A More EquitableMore Equitable Tax System for Washington is Worth the Struggle - 1
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                 Tax S...
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                                         Table of Co...
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                                             Executi...
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                 A More Equitable Tax System for Was...
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                            Figure 1: Washington’s R...
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Key Terms

   Several terms merit explanation, as mo...
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A Constitutional and Historical Basis for Tax Equity...
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   From the late 19th century to the early 20th cent...
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second, the Revenue Act of 1935 comprehensively res...
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                     Figure 3: Summary of Washingto...
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    •   Initiative 747 – passed by voters in 2001, ...
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critique (as previously mentioned). More specifical...
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                                        Figure 4


...
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   Additionally, both the Gates Commission and ITEP...
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tax system changes during recessions, as opposed to...
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                                             Figure...
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Local and National Politics of Progressive Tax Syst...
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      I have proposed a tax-reform plan that would ...
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tiered income tax measure – Initiative 1077 (I-1077...
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Key Ingredients for More Equitable Tax Systems

   ...
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Earned Income Tax Credits (EITCs)

   Since 1975, t...
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unfunded, it is designed to equal five percent of t...
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   While offering the security of remaining in one’...
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Tax Reform Alternatives

   Effective policy altern...
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is dedicated to the Education Legacy Trust Fund for...
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homeowners. Accordingly, Alternative C provides a m...
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Evaluative Criteria

   The alternatives introduced...
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                       Figure 11: Analysis of Tax S...
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Recommendation

   Among the three alternatives ide...
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                  Figure 12: A Selective Comparison...
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              Figure 12: Continued
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                                                Ref...
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Lee, R.D., Johnson, R.W., & Joyce, P.G. (2008). Pub...
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Schultz, S., & Chapman, J. (2009, April 3). The Wor...
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Washington State Tax Structure Study Committee. (20...
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A More Equitable Tax System for Washington is Worth the Struggle

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Washington’s outdated and unbalanced tax system is the most regressive of any U.S. state. This inequity has intensified over the past three decades, as the income gap between the highest and lowest income Washingtonians has grown rapidly. Among myriad factors contributing to Washington’s current tax structure, foremost are the State’s populist and progressive roots, as well as the recent, increased use of the initiative and referendum process to limit government financing options. Ultimately, the tax structure’s extreme inequity violates any basic sense of justice, and threatens the State’s long-term capacity to meet the needs of its increasing and diversifying population.

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A More Equitable Tax System for Washington is Worth the Struggle

  1. 1. A More EquitableMore Equitable Tax System for Washington is Worth the Struggle - 1 A Tax System for Washington is Worth the Struggle by John Dortero Final Capstone Paper PUBM 590-01: Prospectives in Public Service Instructor: Michael Bisesi, Ed.D. June 9, 2010
  2. 2. A More Equitable Tax System for Washington is Worth the Struggle - 2 Table of Contents Executive Summary ……………………………………………………………………. Page 4 Introduction ………………………………………………………................................. Page 5 Key Terms ………………………………………………………………………………. Page 7 A Constitutional and Historical Basis for Tax Equity ……………………………….. Page 8 The Initiative and Referendum Process – Ally and Adversary ……………………... Page 10 Analysis and Key Findings ………………………………………….…………………. Page 12 Local and National Politics of Progressive Tax System Reform in the 21st Century .. Page 18 Key Ingredients for More Equitable Tax Systems …………………………………… Page 21 A Progressive Income Tax ..………………………………………………………….. Page 21 Earned Income Tax Credits …………………………………………………………... Page 22 Property Tax Relief Programs for Homeowners and Renters ………………………... Page 23 Tax Reform Alternatives ………………………………………………………………. Page 25 Alternative A: No Action ………………………………………………….................. Page 25 Alternative B: Initiative 1098 …………...……………………………………………. Page 25 Alternative C: A More Comprehensive Approach ………………………………….... Page 26 Evaluative Criteria ………………………………………………………....................... Page 28 Recommendation ……………………………………………………………………….. Page 30 Conclusion ………………………………………………………………………………. Page 30 References ………………………………………………………………………………. Page 33
