Hi, my name is Washington, and I have a revenue problem

Gov. Gregoire has proposed a half cent sales tax increase to plug the growing gap between Washington's spending and revenue. Here's why we need a longer-term tax solution.

Crosscut archive image.

Gov. Chris Gregoire.

Gov. Gregoire has proposed a half cent sales tax increase to plug the growing gap between Washington's spending and revenue. Here's why we need a longer-term tax solution.

If it wasn’t clear earlier in this budget cycle, recent action on several fronts indicates that the state faces a significant revenue problem that will preoccupy legislators for the foreseeable future. This brings into question the distribution of the tax “burden” and the ability to pay concept. And it reinforces the need for a major reform of the state’s tax structure.

As anticipated, the State Supreme Court on January 5 issued a ruling that the state has not lived up to its constitutional duty to amply fund K-12 schools, and that it expects the legislature to remedy the problem by 2018. By some estimates, this could add several billion in annual costs to the state’s budget, while providing some relief to school districts overly dependent on local levies.

A task force appointed by Governor Chris Gregoire to study the state’s transportation needs reported that road, bridge, and ferry maintenance and replacement costs total $50 billion, and it recommended a $21 billion, 10-year program to begin an effort to reduce the backlog.

Although transportation projects are funded separately from education and social programs, taxpayers are logically sensitive to their total tax payments.

And the Governor, in response to requests from state business leaders, laid out a 6-year operating budget forecast that indicated an increasing revenue shortfall — even without full funding of basic education.

On the revenue side, the projection assumes passage this spring of the Governor’s proposal for a half percent increase in the state sales tax, and on the expenditure side it assumes some increased funding of basic education and the K-12 class size reductions and teacher pay increases mandated by ballot initiatives. It predicts that the general fund balance will grow to a negative $3 billion in 2017.

This decidedly dismal fiscal news was complicated by a chorus of voices calling for “reform before revenue.” A loose coalition of conservative Republicans, moderate to conservative “Roadkill” Democrats, and business organizations, aided by the Seattle Times Editorial page, suggested that a long list of reforms should be addressed before there is any consideration of new revenue.

How this huge agenda could be accomplished in the short 60-day session was not explained.

All realistic reform proposals should be considered, especially those that could result in savings through more efficient delivery of services. But the passel of reforms being promoted encompasses an agenda for a 600-day session, not one of just 60 days. As such, it’s essentially a prescription for legislative gridlock.

A more reasonable refrain and strategy would be “revenue and reform.” The legislature should submit a revenue proposal tied to a few key reforms, thereby indicating a serious intent to stay on the reform path and tackle the predicted continuing deficit problem in future sessions.

To address the short-term problem, Gov. Gregoire has proposed that a temporary half percent increase in the sales tax be referred to voters. It would “buy-back” about one-third of the $1.5 billion budget shortfall in the current biennium and help ease the expected deficit in the next.

Assuming that the legislature will eventually honor Gov. Gregoire’s request and place a tax measure on the ballot, there likely will be much debate regarding our current tax system — how taxes are distributed across the income spectrum and between individual taxpayers and businesses, and especially how our state’s tax system compares with those of other states.

This could be a healthy and long-overdue discussion if legislators and citizens engage in thoughtful dialogue based on factual information, rather than dueling ideologies. And let’s hope it doesn’t get to campaign commercials paid for by deep pockets.

Among the questions likely to be asked:

  • Can citizens afford more taxes, given the continuing recession and unemployment?
  • Will a new tax source and what it buys increase the regressive nature of the current tax system?
  • And how do we get out of and stay out of the revenue hole we’ve dug?

So first, here’s a summary of Washington taxes, from the most recent study of tax burdens by the Department of Revenue. The information is based on its analysis of U.S. Census data from the 2008 and 2009 fiscal years — the most recent available.

An interjection: It’s hard to use the terminology that revenue statisticians use. “Burden” connotes something disagreeable. Taxes can be a burden when large and not fairly distributed. But as FDR said: “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”

In 2009 Washingtonians paid $27 billion in taxes to state and local governments. The majority — $16.4 billion — went to state government. This might seem like a lot, but in reality it was $1.6 billion less than the previous year; a drop of 9 percent.

