Stalking the elusive state-tax dollar
It's virtually impossible to rescue our budget without raising taxes. But will straightforward math and common sense carry the day?
Flickr contributor DavidDMuir
They say that when God closes a door, he opens a window. Some people certainly hope that Washington’s current budget crisis, which seems to have slammed so many doors, has pried open the long-stuck window through which an income tax could slip into this state. At the very least, the budget crisis has forced key legislators to talk seriously about a tax increase.
On February 26, exactly one week after the state announced it was looking at $8.3 billion worth of red ink, Senate Majority Leader Lisa Brown told the Washington State Labor Council, "we’re going to look for ways that we can raise the necessary revenue to keep basic state services in education and higher education, and health care and critical human services."
This wasn’t the first hint that Democratic legislators were contemplating a break with Gov. Chris Gregoire’s no-new-taxes approach. Reporting the $8.3 billion deficit forecast, Gregory Roberts wrote in the Post-Intelligencer that the chairs of both the House and Senate ways and means committees, Kelli Linville and Margarita Prentice, “said Democratic lawmakers are seriously considering drawing up a list of desirable programs that are on the chopping block and asking voters to approve new taxes to save them.”
As revelations go, this is all very much dog-bites-man. Not only are these people Democrats, they’re responsible for a state that’s worse than broke. Even in Eastern Washington, $8.3 billion doesn’t grow on trees. On a per capita basis, that $8.3 billion pushes Washington farther into the red than the projected $41 billion gap that California legislators have evidently closed.
It will be virtually impossible to plug Washington’s budget gap without more revenue. Describing the California Legislature’s action, Jennifer Steinhauer reported in the New York Times that 40 of the 50 states faced deficits, and quoted Susan Urahn, managing director of the Pew Center on the States, who said "California is an example of what you will see" elsewhere. Steinhauer suggested that California’s approach — a combination of tax increases, borrowing, stimulus manna and deep program cuts — might provide a "template" for legislators in the 39 other red-ink states.
Of course, legislators in other states don’t have to send tax increases to the voters. Here, under Tim Eyman’s Initiative 960, passed in 2007, and Initiative 601, passed in 1993, any tax increase requires two-thirds votes in both houses of the Legislature or a vote of the people. Getting two-thirds for higher taxes is a non-starter. It will be up to the people. "In other places, [legislators] legislate," observes Remy Trupin, executive director of the Washington State Budget & Policy Center. "Other places have representative government."
In this state, any one who wants to raise more revenue must do it not only through a vote of the people, but also through a Rube Goldberg tax system that has been in place since the Great Depression. At the start of the Depression, Washington, like other states, relied almost exclusively on property taxes. By 1932, Washington’s farmers found themselves with lots of property and no cash to pay taxes on it. Charles Hodde, a Missouri-born farmer in his mid-20s living on rented acreage in Colville, recalled years later (after he had been Speaker of the House, director of the state departments of Revenue and General Administration, and chair of the state Tax Commission) that "in Chelan County where they had all the orchards and everything . . . less than fifty percent of the taxes were being paid. . . . You could let them go delinquent for five years before they could start foreclosing on your farm, so you just didn’t pay them, see."
"Well," Hodde said, "we had to do something about it." The Grange did something. Grange campaigns led partly by Hodde easily collected enough signatures to put tax reform initiatives on the ballot. The voters were asked to limit the property tax and replace the revenue with a graduated tax on net corporate and personal income. Income tax did not mean then what it does now. Even at the end of that bleak decade, only about 4 million Americans paid federal income tax. For most Washington citizens, replacing property tax with income tax represented a tax reduction pure and simple. For most citizens, in the early 1930s, a graduated net income tax represented a tax on someone else.