  3. 3. A More Equitable Tax System for Washington is Worth the Struggle - 3 Figures Figure 1: Washington’s Regressive Tax System by the Numbers ……………………… Page 6 Figure 2: National Income Trends …………………………………………………….... Page 6 Figure 3: Summary of Washington State’s Income Tax Ballot Measures by Year …….. Page 11 Figure 4: Major Washington State Taxes ……………………………………………….. Page 14 Figure 5: Washington’s General Fund revenues grew more slowly than total state personal income from 1971-2002 ………………………................. Page 14 Figure 6: Most States Raised Taxes Significantly during the Last Recession …………... Page 17 Figure 7: How Washington State’s Tax Increases Compare to those Enacted in other States during 2009-2010………………………………. Page 17 Figure 8: Twenty-Four States Have Enacted EITCs ………………………….................. Page 22 Figure 9: Estimated Revenue Effects of Alternative B (Initiative 1098) …....................... Page 26 Figure 10: Estimated Revenue Effects of Alternative C ……………………….................. Page 27 Figure 11: Analysis of Tax System Alternatives using Weighted Evaluative Criteria …… Page 29 Figure 12: A Selective Comparison of 2007 Tax Distributions by State …………………. Page 31
  4. 4. A More Equitable Tax System for Washington is Worth the Struggle - 4 Executive Summary Washington’s outdated and unbalanced tax system is the most regressive of any U.S. state. This inequity has intensified over the past three decades, as the income gap between the highest and lowest income Washingtonians has grown rapidly. Among myriad factors contributing to Washington’s current tax structure, foremost are the State’s populist and progressive roots, as well as the recent, increased use of the initiative and referendum process to limit government financing options. Ultimately, the tax structure’s extreme inequity violates any basic sense of justice, and threatens the State’s long-term capacity to meet the needs of its increasing and diversifying population. Consequently, extensive tax structure research by local public policy and advocacy organizations and gubernatorially-appointed commissions has arisen, complimented by similar efforts at the national level. Moreover, several states have implemented effective policies to address tax system inequities (e.g., Earned Income Tax Credits) and, simultaneously, long-term adequacy. However, absent Washington’s political will to reform its tax system into a more equitable one, these examples will linger as great ideas – emblematic of the 2002 Gates Commission Report, the most recent of Washington’s tax structure studies. Therefore, the following report evaluates and compares three tax reform alternatives (“No Action,” Initiative 1098, and “A More Comprehensive Approach”), using a weighted evaluative criteria methodology comprised of equity, political acceptability, adequacy, and ease of administration. Because their scores are nearly identical, the two highest-scoring alternatives are both highly recommended: • Alternative B – the enactment of Initiative 1098 • Alternative C – a more comprehensive approach, applying some of Initiative 1098’s provisions, plus funding the Working Families Tax Rebate program at 30% of the federal Earned Income Tax Credit, reducing the state sales tax by one point - from 6.5% to 5.5%, and replacing I-1098’s state property tax reduction with an expansion of current “circuit breaker” property tax relief programs Both Alternatives B and C feature many key ingredients of progressive tax systems, offering two attractive options for Washington to take meaningful steps toward greater equity, while also mindful of the intense political conflict surrounding tax reform.
  5. 5. A More Equitable Tax System for Washington is Worth the Struggle - 5 A More Equitable Tax System for Washington is Worth the Struggle Taxation is a significant source of revenue for the essential functions of government. However, it is also a function of taxpayers’ values concerning equity, transparency, accountability, and other principles. One of Washington State’s most dubious distinctions is that its tax system is the most regressive of any U.S. state. Despite being a moderately tax-burdened state in terms of dollars in local and state taxes paid per $1,000 of income, Washington residents comprising the lowest income quintile pay six times the proportion of their income in all taxes as do the wealthiest 1% – as indicated in Figure 1 on the following page. This inequity is compounded by national income growth trends over the past three decades: the incomes of the wealthiest Americans rose exponentially faster than those of middle and lower incomes from 1979-2005 (as shown in Figure 2). As this income gap continues to widen across the U.S. (and Washington), tax systems are becoming less fair, as measured by the “ability to pay” principle. In addition to the inequitableness of Washington’s tax structure, a preponderance of evidence indicates that an overhaul is long overdue. First, the structure remains largely unchanged since the 1935 Revenue Act, despite the State’s nine tax structure studies over the past century having recommended numerous changes. The most recent study in 2002 by the Washington State Tax Structure Study Committee (WSTSSC, also known as the “Gates Commission”), concluded that the State’s tax system is not only highly regressive, but also outdated, incompatible with neighboring states, and inadequate for a 21st century economy. Second, numerous states such as Idaho, New York, Vermont, and Wisconsin use a combination of progressive income taxation and one or more tax relief programs, such as refundable Earned Income Tax Credits (EITCs), to effect greater state tax system equity. Third, Washington’s existing revenue sources provided few options to resolve a $2.8 billion budget shortfall during the 2010 Regular and Special Legislative Sessions. Hence, the resulting “balanced” budget lacks long-term revenue solutions. Therefore, the following addresses the crucial need for Washington’s tax system to be transformed into a more equitable one, offering longer-term sustainability and a higher quality of life for all. It is hoped that this paper will provide to those interested in tax fairness a rationale for why greater equity must be a keystone of any structural reforms to Washington’s tax system.
  6. 6. A More Equitable Tax System for Washington is Worth the Struggle - 6 Figure 1: Washington’s Regressive Tax System by the Numbers Note. From Who Pays? A Distributional Analysis of Tax Systems in all 50 States. (3rd ed.), by Davis et al. Copyright 2009 by the Institute on Taxation & Economic Policy. Figure 2: National Income Trends Note. From Income Inequality Hits Record Levels, New CBO Data Show, by Arloc Sherman. Copyright 2007 by the Center on Budget & Policy Priorities.
