Washington Tax and Revenue: Where do we go from here?

State government services are essential to the health and well-being of all state residents. The public schools, institutions of higher education, transportation infrastructure, justice system, regulation of workplace safety, protection of the environment, social safety nets, and other public services establish the framework which enables individual freedom and opportunity to flourish. State services that are adequately financed and well run allow opportunity and prosperity to be broadly shared and available to all. On the other hand, inadequate and overburdened state services constrict opportunity and prosperity for the whole community.

Unfortunately, Washington’s seventy-year-old tax structure is no longer able to produce sufficient revenues to keep Washington among the best states to live and do business. Most states rely on a four-part mix of personal income tax, sales tax, property tax, and corporate income tax to finance the bulk of state services, enhanced by an array of specialty taxes on alcohol, tobacco, gambling and the like. However, Washington has historically rejected both personal and corporate income taxes. Instead, Washington collects a higher rate of sales tax than most states and a business and occupation (B&O) tax on gross business receipts. Because of its unusual tax structure, Washington has:

  • The most regressive tax system in the United States. People in the lowest income quintile of the state’s population pay 18% of their income directly and indirectly in state and local taxes, the middle class pays 11%, while the richest 1% pay just 3%.
  • A shrinking tax base. State revenues are growing at only 85% the rate of the state’s economy, and therefore will perpetually fall below the level needed to maintain services, even when the state is fully recovered from recession.
  • Unfair business taxes. Washington’s business taxes are widely considered to be unfair, particularly to start-up companies and those with slim profit margins.
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