The people voted yes, basically shifting more of the tax burden to the rich. (Shifting the burden to someone else remains a popular tactic. That’s why visitors pay heavy taxes on hotels, motels and rental cars.) As a stop-gap until the income tax went into effect, the 1933 Legislature imposed a business and occupation tax — taxing the total amount a business took in, whether it was making a profit or not. Then the state Supreme Court ruled that a graduated income tax was unconstitutional. The court reasoned that income was a form of property and the state constitution required all property in a certain category to be taxed equally. Therefore, the state could not have a graduated tax that forced some people to pay higher rates than others.
Legislators could have come back with a flat-rate income tax, but they didn’t. Instead, they waited the constitutionally-mandated two years then exceeded the limit on property taxes. The people wouldn’t stand for it. Most voters didn’t seem to care how the Legislature paid the costs of government. That wasn’t their problem. In 1934, the people passed another limit on property taxes but turned down a constitutional amendment that would have authorized a graduated net income tax. That was evidently an idea whose time had already passed. "There is abundant evidence that [voters] knew what they were doing," J.W. Gilbert wrote in the Seattle Times. Nevertheless, "[t]he next session of the Legislature . . . must devise new sources of revenue."
The next session of the Legislature did exactly that: it imposed a two-percent tax on retail sales. And so the Legislature completed the trifecta: a limited (albeit widely resented) property tax; a B&O tax; a sales tax. Washington’s current tax system was complete.
Ever since, many people have assumed that the business and occupation tax is permanent, and that the state constitution forbids an income tax. The first of those assumptions has turned out to be true, at least so far. On the day the $8.3 billion deficit number surfaced, representatives of the Seattle Times and other troubled newspapers were in Olympia, arguing for a 40% drop in their own B&O tax rates. They wanted newspapers to pay only .294 percent of their gross earnings, just like aerospace or forest products companies — more than they’d pay as splitters of dried peas or breakers of perishable meat, but less than they’d pay as hospitals or chemical-dependency centers..
The byzantine B&O tax schedule reflects generations of special-interest lobbying. Carl Gipson of the free-market Washington Policy Center wrote last year that the state Department of Revenue recently listed 570 "exclusions, deductions, preferential tax rates, deferrals and credits," and that "over 70 percent of the value of the exemptions dates from the 1930s."
The system is nutty, not least because it’s hard on start-ups, which the state always says it wants to encourage, and on businesses that are just scraping by. John Burbank, executive director of the Economic Opportunity Institute, says that just as the sales tax weighs more heavily on lower- and middle-income residents than on the rich, so the B&O tax weighs more heavily on small businesses than on large.
Burbank doesn’t propose scrapping the whole system or even plugging all the loopholes. (That would be a tall order; he says there are so many loopholes that the whole system is "sort of like Swiss cheese.") He does propose plugging the specific loophole that shields money a company invests in intangible assets–stocks, bonds, sub-prime mortgages — rather than in plant and equipment. That is a "perverse incentive," Burbank argues. We should encourage businesses to invest in productive assets, not to speculate in financial markets. That particular loophole also costs the state a lot of money. Plug it, Burbank says, and the state could eliminate B&O taxes on all sales of services below $600,000 and all sales of goods below $1.2 million, thereby lifting the burden from 85 percent of its businesses — and still come out $100 million ahead.
If people are right to assume that the B&O tax, conceived as a short-term fix, has become permanent, popular assumptions about the income tax tend to be less accurate. The state Supreme Court never said that taxing income would be unconstitutional. It struck down a graduated income tax. There seems little doubt that Democrats could have had a flat-rate tax in the 1930s or 1940s if they had wanted one, but they weren’t willing to settle for half a loaf. They held out for a graduated tax or nothing. They got nothing. Be that as it may, by this time, the barrier to establishing even a graduated tax is probably not constitutional but political.