  7. 7. A More Equitable Tax System for Washington is Worth the Struggle - 7 Key Terms Several terms merit explanation, as most are used repeatedly in this paper to describe economic and social qualities of taxes, as well as the current state of Washington’s and other states’ tax systems. The descriptions of the terms below reflect multiple influences: “best practices” in policy analysis such as the Washington State Tax Structure Study (2002), Who Pays? A Distributional Analysis of Tax Systems in all 50 States (2009), and the Tax Policy Handbook for State Legislators (2010), as well as philosophers concerned about equity and the human condition – namely, John Rawls (known for his widely-cited concept of justice as described in A Theory of Justice, which Nobel Laureate Economist Amartya Sen emphasizes as being rooted in fairness), Pope Leo XIII (author of the foundational writing on Catholic Social Teaching – Rerum Novarum), and Adam Smith (whose epic on capitalism, Wealth of Nations, includes strong arguments for taxation based on the “ability to pay” principle). • Equity/Fairness/Justice: with special attention on the most vulnerable members of a community, a distribution of taxes paid by individuals or groups which coincides with one of two principles: either one’s ability to pay or the benefits which one receives from paying particular taxes. • Vertical Equity: a measure of ability to pay which requires proportional (each household pays the same percentage of income in taxes – e.g., a flat income tax) or progressive taxation (those with the highest incomes pay the highest percentage of income in taxes – e.g., a graduated income tax). • Horizontal Equity: taxation based on uniform and non-arbitrary assessments, requiring taxpayers with similar incomes or wealth pay similar amounts of tax (e.g., property tax, estate tax, etc.). • Regressive: a quality of specific taxes (namely, sales taxes) or overall tax structures in which those with the lowest incomes and/or wealth pay a higher proportion of their economic resources in taxes than those with the greatest incomes and/or wealth. This is opposite the “ability to pay” principle, which characterizes progressive taxes or structures – and which are fairer or more equitable. • Adequacy: a tax system’s capacity to produce enough long-term revenue growth to fund typical growth in public services as a population increases and diversifies during economic expansions.
  8. 8. A More Equitable Tax System for Washington is Worth the Struggle - 8 A Constitutional and Historical Basis for Tax Equity Given the multiple evidence of Washington’s tax system inequities and inadequacies, it is essential to understand developments in governance, political movements, and other factors which have shaped taxation policies over the past century. Constitutions provide a crucial starting point. As blueprints for the structure, operation, and scope of government authority, both the U.S. Constitution and states’ constitutions reflect the social norms of the eras in which they were written and/or amended, and are the products of endless debates about the ideal distribution of tax burdens and tax fairness in general. For example, numerous western states’ constitutions reflect the values of successive Populist and Progressive political movements from the 1890s through the post-World War I era, which called for greater social and economic equality, prompting an upsurge in constitutional uniformity-of-taxation clauses and direct democracy as means for citizens to ensure greater accountability and transparency in their state governments (Clayton et al., 2004; Washington State Department of Revenue, 2007). Specifically, Article VII, Section 1 of the Washington Constitution requires property to be taxed uniformly. It also broadly defines property as, “…everything, whether tangible or intangible, subject to ownership” (DOR, 2007; Roberts, 2002; Spitzer, 1993; WSTSSC, 2002). With respect to the executive branch, Washington’s Department of Revenue (DOR) is particularly germane. Its research division has chronicled the evolution of the State’s tax system, with information spanning 150 years, well beyond Washington’s initial statehood. This is largely due to the work of historian Don Taylor, who has worked there for the past 50 years (DOR, 2009; Taylor, 2009). From its early years in the 1850’s as a rural region, through its initial statehood in 1889, and into the Great Depression, Washington financed its government operations primarily with property taxes. During this period, land ownership was an accurate measure of one’s wealth and, thus, property taxes were a more accepted revenue source than they are today (Chelsey, 2004). However, when Washington entered statehood in 1889, standardization of property assessments was lacking, despite being among the vast majority of states with uniformity provisions in their constitutions (Spitzer, 1993).
  9. 9. A More Equitable Tax System for Washington is Worth the Struggle - 9 From the late 19th century to the early 20th century, the Industrial Revolution accelerated the pace of national urbanization and, thus, property became a lesser measure of individual wealth. During this period, a growing national perception was that many business sectors central to industrialization (such as railroad companies) were unfairly profiting from tax exemptions. In response, grassroots citizen activists emerged, advocating for fairer taxes and checks on taxation and other powers of governments (to be examined in further detail later). Accordingly, Washington began transforming its tax structure by moving away from heavy dependence on property taxes in favor of excise taxes, such as sales, use, and other transactional- type taxes, including the Business & Occupations tax (B&O tax – whose initial format was enacted in 1907) as the primary revenue source, as well as ancillary taxes, such as common school levies and the inheritance tax (DOR, 2009). Also significantly, the creation of the State Board of Tax Commissioners (SBTC – the DOR’s predecessor) in 1905 marked the first time that a tax agency was assigned research duties which included studying other states’ tax systems, and recommending changes to remedy tax inequities and enhance tax administration efficiency (Taylor, 2009). Subsequently, a massive expansion of taxation