Washington taxpayers deserve fair, stable system

It may be political gospel that voters won't approve an income tax in Washington state, but it would be even more difficult to sell voters the unfair, regressive and job-stifling gaggle of taxes now on the books.

Just imagine pitching this tax system to voters:

Pay for most of state government with sales tax, charging the second highest rate in the nation. The sales tax is subject to almost immediate revenue swings as the economic winds blow hot and cold. It's based on your need to buy, not your ability to pay. Even worse, you haven't been able to deduct state sales tax from your federal income taxes since 1986.

Add to that regressive sales tax a state property tax, which puts a particularly heavy burden on elderly and retired people and others on fixed incomes.

Then, be the only state to saddle businesses with a gross-receipts tax, making business owners pay the state even if they don't make any money. What better way is there to stifle innovation and job creation and discourage businesses from moving here?

Toss in a flurry of "sin" taxes, putting an even more disproportionate burden on those with smaller incomes.

And just to make sure state services are whipsawed by the economic cycle, provide no legal requirement to keep any amount of money in reserve for the lean times.

Even Tim Eyman couldn't buy enough signatures to put this tortured tax package on the ballot.

Anyone who expected the work of the Tax Structure Study Committee to be of any help in the state's immediate budget crisis will be disappointed with the results of its work, which was released on Tuesday. That's just as well. The midst of a short-term crisis is the worst time to attempt long-term reform. The governor and the Legislature will have to stem the current sea of red ink with existing tools.

There is, however, in the committee's work great potential to prevent future budget crises, through the creation of a more fair and stable tax structure.

Perhaps the committee's biggest contribution was to expose just what a mess the state taxation system is now. (A summary of the committee's findings appears on the previous page.)

Taxpayers in Washington carry an average-size burden of state and local taxes (24th) compared with taxpayers in other states. But taxpayers here carry the nation's second-heaviest tax burden in total taxes (state, local and federal). That's because so much of this state's general fund revenue comes from sales taxes, which are not deductible from federal income taxes. We're paying an estimated $1 billion more than we need to in taxes going to Washington, D.C.

Heavy dependence on the sales tax, property tax and business and occupation tax passed through to consumers means that the burden here is heavier on those who are less able to pay. Those who earn less than $20,000 a year spend nearly 16 percent of their income on state and local taxes, while those earning more than $130,000 a year pay just over 4 percent.

The Legislature, business, labor, tax watchdogs, senior citizen advocates and good-government groups should begin building on the work of the study committee. Taxpayers are owed a tax structure that is more fair, more stable and makes the state more competitive. Here is one possible approach, borrowing heavily from the committee's research and recommendations:

Devise a system that is "revenue neutral," which raises no more or no less tax money than the current system. Voters will rightly reject any attempt to make tax reform a Trojan horse for tax increases.

Drop the state sales tax rate dramatically from the current 6.5 percent and cap it at that new rate.

Eliminate the state's share of the property tax, allowing property taxes only at the local level.

Dramatically reduce or eliminate the B&O tax and prohibit future increases.

Impose a capped corporate income tax and/or a value-added tax to replace the B&O tax revenue.

Impose a capped flat-rate or graduated income tax that would be deductible from residents' federal income taxes and shift the tax burden to those more able to afford it.

Require a "rainy day" fund of a preset percentage of the annual general fund budget that the Legislature cannot tap in good economic times (to avoid expanded spending or tax cuts) and must spend in bad economic times (to shore up essential services).

The voters of this state won't accept tax reform if they can't trust the Legislature to not raise taxes later. There may be other ways to preclude future tax increases, but the most obvious is to carve reform into the bedrock of the state Constitution.Tax reform enshrined in the Constitution cannot be amended by the Legislature or initiative alone.

Despite the mythology, it's been 20 years since Washington residents voted on a corporate income tax and almost 30 years since they considered a personal income tax, and the state sales tax was still deductible then. They deserve another chance to vote for a tax system that is less subject to drastic economic swings, taxes one's ability to pay, keeps more of their money in Washington state and doesn't stifle economic expansion and job creation.

On the Net: dor.wa.gov/content/WAtaxstudy/Final_Report.htm

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