Many people assume that the 1933 decision "is still good law and that Washington courts would reach a similar decision today," state constitutional scholar Hugh Spitzer has written. He continues:
If that is true, a constitutional amendment would be necessary before the state could impose any income tax other than a flat tax on gross income at a rate no more than 1 percent. However, there is ample reason to believe that a modern income tax, established by the Legislature or by the voters, would now be upheld. The basic reason is that [the 1933 decision] was based on an earlier Washington case which the state Supreme Court clearly misread. More importantly, the earlier case was based on a line of Supreme Court cases that have subsequently been reversed.
A lot of people in politics realize this is the case. Lisa Brown, for one, seems to be signaling that it’s time to re-think the income tax. In her speech to the Labor Council, she didn’t just talk about raising taxes. She also said that new tax legislation shouldn’t "place that [additional financial] burden on people who are already paying too much in our unfair tax system." In tax reform circles, if you talk about the unfair burden on working people or the regressive nature of Washington’s tax system, you want an income tax. If you talk about making the tax system more predictable, leveling the state’s revenue stream through economic ups and downs, you don’t mean we should collect less money in good times. You mean we should collect more money in bad.
The Economic Opportunity Institute's Burbank is well aware of the public suspicion that tax reform simply means more taxes — and of its basis in fact. If we want to reform Washington’s tax structure, we’d better "make sure that this is not just an attempt to bring more revenue into the state,” Burbank says. He’s not averse to raising more money, but "if you do have new net revenue, you have to prioritize where it’s going to go."
Would Brown and other Democratic legislators really put an income tax on the ballot this fall? It’s hard to believe that they would stick their necks out that far — or that they would stake the state’s short-term solvency on a major structural change in our tax system. Trupin, who wants an income tax — he says we lack "a tax structure that supports the values that Washingtonians say they support." — believes that changing the fundamental structure of the tax system "is very complicated . . . [and] would require tremendous fighting both in the legislature and on the ballot." He can’t imagine that happening by November. On the other hand, he figures we could“at least take a step toward “ a better system. Burbank asks bluntly, "If not now, when?"
Burbank suggests an income tax limited to households that earn more than $200,000, which for most voters satisfies the criterion of shifting the burden to someone else. He also suggests linking an income tax to a reduction in sales or property tax, which could reduce the tax burden for 90 percent of the population. Burbank says that early last year, polling and focus groups found that about 70 percent of the people looked favorably on the idea.
How does that square with the public’s willingness to vote repeatedly for Eyman tax-cutting schemes? They’re caught in an unfair system, Trupin suggests, and the only way to keep their own unfair burdens from growing heavier is to keep the load down for everyone. "The reason people vote for [Eyman],” he says, “is that [Washington taxes] are regressive."
Burbank thinks the people may turn out to be a better bet than the Legislature. Legislators seem scared of the idea. “Maybe, as in 1932, it will take an initiative of the people."
And Burbank is ready to roll the dice in the courts. "Let’s pass an income tax," he says, "and if someone wants to challenge, then that gives the state Supreme Court an opportunity to review their ruling from 1933."
Next: Olympia's red ink flows toward schools.
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Comments:
Posted Thu, Mar 12, 6:21 a.m. Inappropriate
Burbank is a hack, his Institute is a shill for the current administration. " If you do have new net revenue, you have to prioritize where it's is going to go." Gee, Mr. Burbank I don't know, do you really think giving the exact same people who got us into an 8.3 Billion Dollar Deficit ( 25% of the Budget)a new net revenue source and trusting they will start to prioritize correctly the right thing to do? Why should we trust you? You are not proposing any cuts? No Thanks, let's use this opportunity to review all processes and zero out programs that are not effective first.
Posted Thu, Mar 12, 8:56 a.m. Inappropriate
What a load of crap. That's just what we should do --- raise taxes on the most productive people in the economy. Perhaps Washington can be the next Michigan.
Nowhere in the article does it mention that state revenues are projected to be HIGHER in the next fiscal year than in the previous one. We don't need more taxes --- we need to simply stop spending more, year after year after year.