occurred at both state and federal levels, highlighted by the 16th Amendment to the U.S. Constitution in 1911 – enacting a national income tax (Roberts, 2002). Washington added an auto licensing (excise) tax in 1915, and its first gasoline tax in 1921. From the “Roaring 20’s” to the 1930’s, populism and progressivism also influenced grassroots movements for tax equity in Washington, as teachers, labor leaders, and the Grange (the nation’s oldest farmer-based organization) increased their statewide political influence. These groups formed a coalition whose goals included reducing property taxes (which were no longer the best measure of wealth, due to rapid urbanization) and establishing a graduated income tax – impeccably timed, as the Great Depression plunged both the State and nation into a revenue crisis (WSTSSC, 2002). Two significant outcomes of the revenue crisis effected long-term consequences on Washington’s tax system: first, the teacher/labor/Grange coalition launched a state income tax measure in 1932 (Initiative 69 to the People – shown in Figure 3), which voters overwhelmingly approved but was swiftly struck down by the State Supreme Court’s 1933 Culliton vs. Chase decision, which interpreted income as property;
  10. 10. A More Equitable Tax System for Washington is Worth the Struggle - 10 second, the Revenue Act of 1935 comprehensively restructured the state’s tax system into its current form by shifting from the property tax to the sales tax as the primary revenue source (DOR, 2010; Taylor, 2009). Despite several tax system studies led by the SBTC (and, later, the DOR) recommending significant changes – often urging some form of income tax, the State did otherwise. In the ensuing decades, Washington moved toward a greater and disproportionate reliance on a wide variety of sales taxes (e.g., retail, cigarettes, motor vehicle fuel, etc.), enacted additional property tax limits, and failed to enact an income tax by both legislation and voter initiative (Taylor, 2010; WSTSSC, 2002). The Initiative and Referendum Process – Ally and Adversary The initiative and referendum process, a form of direct democracy currently utilized in various formats by 27 states, is an outgrowth of the Progressive and Populist political movements of the late 19th and early 20th centuries, and coincides with numerous western states’ early statehoods (Clayton et al., 2004). Washington is among the earliest western states to adopt the initiative and referendum process – in 1912 (Washington Secretary of State, 2009). Over the past century, Washingtonians have used the initiative process for benevolent campaigns to address public goods issues (e.g., extending the right to vote to women, increasing minimum wage, etc.). However, like Oregon, Colorado, and other initiative states in the west, tax reform has been among the most frequent topics (Morgan, Robinson, Barden, and Strachota, 2002; Seeberger, 1997; Taylor, 2010). Figure 3 on the following page shows the five instances in which voters have faced ballot measures concerning personal or corporate income taxation. As previously mentioned, the passage of Initiative 69 in 1932 meant Washingtonians were subject to a personal income tax for one year (until the State Supreme Court’s ruling in Culliton). Furthermore, a disturbing trend in the use of the initiative process over the last 30 years has been to override state legislatures’ capacities to finance government and, ultimately, fund public services in an adequate manner. In 1978, California voters passed a landmark initiative – Proposition 13 – which massively reduced California’s property tax levying authority (McCaffery & Bowman, 1978). Moreover, Prop. 13 spurred a trend among other western states (Washington, Oregon, and Colorado, to name a few)
  11. 11. A More Equitable Tax System for Washington is Worth the Struggle - 11 Figure 3: Summary of Washington State’s Income Tax Ballot Measures by Year 1932* 1934 Initiative to the People 69 House Joint Resolution 11 Option Votes Percentage Option Votes Percentage No 136,983 29.8% No 176,154 56.6% Yes 322,919 70.2% Yes 134,908 43.4% Filed March 22, 1932. Submitted to voters at the state general election held Submitted to voters at the state general election held on November 6, 1934. on November 8, 1932. The Act is now identified as Chapter 5, Laws of 1933. 1970 1973 House Joint Resolution 42 House Joint Resolution 37 Option Votes Percentage Option Votes Percentage No 672,446 68.5% No 770,033 77.1% Yes 309,882 31.5% Yes 228,823 22.9% Ballot Title: Ballot Title: Shall the state constitution be amended to reduce the maximum allowable Shall a graduated net income tax be authorized, excess levies for rate of taxation against property to 1 percent of true and fair value in the school operations be prohibited, and some excise taxes limited? absence of authorized excess levies, and to permit the legislature to tax income at a single rate without regard to this limitation or, after 1975, at a 1975 graduated rate if the voters in that year or thereafter approve the removal of Initiative to the People 314 the single rate limitation? Option Votes Percentage No 652,178 66.8% Yes 323,831 33.2% Ballot Title: Shall corporations pay a 12% excise tax measured by income so that special school levies may be reduced or eliminated? Note. Adapted from Nick Handy, personal communication, April 21, 2009. of citizens using the initiative process to gain greater power over their pocketbooks, despite many unintended consequences – namely, widespread economic devastation from inadequate state budgets (Initiative & Referendum Institute, 2009). Likewise, Washington has experienced considerable tax (and budget) limitations at the hands of voters – many sponsored by anti-tax crusader Tim Eyman. However, like a seesaw, many significant anti-tax initiatives passed have often been partially or fully turned back by the Washington State Supreme Court, or modified by the Legislature (Taylor, 2010; Watkins, 2010). Among the most significant examples during this period are: • Initiative 601 – passed by voters in 1993, replacing Initiative 62 (passed in 1979). I-601 uses a growth factor formula (computed by averaging increases in statewide personal income over the previous ten years) to limit the increase in state general fund expenditures over the previous year.