Most fees are excluded from these numbers, as are other non-tax revenues such as tuitions, utility charges, payments to worker’s and unemployment compensation programs, and liquor proceeds.

For state-to-state comparisons state and local taxes are combined, since the 50 states differ widely in the amounts raised at the two levels.

In 2009, the two most commonly used indicators were:

  • Taxes per capita. At $4,409, Washington ranked 21st, counting down from the state with the highest tax burden, Alaska at $9,104. The national average was $4,141.
  • Taxes per $1,000 of personal income. Washingtonians pay $93 for every $1000 we earn — below the national average of $102 per $1000 earned, and we ranked 35th out of 50 states. Again, Alaska was at the top with $206.

(Alaska’s top ranking in both cases is an artifact, since it reflects the state’s petroleum tax revenues that are paid by consumers of oil products in other states.)

What does this tell us? Washington's overall tax burden (the total amount paid by Washingtonians in order to continue operating state and local governments) is comparatively low. But a disproportionate amount of that burden falls on Washington's lower income residents. 

The second measure paints a more accurate picture of Washingtonians' ability to pay for government. It’s a direct measure of the overall wealth of all state residents, and their ability to pay the costs of government. Obviously individual wealth takes other forms — both tangible (owned physical property) and intangible (cash, stocks, bonds). However, those forms of wealth are much harder to quantify.

At 9.3 percent of personal income, Washington’s tax burden by income is at its lowest level in the past 50 years. And we have ranked lower than 35th only twice before. Yet our per capita personal income has remained relatively high in spite of the economic recession — ranking 13th in the 2010 calendar year.

Crosscut archive image.

Of equal importance to the average tax burden is its distribution across personal incomes. The Institute on Taxation & Economic Policy does a periodic national analysis of the tax systems of all 50 states, which is recognized as an authoritative source for tax distribution comparisons.

The most recent of these studies, published in Nov. 2009, lays out Washington’s tax distribution, which is well-known for being first in the nation for regressivity, with lower income households paying several times more of their income than higher income households.

Families in Washington's lowest income group (out of five groups) earn less than $20,000 per year, but pay 17 percent of their income in taxes. In contrast, families in the fourth highest group (incomes from $62,000 to $99,000) pay only 9.5 percent of their income in taxes. The top earners, with incomes above $99,000, pay even less.

Gregoire's proposed half cent bump in the sales tax could make Washington's tax code slightly more regressive. Retail sales generate about half of the state’s tax revenue, so an increase in the sales tax would likely be felt more by low-income folks.

The impact could be mitigated to some extent by the governor’s proposals to use the revenue to buy-back services for low-income Washingtonians, such as aid to the disabled. And researchers at the University of Washington have found that most purchases by low income families are not subject to the sales tax.

Half cent increase or not, the best way to fix Washington's regressive tax structure is to reform the state tax code by reducing the dominance of the sales tax. Oregon depends on a state income tax (paid by both individuals and corporations) to almost the same extent that Washington depends on the sales tax. As a result, the state enjoys a much less regressive tax distribution.

Crosscut archive image.

Such a reform would also need to address the proportion of state taxes paid by different entities. The Department of Revenue estimates that households pay 60 percent of taxes in Washington state. The remainder is paid by businesses, governments, and tourists. Though businesses might seem a natural place to transfer tax burdens, organizations representing business complain that their members pay too much compared to other states. The issue is further complicated by the fact that sales records don't record the type of purchaser paying the sales tax, and businesses can shift taxes to consumers or to business owners and workers.

A systemic reform of the state tax code is the best long-term solution for Washington's revenue adequacy and budget sustainability problems. And it would allow the legislature to tackle the state's current long-standing problems with tax distribution, creating a more equitable tax structure that doesn't unfairly impact Washington's lowest-income taxpayers. A tax structure that also fosters economic development and job creation.

We should encourage our legislatorsthe legislature to give the issue high priority once they solve the immediate budget shortfall.  


Please support independent local news for all.

We rely on donations from readers like you to sustain Crosscut's in-depth reporting on issues critical to the PNW.


About the Authors & Contributors

default profile image

Dick Nelson

Dick Nelson is a former Washington State legislator. He currently contributes to the public debate on state and local fiscal issues through research and commentary. As when he was in the legislature, he prefers the Democratic Party.