Posted Thu, Mar 12, 9:02 a.m. Inappropriate
"Tim Eyman’s Initiative 960, passed in 2007, and Initiative 601, passed in 1993, any tax increase requires two-thirds votes in both houses of the Legislature or a vote of the people."
That darned Tim Eyman. If it weren't for him and all the stupid people who voted for those initiatives the legislature could just raise the sales and property taxes and we'd just have to pay up. C'mon, Mr. Chasan, please mention how much Washington expenditures have gone up in the past seven or eight years. Do you think some of that increase could maybe be eliminated or reduced?
Posted Thu, Mar 12, 9:13 a.m. Inappropriate
So why does the Washington Policy Center get a label ("free market") but neither the Economic Opportunity Institute nor the Washington State Budget & Policy Center do? Those two groups have clear philosophical leanings and the EOI lobbies heavily.
No bias here, for sure.
Posted Thu, Mar 12, 9:21 a.m. Inappropriate
Gee guys(Cameron, PJS) , lets give you the budget and tell us who and what should be cut to balance an $8.3B shortfall. It seems that there is a significant infrastructure in place and maintained paid by taxes that has raised our society out the mud, and those who make the most profit the most by that standard . Remember the baseline established by no taxes is pretty minimal.
If you want to pay no taxes, move to Somalia, there are no taxes taxes in Mogidishu. The only problen is you have to hire a private army to conduct business there. Your choice.
Posted Thu, Mar 12, 10:35 a.m. Inappropriate
ruffner, as well as Burbank, are blowing smoke. Let's see - an $8.3 billion deficit. Where have I seen that number before? Oh right, it's almost exactly the same as the increase in spending during Gregoire's first term. She blew through the rainy day fund and increased spending by $8 billion - up 31%!
This is all about SPENDING not taxes. The only thing that has saved the taxpayers of Washington State from an incredibly greedy government is the initiative process. Thank God for Tim Eyman!
The solution is simple, and it's not raising more taxes as the article's author states. As I recall, prior to Gregoire, we had adequate police coverage, decent parks, my kids were doing well on national tests of achievement, and we weren't in 'crisis' at the state level. All we need to ratchet back spending, programs, and state staffing to levels consistent with four years ago.
Posted Thu, Mar 12, 10:42 a.m. Inappropriate
Speaking from some experience with previous state ballot measures that addressed tax system reform, it’s important to be very clear from the getgo what the objective is: to raise more revenue immediately to offset the next biennium’s budget deficit, to reduce the cyclical swings in tax revenues, to improve the equity and progressivity of the tax system, or a combination? This was not entirely clear from the quotes of proponents in the article or from Tuesday’s P-I op-ed. One says a tax reform package should go on the ballot this November, and the other says it will require a “multi-year educational campaign.” Which is it? The public will be apprehensive of motives so clarity of purpose is essential, as is an early, objective fiscal impact analysis that forecasts future revenue and tax incidence, i.e. who will pay more and who will pay less across the income spectrum, and the revenue split between individual and business taxes. Otherwise, a good overview and discussion starter.
Posted Thu, Mar 12, 10:44 a.m. Inappropriate
like ruffner said, do the cuts.
Posted Thu, Mar 12, 11:24 a.m. Inappropriate
Don't cut anything. Just keep spending at the level of the fiscal year ending in June 2009. Revenue will exceed expenses --- without any tax increase --- and there will be no deficit.
What's so difficult about that? Oh yeah --- people in government feel entitled to having state government grow and grow and grow every year, regardless of the economy.
That's no way to run anything.
Posted Thu, Mar 12, 11:29 a.m. Inappropriate
Can somebody please show some data that demonstrate that the "cyclical swings in tax revenue" are worse in states without income tax than in those that have income tax?
I am dubious, though I admit that I haven't studied the data. California has the highest or 2nd highest income tax rate in the country, yet in this recession and the last had brutal, brutal "swings in tax revenue."
