Our state tax system is a real turkey

Since Washington has no income tax and relies heavily on sales taxes for its revenues, our state government goes quickly and deeply into the red during hard times. That is not true in other states with more balanced tax systems. Our reliance on sales taxes, moreover, is regressive, hitting hardest the lower- and middle-income citizens least able to pay.

Our business and occupations tax, unused in other states, deters investment and job creation in Washington. Yet no governor and Legislature have been able to enact an income tax or repeal the notorious B&O tax.

The chance to do both will present itself next week when the state tax commission chaired by Bill Gates Sr. presents its formal report to the governor and the Legislature.

The commission, which includes six academic economists, four state legislators and its chairman, has labored for 10 months. No business, labor or interest-group representatives served on the commission, which enabled it to proceed disinterestedly. Interest groups will be heard from, you can be sure, when the report is released formally.

From the outset Gates defined the commission's work as "an effort to create something of long-term value." Its report's introductory section is intended to serve as a primer on tax policy for policy-makers and voters.

The commission, in its last working session, was considering several bombshell proposals:

Replacement of the B&O tax with a value-added tax. A VAT, widely used in Europe, is controversial in itself. Among other things, it is difficult to evade and generates huge amounts of public revenue.

Adoption of personal and corporate income taxes, with several alternative structures being recommended.

A number of other changes, including imposition of a tax on "remote sales" (i.e., Internet sales), sure to create sparks locally.

Several Washington governors have tried and failed to get a state income tax. Conventional wisdom holds that another attempt would amount to touching a fatal "third rail of politics." But the Nov. 5 election returns should have made clear that voters are ready for change in how their tax dollars are raised as well as spent.

Since the tax commission's report will be controversial, elected officials' first instinct will be to praise and then bury it. That would be a mistake.

What is needed, instead, is a broad public dialogue on a VAT, income-tax alternatives and other proposals. The report should provide a starting rather than ending point for a full-blown re-examination of the current failed tax system and a weighing of the pluses and minuses of alternative options.

In the past, would-be Washington tax reformers have proposed an income tax as the centerpiece of reform and then, having failed, abandoned the issue for several years. If tax reform is to be achieved this time, it will be necessary to present a comprehensive set of intersecting proposals rather than one for an income tax alone; to explain to voters why they are better than the present system, and then to relate them directly to the transportation, education and other needs of the state. Big tax changes must be explained as a way to create big and desirable changes in our daily lives.

A determined governor, even with legislative support, will not be able to bring off fundamental tax-system change by himself.

A good model lies in '60s efforts at national level toward liberalized trade and health-care reform.

After President John F. Kennedy's election in 1960, he and his allies triggered formation of the Committee for a National Trade Policy, a broad-based lobbying and public-information organization in the private sector that was instrumental in seeing to passage the historic Trade Expansion Act of 1962. President Johnson, to build support for enactment of Medicare and other health care legislation, launched similar private-sector organizations. The same model has been used nationally in civil rights, environmental and other causes where big and difficult changes were being sought. The effort must be continuing and not just over a brief political-campaign season.

The Gates commission shuts down next week. But debate on tax reform should not shut down.

The governor should examine all options and commit to a plan -- not punt until after the 2004 elections. Then he should work with a private-sector action coalition to move Washington, finally, toward a tax system that serves growth, investment, employment and fairness. The commission report will help us take the vital first step in that taxing journey.

Ted Van Dyk, a visiting scholar at the Institute for International Policy at the University of Washington, has been involved in national policy and politics since 1960. E-mail: t_van_dyk@hotmail.com

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