Building an Economy that Works for Everyone

Battening the hatches: Fixing Washington’s tax system to better weather economic storms

Sunday’s Seattle Times’ outlines potential fallout from the nation’s economic for Washington State. Workers and business stand to take a hit – but so does state government:

Atop the list of recessionary losers is government revenue as tax collections fall. Worse, this risks the competitive position of states and cities when the economy recovers, because funding for education, research and infrastructure stagnates or declines.

“The danger is that you undo all the important strategic investments that were done in previous years,” said Mary Jo Waits, project director of the Pew Center on the States in Washington, D.C. “Developing talent, research and development and work-force programs are all important to the future.”

It remains to be seen how that plays out in Olympia. Unlike many states, Washington is blessed with a budget surplus, projected at $1.4 billion, but the state still must address a high dropout rate while critical transportation projects remain stuck in gridlock.

Our tax structure is doesn’t just hurt public revenue and spending during downturns. With one of the most regressive overall tax structures in the nation (one of the only states without a state income tax, and one of the highest sales tax rates in the nation) those who make $20,000 a year pay over four times more in taxes proportionate to their incomes than those who earn more than $200,000 per year.

Put another way, the lowest income fifth of the state’s population pays 18% of their income directly and indirectly in state and local taxes, the middle class pays 11%, while the richest 1% pay just 3%. The upshot is that public revenues are only growing at about 85% the rate of the state’s economy, perpetually falling below the level needed to maintain services, let alone expand education services.

Washington is also the only state that relies heavily on a business tax based on gross receipts rather than profits. Washington’s business and occupation tax (B&O) is hard on new and expanding businesses (though it raises far more public revenues than state corporate income taxes do).

As the Times points out, this is a problem:

But for cities and states, the stakes just get higher. Weaker regions will find recoveries harder, and even strong ones wake up to new global rivals and challenges. If there’s a consensus on competitiveness, it comes down to policies that build, attract and retain talent and capital, both of which are more mobile today than ever before.

That means top-notch K-12 education, world-class research universities, clusters of flexible, fast knowledge companies, great amenities, adequate infrastructure and, increasingly, limits on greenhouse gases and environmental damage.

Overall, our state collects an average level of total state and local property tax compared to other states. But in Washington, one quarter of property tax goes to the state to support public schools. Because property taxes and assessments are so visible, they tend to be unpopular.

Senate Bill 6879, introduced during the 2008 session, attempts to address these issues by creating a Basic Education Finance Task Force to recommend to the Legislature a new finance system for Kindergarten through 12th Grade for Washington’s public schools based on a new definition of basic education.

That is certainly worth exploring, especially seeing how other states are starting to figure out that taxes, when invested wisely in education, families and workers, return many times their original value to our entire economy.

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