Washington is dead last in the nation when it comes to the overall tax burden on the state's poorest compared to its richest.
Realistically, that disparity will take years to fix, if the Washington Legislature chooses to do so.
"Washington is ranked as having the most unequal tax burden across the entire country," said Rick Peterson, senior advisor at the Washington State Treasurer's Office during a House Finance Committee hearing Monday.
"After analyzing out tax structure over the past 12 years, I have come to believe that how we collect taxes does matter. Indeed, I now think that Washington may have the worst state and local tax system in the United States," echoed Dick Conway, member of the Washington State Tax Structure Study Committee and a prominent Puget Sound area economist.
Rep. Reuven Carlyle, chairman of the finance committee, has been looking at revamping Washington's tax structure, a venture that is still in its infancy and that Carlyle acknowledged will take several years to accomplish. "Inherently, it's a multi-year conversation," he said.
Peterson and Conway zeroed in on the fact that an average taxpayer among the state's poorest 20 percent saw 16.9 percent of his or her income go to state and local taxes in 2010. Meanwhile, a Washington taxpayer in the top 1 percent likely paid 2.8 percent of his or her income in state and local taxes, according to figures from several sources collected by the state. State taxpayers in the top 2 to 5 percent paid 4.7 percent of their incomes in state and local taxes. The final three quarters of the top 20 percent paid an average of 6.8 percent of their incomes in taxes.
That is the worst disparity between the any state's top and bottom income earners in the United States, Peterson and Conway said. "We're way out of whack with everyone else," Conway said.
During the 21st century, Washington taxpayers overall have stayed beneath the national average in the amount of state and local taxes they pay, Conway said.
His figures showed the percent of income paid in state and local taxes has varied here and nationally in recent years, but the state has consistently come in under the national average:
- In 2000, the average Washington taxpayer paid 10 percent of his or her income in state and local taxes. The national average was 10.6 percent.
- 2005: Washington, 10.4 percent. The nation, 10.8 percent.
- 2007: Washington, 10.5 percent. The nation, 11.1 percent.
- 2011 Washington, 9.7percent. The nation, 10.6 percent.
Conway said if Washington had taxed at the national percentage each year from 2005 to 2011, the state and local governments would have collected an extra $14.7 billion during that period.
"This is not loose change. With an additional $14.7 billion, we could have paid upfront for the 520 bridge (at $4.1 billion), the Alaskan Way Viaduct replacement (at $3.1 billion), and the Washington share of the Columbia River bridge (at $500 million), and still had $7 billion left over to meet the (Washington Supreme) court-ordered basic education requirement," Conway said.
Washington's tax structure is significantly different from other states' systems. Washington has no personal or corporate income taxes. Forty-three states have personal income taxes, and 44 have corporate income taxes. Washington — when Seattle's local sales taxes are added -— has the third highest sales tax rate in the nation at slightly more than 9 percent. "We are twice as dependent on sales taxes as the rest of the nation." Conway said. Alabama and Illinois have slightly higher sales tax rates, while also having personal and corporate income taxes as well.
This state also has a significant, complicated system of business-and-occupation taxes that both Republican and Democratic legislators have been unhappy with. Jason Mercier, an analyst with the conservative Washington Policy Center, said the combination of numerous types of B&O taxes and roughly 1,800 taxing districts in the state make this system difficult for a business owner to navigate through.
Conway recommended that the state eliminate the B&O tax, reduce the sales tax and introduce an income tax. Politically, Washingtonians have been hostile toward income tax proposals. Even Carlyle, who likes the idea of an income tax, said the political landscape is heavily stacked against such a proposal. "It's absolutely plain that the voters don't believe in an income tax, " said Rep. J.T. Wilcox, R-Yelm and a member of the finance committee.
Carlyle is trying to spark studies and overhauls of Washington's tax system over the next several years.
The 2012 state Supreme Court ruling that is requiring Washington to increase its appropriations for basic educationis a major force for an overhaul. A legislative task force concluded in late 2012 that an extra $4 billion to $4.5 billion would be needed over the next six years to meet those requirements. Ultimately, the Republican-oriented Senate and Democratic-dominated House settled on allocating $982 million for basic education improvements for 2013-2015. If the $4 billion estimate holds up, the Legislature will have to appropriate significantly more additional money than that $982 million in each of the next two budget biennia.
And the Legislature scraped up the first extra $982 million mostly through one-time budget shifts and measures. No permanent funding sources have been set up to deal with the increased money needed for 2015-2016 and 2017-2018.
"We've reached the tipping point where we cannot avoid looking at reforming the tax structure," Carlyle said, in order to raise the extra court-mandated education money.
"The first step in changing the tax structure is winning back the trust of the voters," Wilcox said.
However, Republicans and Democrats are heading for a possible clash in the next few weeks on whether a gas tax increase is needed. Democrat wanted to pass a $10 billion transportation package in June with a 10.5-cents-per-gallon increase in the gas tax. The 23-Republican-two-Democrat Senate Majority Coalition Caucus, with a 25-24 majority, didn't go along, but it has put forth a plan for voter review that looks to add some extra transportation spending through budget shifts.
Gov. Jay Inslee wants to call a special legislative session in November to pass a transportation projects-and-revenue package. But that will only happen if Democratic and Republican leaders agree on a package beforehand that would have a chance to pass in a short special session.