Posted Thu, Mar 12, 11:52 a.m. Inappropriate
Tax revenues were inflated along side assets, incomes and consumption. They must fall, likewise. Rather than real investments in infrastructure, as ruffner would suggest, a growing share of tax revenues go towards ill-conceived jobs programs and a social agenda--primarily on the backs of small-businesses and home-owners. If you want to raise taxes, raise then on absentee property owners.
Posted Thu, Mar 12, 1:47 p.m. Inappropriate
One way to see the cyclical nature of Washington's revenue is to compare our total state/local tax collections per $1000 of personal income with the same numbers for the nation (all 50 states). The Department of Revenue does this annually. However, because of the lag in collecting all data it's a couple of years behind. The last year posted online at the DoR web site is FY2006: http://dor.wa.gov/docs/reports/2008/compare08/comparative%20taxes%20fy%202006.pdf
See Chart 1 on page 10.
Since WA, after Hawaii, is the state most heavily dependent on the sales tax, and the big majority of states have both a corporate net income tax (45)and a personal inclome tax (41), this comparison is a rough indicator that WA's cycles are bigger than the national average. The last big recessional swing occurred in 1982-83 and the metric took a big dip away from the national number. Data for other individual states is probably available from the DoR on request.
Posted Thu, Mar 12, 2:06 p.m. Inappropriate
If you let me make the cuts, I can and will do it. Will you agree with them? No.
Posted Thu, Mar 12, 3:47 p.m. Inappropriate
Three simple ways to control the spending and the budget:
1. Immediately cut payroll & benefits across the board to balance the budget. This way we RETAIN JOBS, PREVENT FORECLOSURES, and SHARE THE BURDEN. If unions insist on bankrupting government, then let them know that future cuts will be even more extreme. Unfortunately, government salary & benefit structures are back-loaded and without much incentive for productive work. Too much incentive is created for simply keeping a job until retirement when benefits kick in.
An immediate 10% cut would do wonders. The average salary would end up around $60K instead of $70K (based on your average Sound Transit worker), still, I bet, well above the average salary in the state.
2. Require all parts of government to show productivity improvements over time to justify salary increases. That's the way the rest of the working world works. Instead, we reward State employees for business as usual. This is the same problem teachers face. Either prove that you are getting better at your job as an individual and as a group, or kiss your raises good bye.
3. Cap the cost of health care as a percentage of total compensation. If costs go up, then do with less healthcare or go bargain with some other provider.
The whole idea that we cannot prioritize and do with less is nonsense. Every department should have a plan for downsizing. It will hurt. But it gives everyone an opportunity to identify waste and to understand what value a department or individual is actually providing.
I am not someone who believes that government workers are incompetent or that what they do doesn't have value. I do believe that as whole the state is incredibly inefficient and ineffective in what it does due to the bureaucracy, the lack of competition, and the corruption of our state compensation system through an implicit votes-for-union-jobs-and-raises trade-off. A state that was really running on all cylinders with its employees increasingly and obsessively productive could do twice as much at half the cost. Ultimately the employees still remaining would do much more, be happier doing it, and be paid more as well.
Needless to say, I'm in favor of balancing the budget. By the way, I'm also for a revenue-neutral graduated income tax that taxes everyone at least a little bit, and taxes 10% at $200K and 20% at $500K. Part of this income tax should be called an education tax that is tiered for professionals, college graduates, high school graduates, and non-graduates. on lawyers, doctors, and other professionals. All projected revenue would be balanced with a corresponding decrease in the sales tax (which we should try to bring back towards 5%).
We should also phase out all unearned industry tax breaks (NB: they're all unearned) for businesses such as Boeing and Microsoft and for other companies with effective lobbyists. This would allow us to bring down property taxes by double digits.
The tax system is broken, the bureaucracy is slow, wasteful, and unproductive, and we cannot afford business as usual. And we certainly shouldn't reward it.
