Income tax is needed, panel tells Legislature

OLYMPIA -- A high-profile committee set up by the Legislature called on politicians yesterday to impose a state income tax and to reduce sales and property taxes, condemning the state's current tax structure as unfair and regressive.

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The recommendations of the committee, headed by Bill Gates, the father of Microsoft Corp.'s co-founder, were hardly a surprise. In fact, analysts have concluded that the state's tax structure is unfair to poor people for decades, and politicians have responded with ill-fated income tax proposals.

Yesterday's report is also unlikely to lead to any substantial changes from the Legislature, which convenes in January and must grapple with a $2 billion budget shortfall. Further, many say such a move would require statewide voter approval to comply with the state constitution.

"The income tax, we just don't see that happening," said Sen. Dino Rossi, R-Sammamish, incoming chairman of the Senate Ways and Means Committee. "We have two billion of our own problems right now."

Authors of the report acknowledged the political realities in a state that has embraced tax cutting in recent years. They said they hope their ideas generate a public dialogue, rather than a silver bullet that solves the state's tax shortfall.

Gates said he knew the proposal wouldn't be greeted "warmth and enthusiasm," but the fact is the state's revenue situation is grave.

"I think we are in crisis mode," said Gates, an attorney.

The Washington Tax Structure Study Committee didn't endorse a specific income tax model, but offered several alternatives for lawmakers to consider.

The committee focused on shifting the tax burden to a more equitable system, rather than increasing revenue to the state.

Still, Rossi and other Republicans tend to view the imposition of an income tax as a prelude to higher taxes.

And even lawmakers who favor an income tax -- primarily Democrats -- recognize that anti-tax sentiment is strong among voters, and political will to risk fueling that is weak.

"I'm in favor of an income tax -- always have been," said Seattle Democratic Rep. Helen Sommers, chairwoman of the House Budget Committee.

But when asked if it could happen anytime soon, Sommers said, "The constituents don't want it. I just don't know."

The current state system relies almost entirely on the retail sales tax, the business-and-occupation tax, and the state's share of the property tax. The system is widely criticized as unduly burdensome on the poor and on new businesses that are taxed on their gross proceeds whether they make profits or not.

The state tax structure forces the poor to devote too much of their budgets to taxes and the wealthy too little, the committee reported.

In Washington, families in the lowest income bracket spend nearly 16 percent of their income on key taxes, while taxpayers at the top pay 4.4 percent, according to the report.

Meanwhile, Washingtonians miss out on the opportunity to deduct state income taxes from their federal tax bill -- to the tune of more than $1 billion a year. Washington taxpayers cannot deduct sales taxes from their federal tax bills.

Most of the committee's alternatives are variants on a flat income tax, which would fall more equitably on people of differing incomes.

Previous studies have drawn similar conclusions. In more recent decades, those have included, according to the state Revenue Department:

In 1966 and 1968 a tax committee appointed by Gov. Dan Evans, a Republican, recommended the state impose an income tax. Evans and legislators sent a proposal to voters on the 1970 ballot. It was defeated by a margin of more than 2 to 1.

In 1973, Evans and lawmakers tried again. Voters rejected it by nearly 3 to 1.

In 1982, Gov. John Spellman, a Republican, appointed a new council. Its recommendations, in a 1983 package to lawmakers, also included an income tax proposal. Lawmakers did not respond.

In 1988, Democratic Gov. Booth Gardner appointed another committee, which recommended an income tax among two tax reform options. No such bills passed the Legislature or were referred to voters.

Also, back in his days as a Democratic legislator, current Gov. Gary Locke co-sponsored three income tax bills from 1983 to 1991.

This year, the Tax Structure Committee suggested creating a single income tax rate, while cutting the sales tax; this, it says, would spread the state tax burden more evenly.

While the panel declined to rally around a single detailed proposal, they suggested several options, including imposing a 3.8 percent state income tax, lowering the state sales tax to 3.5 percent from 6.5 percent and cutting property taxes by 24 percent.

"We are saying that if the Legislature wants to overhaul our tax system to make it more fair and less regressive, then asking voters to create an income tax is a way to do that," Gates said in a statement.

The million-dollar question is if. While 43 states impose some type of income tax, efforts to create new income taxes have run into steep opposition around the country in recent years.

For example, an effort to enact a state income tax in Tennessee sparked a minor riot outside the state Capitol, according to John Logan, a senior tax analyst at CCH Inc.

"It's a tough climate," Logan says.

The problem is, income tax payments are obvious on paychecks, while sales taxes are often easy to ignore, as consumers pay a few cents or even several dollars in taxes on individual purchases.

The tax panel maintained, however, that the sales tax system is unfair, forcing poor families to carry a heavier burden.

Many say the fundamental flaws in Washington's tax structure become more pronounced with the changing economy -- and will continue to worsen. The basis of the current system date back to the 1930s.

For example, the rise of online shopping means the state is getting a smaller share of what Washingtonians spend shopping.

For his part, Locke has said -- now as governor -- that voters have made it clear they don't want an income tax and he will not advocate one again. On that, nothing changed in the wake of yesterday's report, said Ed Penhale, spokesman for Locke's budget office.

"The commission's report is a blueprint for intelligent discussion for how we can improve our tax structure," Penhale said. "There are many ways to improve the tax system, including ideas that voters have been cold to in the past."

Lawmakers most probably will not agree to any substantial change after they convene in January, all sides agree. While some legislation will be proposed, it is expected to go the way of hundreds of bills that get no real consideration.

"We can't enact it to solve our short-term term fiscal concerns," said Sen. Lisa Brown, a Spokane Democrat who sponsored the bill calling for the report. "The Legislature is always short-term oriented."

Brown did say that perhaps the 2003 Legislature would agree to incremental changes, such as reviewing tax exemptions every 10 years.

But any income tax, which Brown would support so long as other taxes are reduced, would have to be backed by a broad coalition of citizens, civic groups, business leaders and politicians, she said.

"I don't really think there's going to be some leader that's going to ride up on a horse," she said.

Why not?

First, taxes are as hot a political button as there is in Washington politics. In fact, when the 2001 Legislature approved the $318,000 Gates study released yesterday, some Republicans charged it was a disguised first step toward an income tax.

Also, talk of even the tiniest tax increases last year, such as the repeal of an exemption for out-of-state printers -- led to arduous debates. And lawmakers faced a huge shortfall then, too.

When legislators convene in January, they won't face the pressure of governing in an election year, which sometimes spurs more political ambitions. Still, they already have a $2 billion shortfall to deal with -- thanks, in part, to voter anti-tax sentiment.

Voters have overwhelmingly approved tax limiting ballot measures in recent years, all while approving billions in mandated spending.

And last month, voters resolutely defeated Olympia's multibillion-dollar tax-and-spend proposal for roads. Besides the high price tag, voter distrust is considered a key factor.

"People like the tax devil that they know and they're nervous about something they don't know," said Hugh Spitzer, a law professor at the University of Washington and vice chairman of the committee.

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