  12. 12. A More Equitable Tax System for Washington is Worth the Struggle - 12 • Initiative 747 – passed by voters in 2001, restricting state and local property tax growth to 1% (without voter allowance of a higher amount). Found to be unconstitutional in 2007. In response, replacement legislation was passed later in the same year. Accordingly, the 1% growth limit on regular property tax levies still stands. • Initiative 960 – passed by voters in 2007, requiring most tax increases to be approved by a legislative supermajority (2/3). As two years have now passed since I-960’s approval, the Legislature suspended I-960 during the 2010 legislative session, allowing lawmakers to adopt the tax increase package with a simple majority vote to address the $2.8 billion budget shortfall. • Initiative 1053 – On the first day of the 2010 Legislative Session, the vigilant Eyman announced his new initiative drive to resurrect Initiative 960 (nicknaming it “Son of 960”) – once again, mandating a 2/3 legislative majority or a public vote for any tax increase. • Initiative 1098 (formerly Initiative 1077) – On April 20, 2010, Bill Gates, Sr., leading a coalition of business, labor, and community leaders, known as Washingtonians for Education, Health Care, and Tax Relief, announced a new, two-tiered income tax measure which would apply only to the wealthiest Washingtonians. Tax relief for middle and lower income residents would come from a reduction in the state portion of the property tax, as well as an increase in the B&O tax credit – targeting small businesses. Analysis and Key Findings The conclusions drawn from several best practices point to Washington’s need for a more equitable tax structure. First, as mentioned earlier, the most comprehensive policy analysis specifically addressing Washington’s system is eight years old, yet extremely relevant – Tax Alternatives for Washington State: A Report to the Legislature, by the Gates Commission. The work of this multifaceted group of scholars, economists, attorneys, and other citizens was aided significantly by the DOR, arguably the State agency with the greatest knowledge and resources pertaining to the tax system. The report, the ninth produced by gubernatorial directive to address the revenue system’s adequacy and other qualities, provided a scathing
  13. 13. A More Equitable Tax System for Washington is Worth the Struggle - 13 critique (as previously mentioned). More specifically, its observations about the discrepancy of Washington’s sales tax rate with those of neighboring states (chiefly, Oregon which has no state sales tax), emphasized a rising problem: consumers’ tax avoidance via remote shopping in Oregon and Idaho, as well as on the internet, translating to revenue shortfalls estimated at $138-148 million in 2001. The report’s policy alternatives, which include personal income taxation and sales tax streamlining, are carefully crafted for greater implementation options – from incremental to full replacement of major taxes (WSTSSC, 2002). On the following page, Figure 4 depicts Washington’s unique tax structure. The noticeably high dependence on sales tax (the most regressive tax) and B&O tax (fundamentally unfair to small businesses) are leading causes of the tax structure’s extreme regressivity. Moreover, Figure 5 depicts the increasingly inadequate growth in state revenues (mostly from taxes) to meet the rising demand for services from the state’s expanding and diversifying population. Second, the recently updated Who Pays? A Distributional Analysis of the Tax Systems in All 50 States (3rd edition) by Institute on Taxation and Economic Policy (ITEP) is a leading comparative state-to-state analysis, which examines how particular states like Washington are highly regressive (Davis, C., Davis, K., Gardner, McIntyre, McLynch, & Sapozhnikova, 2009). Its chief finding is that almost every state and local tax system collects a much greater share of income from middle- and low-income families than from the wealthiest ones. In total, 48 states fail to achieve basic tax fairness: requiring the highest income residents to pay at least as high a percentage of their incomes in taxes as the poorest ones. More significantly, the report points out that the an absence of an income tax or one which is a flat rate, as well as heavy dependence on sales and excise taxes, equates to a highly regressive tax system – a precise description of Washington’s tax structure. Alternatively, the ITEP study also explains why Vermont is among the least regressive states: it has a highly progressive income tax and low dependence on sales and excise taxes, as well as one of the largest refundable Earned Income Tax Credits (EITCs). Accordingly, the progressive income tax and EITC will be further explored as effective mechanisms to build more equitable state tax structures.
  14. 14. A More Equitable Tax System for Washington is Worth the Struggle - 14 Figure 4 Note. From Tax Statistics 2009, by Washington State Department of Revenue. Copyright 2010 by the author. Figure 5: Washington’s General Fund revenues grew more slowly than total state personal income from 1971-2002 Note. From Washington State Tax Structure Study, by WSTSSC. Copyright 2002 by the author.
