Dino Rossi has been running ads saying that "you know" that Gov. Chris Gregoire will raise your taxes, despite her firm statement that "this is no time to talk about tax increases." Voters probably should be skeptical — about Rossi as well. To get elected, you have to oppose taxes, but to get re-elected you often have to balance the budget and raise taxes in sneaky ways. But there's another reason to sniff a possible tax increase, from a new kind of tax.
What I'm alluding to is something called the subtraction value-added tax, or a net economic activity tax (NEAT). This tax has been lurking in the shadows for several years, the product of a group led by lawyer Irwin Treiger and crafted by some leading tax attorneys such as Hugh Spitzer and Jay Reich. It has the sponsorship of the Prosperity Partnership, a business-development group put together after the last recession to come up with good ideas for transportation, higher education, cultural amenities, and tax reform. It's a fascinating proposal.
Treiger says the idea is "barely breathing," but that once a new governor is elected, his group will talk to the winner. There's still some tweaking of the idea to do, and the next governor (who of course might be the current governor) will want to react to the idea, or possibly consign it to four more years of oblivion. Two reasons it might make it onto the table: the dire economic conditions, and the fact that the tax is such a different approach that it might not be instantly condemned. It's also "sorta revenue neutral," in Treiger's phrase. It might even escape the crosshairs of Tim Eyman, at least for a while.
So what is NEAT? It's a kind of value-added tax imposed at each step of making a product, but it's subtractive, only taxing the value added, not the previous or cumulative value of the product, as a sales tax does. Productive labor is counted, making it a form of flat income tax. Small business is exempt, if less than $50,000, and a worker's first $20,000 is exempt. The tax would replace the hated B&O tax (levied on gross business, so punishing startups that are not yet profitable) and the state portion of the property tax (probably the most hated tax).
To imagine how it would work, think of Company X, which makes widgets out of flotsam. It buys $50,000 worth of flotsam and turns it into $100,000 worth of widgets, paying tax on the $50,000 of additional value, some in the form of taxes on associated payroll. This is meant to stop the pyramiding of sales and B&O taxes, which Treiger says can result in as many as six additive layers of taxation in this state.
It sounds like a bookkeeping nightmare, and it is slightly regressive, but it does offer considerable tax relief to business, which pays 55 percent of all state taxes, by Treiger's count. He compares that figure to Oregon's 30 percent and terms Washington's total rate on business the highest percentage in the West, if not the nation. Nor is NEAT an untested idea, as Europe has many examples of value-added taxes (VATs). The idea of the VAT was invented in France, which now gets 45 percent of its revenue from the tax. In the U.S., only Texas, of all places, has something like it.
Naturally, all this is way too important to talk about during an election. But after we sober up, realize how little money we have to pay for falling down bridges and collapsing county governments, this might be a tax that could get political consensus. It has a form of income tax to please the liberal redistributionists. It has tax relief for business, particularly startups and small business. It gladdens farmers, who hate property taxes. Retired folks (those heavy voters) get a particularly sweet deal. If the business community could unite around it, we might actually do something.