Expanding Washington’s Sales Tax Base

INCREMENTAL STEPS TOWARD TAX REFORM:DISCUSSION BRIEF #2

The problem: Washington is facing a budget shortfall in 2009 due to rising prices and the national economic downturn. Without new sources of revenue, Washington will have to cut essential services even while demand increases. We will also be forced to postpone important new investments to improve education, public health, and transportation. In addition, Washington suffers from an outmoded and regressive tax structure. State and local taxes fall too heavily on low-and middle- income residents, and public revenues grow more slowly than the need for public investments.

A step in the right direction: Extending the sales tax to selected goods and services may be the simplest way to expand Washington’s tax base, both raising new revenue and strengthening the tax structure. Including the items listed in this brief in the sales tax base would provide up to $784million in additional state revenue and $293million to local governments in the 2009‐11 biennium.

Sales tax: Washington applies a 6.5% tax to the sale of most goods and a few services, providing over half the state’s general fund revenue. Local governments add another 0.5% to 2.4%.Heavy reliance on sales tax is a major factor in the regressivity of Washington’s tax system, since low-and moderate-income people spend a higher percentage of their income on items subject to sales tax than the wealthy do. Over-reliance on sales tax also contributes to the gap between revenues and demand for services, because Americans spend less of their income on items subject to sales tax than in the past.

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