  15. 15. A More Equitable Tax System for Washington is Worth the Struggle - 15 Additionally, both the Gates Commission and ITEP studies both observe Washington’s tax system to be very different than those of its two bordering states – Oregon and Idaho. The former features personal and corporate income taxes, but no state sales tax, while the latter features all three major taxes (property, income, and sales). More importantly, both are much more equitable than Washington’s tax system (Davis et al., 2009; WSTSSC, 2002). In addition to Oregon and Idaho, other states whose tax systems provide valuable contrasts to Washington are: Vermont (the most equitable overall of the 50 states), New York (which features one of the most progressive income tax structures), and Wisconsin (offers households with three children the highest refundable EITC of any state, but a lower EITC for smaller household sizes). A third best practice, the Vermont Tax Study, a comparative analysis of Vermont against 11 other states including Washington, observes Vermont’s tax system as among the most equitable of all states – the same conclusion as the ITEP study. This is largely due to Vermont’s highly progressive, five-tiered, personal income tax which requires middle to high-income residents to pay at least twice the rate (7.2 – 9.5%) as that of the lowest income tier (3.6%). Also significant are Vermont’s comparatively low reliance on sales taxes, and relatively high dependence on property taxes. The latter, while somewhat regressive, are made much more equitable by Vermont’s Homeowner and Renter Property Tax Rebate Claims programs which provide significant property tax relief for households with incomes of $47,000 or less. Furthermore, unlike Washington’s B&O tax which is fundamentally unfair to small businesses and start-ups, Vermont’s corporate income tax takes an opposite approach, offering tax advantages for its entrepreneurs and small businesses which (like Washington’s) represent a large sector of the economy. Finally, another contrasting feature is Vermont’s availing of one of the highest refundable EITCs of any state, while Washington has not yet funded its EITC program – which will be discussed in further detail in the Earned Income Tax Credits section (Davis et al., 2009; Vermont Legislative Joint Fiscal Office, 2007). Fourth, the Center on Budget and Policy Priorities (a non-partisan research and policy institute focused on federal and state fiscal policies and programs which affect low- and moderate-income Americans), and its local affiliate – the Washington State Budget & Policy Center – offer three articles which collectively argue that Washington and other states would be wise to make the best use of additional taxes and overall
  16. 16. A More Equitable Tax System for Washington is Worth the Struggle - 16 tax system changes during recessions, as opposed to relying on spending cuts to balance budgets. In the widely-cited and more dated Budget Cuts vs. Tax Increases at the State Level: Is One More Counter- productive than the other During a Recession?, economists Stiglitz and Orszag make a convincing case for strategic tax increases, as opposed to spending reductions, to maintain adequacy during recessions. Keenly aware of political feasibility as well as economic efficiency, the authors prefer tax increases directed toward high income families, whose consumption patterns are much less likely to decrease during economic downturns. Moreover, they argue that such a progressive shift in taxation more immediately addresses state budget shortfalls than reducing either government spending on goods and services or transfer payments to lower-income families (2001). In Tax Measures Help Balance State Budgets: A Common and Reasonable Response to Shortfalls, Johnson, Nicholas, and Pennington (2009) also emphasize that tax increases during economic recessions often reflect good policy judgment, as such increases are less damaging to families and state economies than significant budget cuts resulting in reduction of services. Specifically, the 30 states which increased taxes in 2009 in response to deepening recessions were following prior trends. During the prior recession of the early 2000s, some 30 states did so – as depicted in Figure 6 on the following page. Moreover, an even greater number of states (44) raised taxes during the recession of the early 1990s. Also notably, the authors point out that while federal economic recovery funds reduce the size of state tax increases, such funds cannot be permanently relied upon as a substitute for state tax increases (2009). Lastly, Revenue Measures Enacted in Washington State in 2009 and 2010 provides new national data (see Figure 7 on the next page) which not only confirms the similarity between tax increases enacted during the previous recession (2001-2004) and those in the current recession, but also notes Washington’s 3.6% tax increase (as a proportion of total state revenues) during 2009-2010 as consistent with tax increase rates of the majority of other states (Nicholas & Chapman, 2010). Due to the State’s disproportionate reliance on sales taxes, it cannot easily target tax increases on its wealthiest residents. Hence, the 2009- 2010 tax increases are combination of selective sales and excise tax as well as B&O tax increases.
  17. 17. A More Equitable Tax System for Washington is Worth the Struggle - 17 Figure 6 Note. From Tax Measures Help Balance State Budgets: A Common and Reasonable Response to Shortfalls, by Johnson et al. Copyright 2009 by Center on Budget and Policy Priorities. Figure 7: How Washington State’s Tax Increases Compare to those Enacted in other States during 2009-2010 Note. From Revenue Measures Enacted in Washington State in 2009 and 2010, by Nicholas & Chapman. Copyright 2010 by Washington State Budget and Policy Center.