Out with the old, in with the new.
Posted Thu, Mar 12, 6:14 p.m. Inappropriate
I see why the democrats who spent this state into deep debt are now so nervously looking about for any backup as they try to do the only thing they know, get more money to spend and then spend it.
If you want to tame a generation of no responsibility individuals who now believe that government is their surrogate parent - then just cut them off.
Cut the family services, show them they cannot bread their way to prosperity !
Cut the unions out of the state education system, fire teachers who are not trained to teach science and math - allow charter schools to take the lead.
Cut DSHS and let the people who made these problems take them back and pay their bills ! Can't afford it - gee, that's just too bad ! Its your problem, not the taxpayers.
Yes, there will be short term chaos, but you know what, simply growing the welfare state has bigger long term chaos that the demos don't want to talk about.
Or, you demos can take out your checkbooks and start writing checks for all this shameless lack of personal responsibility !
Posted Thu, Mar 12, 6:49 p.m. Inappropriate
Income taxes have proven to work just fine in other states. For being a blue state, it seems utterly ridiculous to me that we have THE most regressive tax structure in the country (www.itepnet.org/wp2000/text.pdf). We ask the poor to pay 5 and 1/2 times more tax per income as compared to the rich. Or, another way of looking at it the poor pay 17% of their income as opposed to the top 1% paying only 3.3% of their income!! Now how much sense does THAT make in a down economy where people are jobless?
This is obscene. We live in a state that collects far less tax per capita than most US states and yet we still put it all in regressive taxes that hurt the poor and the middle class. What is the point? If there were ever a time to change, that time would be now, Washington.
Posted Thu, Mar 12, 9:16 p.m. Inappropriate
This is a very well-written, informative article. Thanks to the author for the research and clear writing.
I would support a state income tax starting on incomes over $200,000. Why not?
Posted Fri, Mar 13, 1:19 a.m. Inappropriate
If you you get it, you you get it. If you don't, you don't... Prevention is certainly no snake oil.
This is why steptoe fan is correct that we should reallocate all the revenue we put into social services into police forces.
Hell, this economy is so chock full of opportunity, I don't understand why anyone is unemployed.
Posted Fri, Mar 13, 5:45 a.m. Inappropriate
You focus on the deficit as though it is a problem of not having enough money. Why not analyse the real problem, spending.
I absolutely agree with stuka that the bureacracy is inefficient. This is universally understood, so why expand government. Cut gov and contract out without restriction and you could CUT taxes and still have a surplus.
Why are there 110,000 state employees? What do all these people do?
Freeze hiring and cut the payroll by attrition.
Set perforance standards for the remainder, audit and then adjust.
Business people make these decisions daily.
NO INCOME TAX!!!
Posted Fri, Mar 13, 10:16 a.m. Inappropriate
A very informative article. Thanks. Gives one hope for journalism in the area after the printed P-I is gone.
Count me as a supporter of a state income tax.
Posted Fri, Mar 13, 12:35 p.m. Inappropriate
"Income taxes have proven to work just fine in other states"???? Are you kidding me? How is California's state income tax working "just fine"? Is California's state government "fine"? (Maybe it is if one is an employee of said government, but that's about it.) How is its revenue base any more stable than Washington's?
California has among the highest marginal tax rates of any states, yet its revenue has wild swings in recessions, just like Washington's does. Notwithstanding dn's helpful link above, I see no evidence that a state income tax brings more stability in revenue. (Dn's link addressed tax per $ of income, as opposed to fluctuations in state revenue. In a state with an income tax, one would expect tax per $ of income to decrease in a recession.)
I'll say it again --- an income tax punishes the most productive actors in the economy. A progressive income tax punishes them more severely. How does that punishment help the economy?
Posted Fri, Mar 13, 3:25 p.m. Inappropriate
There's a redneck logger in East King County that makes over $200K per year?!
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