Building an Economy that Works for Everyone

Legislature’s tax package will help ease pain overall

The Legislature has finally figured out a budget and closed up shop. The headlines will be about new taxes. But the equation that taxes are by nature bad doesn’t add up.

What do taxes pay for? Schools, roads, health care, public health, college education, community colleges, police, firefighters, teachers, parks, recreation … In short, taxes pay for all the things we depend on for a good quality of life, family economic security and educational opportunity.

It is all these things that are threatened by the great recession. And, as John McCain’s economic adviser noted, each dollar spent on public services generates about $1.40 increase in economic activity. That is just the multiplier effect, where a dollar in wages to a teacher is spent on food, clothing and entertainment, and that expenditure maintains employment in grocery stores, restaurants and other retailers. Each dollar funds the Main Street economy.

Compare this to tax cuts. According to McCain’s economist, a general tax cut of $1 generates about a $1 increase in economic activity. Some specific tax cuts targeted to corporations and the wealthy generate only about a 30-cent increase in economic activity for each dollar decrease in taxes.

That’s because the money people get in tax cuts, especially those who are better off, and especially corporations, doesn’t necessarily stay in the Washington state economy. Some of it is spent in Washington, but some of it is spent on Wall Street gambling, some of it is spent on vacations across the ocean, and some of it is shipped to other countries as companies outsource production.

So while we can be sure that $1 in expenditures in public services is an investment in Washington, a similar decrease in taxes doesn’t guarantee the same positive outcome.

That’s another reason why it makes more sense to put in place targeted taxes and maintain public services. The Legislature got about halfway there, with a package that closes tax loopholes and enacts targeted new taxes. But they still are cutting $800 million out of public services, meaning that when you consider the multiplier effect in reverse, our economy will lose about $1.2 billion in total transactions. That translates to a loss of 10,000 jobs in every community and every type of business due to the drop in funding for public services.

So what taxes did the Legislature raise? It is a hodgepodge of mostly well-targeted taxes. The cigarette tax was raised by a nickel a cigarette. This will bring in about $100 million a year. It also is a strong incentive to abstain from smoking, especially for teenagers and young adults.

You could burn that money and it still would have a positive effect on people’s health. But our state is going to do better than that. These funds will help preserve 60,000 slots for basic health, the state’s private-public health care program for low-income workers, just when we need it the most with people losing their jobs and their health coverage.

So with one act, lawmakers discourage smoking and provide health coverage. And they had a good precedent. In 2001 the people overwhelming approved a cigarette tax when they passed Initiative 773 by a 2-to-1 margin. It seems like almost everyone, except Big Tobacco, understands the value of this type of tax.

Another big bite was to increase the gross receipts tax on services by one quarter of one percent. Unlike clothes and other goods, these services are exempt from the sales tax. And a lot of them, like accountants and attorneys, are utilized much more by high income residents than middle class families. So this tax generates close to $300 million, while leveling the playing field between taxes on goods and taxes on services. And the money raised means that, for instance, tuition at the community colleges is not raised beyond the reach of middle class families.

The Legislature did not do a perfect job. It didn’t close some big tax loopholes that specifically favor out-of-state banks and encourage corporations to put their retained earnings in Wall Street rather than invest in Washington. But, by standing up to the endless drumbeat to just cut government services, the Legislature performed a partial rescue of K-12 education, public health and community colleges. It is not enough, but it is a lot better than nothing.

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