  18. 18. A More Equitable Tax System for Washington is Worth the Struggle - 18 Local and National Politics of Progressive Tax System Reform in the 21st Century Early last decade marked a significant period in Washington’s journey toward real tax reform. Governor Locke was serving his second (and last) term, and in 2001 the “Dot com bubble” (technology boom) burst, just prior to the 9-11 attack. The economic aftershocks of these events sent Washington, along with the rest of the country, into a recession (albeit less severe than the current economic downturn), and the State decided to reevaluate its tax structure for the ninth time. Thus, the work of The Gates Commission ensued. Unfortunately, the analysis and recommendations of the 2002 Washington State Tax Structure Study were largely ignored, as previously mentioned. The ideas of restructuring the tax system for the first time in 67 years and adopting some form of an income tax were too extreme to gain the support of the Governor or Legislature (Clayton et al., 2004; Franklin, 2009; WSTSSC, 2002). After the Gates Commission’s completion of the Washington State Tax Structure Study, local activists, business leaders, lawmakers, and others continued the discussion on how to move Washington toward a more equitable tax system. Among numerous policy and advocacy organizations, the Economic Opportunity Institute, the Washington State Budget & Policy Center, and the Statewide Poverty Action Network (SPAN, formerly Fair Budget – a welfare reform coalition) emerged as leading voices for progressive reform of the State’s tax system, as well as other complimentary public policies to improve the quality of life of low and middle income Washingtonians (EOI, 2010; SPAN, 2009; Washington State Budget & Policy Center, 2010). During the previous legislative biennium (2009-2010), lawmakers were preoccupied with addressing the State’s multi-billion dollar deficits, primarily using short-term fixes such as federal stimulus dollars, the Rainy Day Fund, and other revenue sources, while failing to address tax reform. However, two economic policy-oriented Democrats from Puget Sound districts serving on the Senate Financial Institutions committee, Senators Joe McDermott (2009) and Rosa Franklin (2009), emerged as the most outspoken lawmakers on the necessity of tax reform. Senator Franklin stated:
  19. 19. A More Equitable Tax System for Washington is Worth the Struggle - 19 I have proposed a tax-reform plan that would ease the tax obligation on the middle class, on limited-income homeowners and on small businesses, while also helping us better withstand recessions…(this plan) came right from the 2003 Gates Commission. It made sense then and it makes even more sense today. In fact, if we’d adopted the commission’s recommendation… we’d be in much less of a recession in our state today. (Franklin, 2009) Accordingly, a key tax reform measure surfaced in the 2010 Regular Legislative Session: Senate Bill (SB) 6250. As a derivative of one of the Gates Commission’s many recommendations, SB 6250 originally proposed adding a graduated state income tax, offset by three-point reduction in the state sales tax rate (from 6.5% to 3.5%) and an elimination of the highly unpopular state portion of the property tax. As the original sponsors of SB 6250, McDermott and Franklin found a few co-sponsors among the more progressive members of the Democratic caucus in the quest for significant tax reform. They added Senator Kohl-Welles’ sponsorship, as well as a companion bill – House Bill (HB) 3070, sponsored by Representatives Hasegawa and Chase. However, both SB 6250 and HB 3070 failed to progress beyond the initial committees to which they were assigned (Senate Ways & Means and House Finance, respectively). Upon their reintroductions in the subsequent Special Session, no further action was taken on either bill. Thus, both bills “died,” adding another year without tax reform (Washington State Legislature, 2010). Simultaneously, a new statewide coalition working for a more sustainable economic future, Rebuilding our Economic Future (REF), advocated for a “humane and sensible” 2010 state budget, arguing that an approach focused solely on cutting expenditures during a recession would produce devastating results: lower quality public education, reduced access to health care, and a decline in Washington’s marketplace competitiveness, equaling an economic crisis shared by all Washingtonians (REF, 2010). Accordingly, the Legislature agreed to raise revenues through targeted tax increases (e.g., $1 per pack increase on the cigarette excise tax) amounting to $760 million. Nevertheless, this was a small victory for REF, as the additional revenue contained no tax reform provisions (Washington State Budget & Policy Center, 2010). Finally, on April 20, 2010, Bill Gates, Sr., leading a coalition of business, labor, and community leaders known as Washingtonians for Education, Health Care, and Tax Relief (WEHCTR) announced a new, two-
  20. 20. A More Equitable Tax System for Washington is Worth the Struggle - 20 tiered income tax measure – Initiative 1077 (I-1077). I-1077 (recently modified as I-1098) comes nearly 40 years after the last attempt to enact an income tax by direct democracy, and would only apply to the wealthiest Washingtonians. Keenly aware of voters’ historical apprehension to enacting an income tax, Gates and his allies structured the measure to also address voter concerns about funding the State’s two largest expenditures – basic education (K-12) and human services, as well as perceptions of being overtaxed (WEHCTR, 2010). Accordingly, all additional revenues generated by I-1098 are reserved for education and health care, and the regressive and highly unpopular state portion of the property tax is reduced, while the B&O tax credit is increased – which addresses the major problem of B&O tax being fundamentally unfair to small businesses who are crucial to the State’s economic health, as they supply the majority of new jobs. Because of the time and expertise used to develop I-1098 as a measure to widely benefit middle and lower income Washingtonians, voters have great reason to support it, and it is thus one of three policy alternatives considered later in this paper. Nationally, the Center on Budget and Policy Priorities (CBPP) and the Institute on Taxation & Economic Policy (ITEP) – two nonpartisan think tanks founded in the early 1980s – have collaborated with similar but more advocacy-oriented organizations, such as United for a Fair Economy (UFE) and Citizens for Tax Justice (CTJ), to address state and federal taxation issues. Each organization is rooted in commitments to tax fairness for low and middle income Americans. Hence, their constant messages urge governments to adopt more progressive tax structures so that the wealthiest individuals, households, and corporations pay more according to the ability to pay principle (CBPP, 2010; ITEP, 2010). Accordingly, there is major consensus among regional and national organizations on essentiality of the progressive income tax to equitable state tax systems (CBPP, 2001; ITEP, 2009; UFE, 2010). Moreover, such a consensus is consistent with a chief aspect of the “Rawlsian” approach to justice – equity in any social structure must attend to its most vulnerable and/or impoverished members (Sen, 2009). In other words, the degree of equality within a state tax system is measured by the degree to which the state minimizes the tax burdens on those with the lowest incomes.
