The Legislature should seek permanent fixes to our dysfunctional tax code.
In her recent budget announcement, Gov. Chris Gregoire recognized the necessity of adding new revenue. We have a moral obligation to provide the best future possible for the next generation of Washingtonians, and an all-cuts budget would be a colossal failure in meeting our obligations to education, environmental stewardship, and protection of our most vulnerable citizens.
The governor has given us an important starting point for discussions.
However, her plan provides only short-term relief; it does not address the larger, more serious, structural failures of Washington’s tax code. By her own data, the governor acknowledges that tax revenue per $1,000 of income has shrunk by 23 percent since 1997. There are three variables that an effective tax code should address:
• Adequacy of revenue. Does the tax structure provide the revenue necessary to fund legal obligations over time?
• Revenue stability. Is the tax base more or less volatile than the overall economy?
• Tax fairness. Do taxpayers across income brackets at least pay an equal percentage of their income in state taxes? Many would argue that true fairness would require the very wealthy to pay a higher percent of their income in taxes since they often benefit disproportionately from taxpayer-funded infrastructure such as roads, ports, and the education system.
The governor’s proposal relies on a temporary sales tax increase of a half-cent. The 2015 expiration of this temporary tax partially fills a short-term hole, but fails to provide long-term reforms to our tax code.
Greater reliance on sales tax actually adds to the volatility of our current tax base – the boom-and-bust cycles of state revenue get worse, not better, with more dependence on sales tax.
Finally, further sales tax dependence renders our tax code even more regressive – the poor will pay more than 15 percent of their disposable income, while the very wealthy will pay less than 5 percent of their disposable income in state taxes.
The Legislature should take this important short-term fix offered by the governor and commit to making serious long-term progress on all three pillars of our tax code over the next 100 days. A sincere commitment by both chambers, and both political parties that focuses on our core values and not political posturing would help restore confidence in representative government that has been so clearly shattered at the national and state level.
There are literally hundreds of combinations that would result in revenue adequacy, revenue stability, and tax fairness. Consider just one option:
The Legislature could actually cut, that’s right, cut the sales tax rate but then apply sales tax to professional services. Why do you pay sales tax to clothe yourself, but you don’t pay it when you procure tax services, legal services, and a host of other services? Washington’s economy has dramatically shifted from a goods economy towards a service economy, but a 1935 tax exemption still dominates our tax code.
Lowering sales tax rates but applying them to a broader share of economic activity would provide additional revenue (adequacy). By taxing all sectors of the economy equally, we would stabilize our tax code as consumers shift spending from goods to services and from one sector to another.
Finally, this one single idea would also create greater tax fairness. Most economists agree that the wealthy spend more resources than low-income families on lawyers, accountants and consultants.
This is just one example of how to improve our tax code. We do not lack solutions in the Legislature; we lack political courage and conviction. This is our moment to prove a skeptical citizenry wrong.