constrain taxes, which has contributed to a decline in Washington’s rank in tax revenue as a percent of personal income, which has led to a series of institutions to be underfunded.  To address this challenge, legislators, with progressive taxation options off the table, are forced to consider additional regressive taxes.  In this manner, Washington’s tax structure forces the progressive agenda to work in opposition to itself.  That is, there is the desire on behalf of liberals to fund progressive priorities – K-12 education, mental health, higher education, cost-of-living wage increases, etc.  But to do so, they must decide whether to inflict further financial burden on the lower and middle classes — the very classes that these programs are intended to support.

In Washington, our dysfunctional tax system frustrates the progressive policy agenda – to the detriment of the state.  Indeed, it is hard to imagine the state successfully meeting its basic institutional funding obligations over the long term without fundamental tax reform.

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 will be writing a monthly article on public policy for the South Seattle Emerald