  21. 21. A More Equitable Tax System for Washington is Worth the Struggle - 21 Key Ingredients for More Equitable Tax Systems Although each of the 50 states’ tax systems has unique features, there are several common features among states whose systems achieve greater overall equity: first, progressive income taxes; second, tax relief programs for lower-income workers, namely EITCs; third, tax relief programs for lower-income property owners and renters; fourth, resulting tax structures which are much more balanced in terms of reliance on income, property, and sales taxes. While these four elements are by no means an exhaustive list, they are highly effective, and are either completely absent from Washington’s tax system (income tax, as well as an overall balanced tax structure), unfunded (EITC), or extremely narrow (property tax relief). A Progressive Income Tax Of all major revenue sources across U.S. states, personal and corporate income taxes are foremost among those which effect maximal equity – describable as progressive. 34 of the 41 states which levy broad-based personal income taxes do so in a progressive (i.e., graduated) manner (Davis et al., 2009). Among leading examples are Idaho, New York, and Vermont, as shown in Figure 12 on pages 31-32. While income tax critics argue the tax is generally more volatile than sales or property taxes, current income growth trends suggest progressive income tax structures are a good approach. Because of the direct link of growth in personal income and tax collections, progressive income tax rates are able to capture the growth represented by the increased concentration of wealth toward the richest Americans over the past three decades (as previously discussed, and depicted in Figure 2). Accordingly, states with high income tax rates on the wealthy do better by this measure than states with low rates (ITEP, 2005; McDermott, 2009; Watkins, 2010). Moreover, progressive income taxes typically grow at a faster rate than personal income in the long run. Therefore, results are a more adequate income tax and, when combined with the other two types of major taxes – property and sales, a more balanced and sustainable tax structure overall (ITEP, 2005; Lee, Johnson, and Joyce, 2008).
  22. 22. A More Equitable Tax System for Washington is Worth the Struggle - 22 Earned Income Tax Credits (EITCs) Since 1975, the federal EITC has been a leading tool for not only encouraging employment, but also offsetting the regressivity of states’ tax systems. Moreover, the EITC has also been shown to alleviate poverty to some degree, as recipients (who, by qualification, are all lower income) are likely to use EITCs for asset-building. Also importantly, since the federal EITC is refundable, it can be issued as a payment to taxpayers owing no tax (i.e., those with the lowest incomes). Observing the success of the national EITC, many states have since incorporated EITCs into their own tax systems – the majority offering refundable ones as the federal government does so, as shown below in Figure 8 (Williams, Johnson, & Shure, 2009). Figure 8 Note. From State Earned Income Tax Credits: 2009 Legislative Update by Williams, et al. Copyright 2009 by Center on Budget and Policy Priorities. Additionally, in terms of patterns of tax policy, 23 out of the 24 EITC states use broad-based income taxes. Vermont and New York are leading examples, as both have highly progressive income taxes, as well as offer two of the highest refundable EITCs – 32% and 30%, respectively (Williams et al., 2009). Washington is one of the newest participant states (and the only non-income tax state), enacting its program – the Working Families Tax Rebate (WFTR) – in 2008. Although the WFTR is currently
  23. 23. A More Equitable Tax System for Washington is Worth the Struggle - 23 unfunded, it is designed to equal five percent of the federal EITC or $25 (whichever is greater), and when the matching rate rises to 10 percent in 2011, the minimum value will rise to $50. More significantly, it will be relatively easy to administer this benefit to approximately 350,000 households, as the Department of Revenue will use federal EITC claimant data from the IRS to verify eligibility (Schultz & Chapman, 2009). Property Tax Relief Programs for Homeowners and Renters The property tax is the oldest and arguably the most despised of the major taxes, yet it is the only type levied in all 50 states. Historically, the New England states have depended heavily on property taxes as a revenue source (Vermont Legislative Joint Fiscal Office, 2007), while western states with initiative and referendum processes (including Washington) have frequently passed measures to limit property taxes. Thus, it is unsurprising that Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, and Maine all have a higher per capita property tax on homeowners’ burdens on average than Washington (DOR, 2009). While Washington’s combined local and state property tax burdens ($1,143 in fiscal year 2007) are slightly lower than the national average per capita ($1,272 in the same year), the State performs poorly compared to the majority of states with respect to property tax relief (Taylor, 2010). This is notable, given the numerous programs available in Washington: • Property Tax Exemption Program for Senior Citizens and Disabled Persons • Property Tax Assistance Program for Widows or Widowers of Veterans • Property Tax Deferral Program for Senior Citizens and Disabled Persons • Property Tax Deferral Program for Homeowners with Limited Income The Property Tax Exemption Program for Senior Citizens and Disabled Persons, created by a 1967 constitutional amendment, was expanded in 2005 and 2008 to include disabled veterans and surviving domestic partners, respectively. In 2009, this program provided a total of $176.1 million in relief for 113,239 participants – an average of $1,555 in relief per household (Taylor, 2010).
  24. 24. A More Equitable Tax System for Washington is Worth the Struggle - 24 While offering the security of remaining in one’s home despite a limited income, there are numerous drawbacks to each of Washington’s well-intended property tax relief programs. First, the programs are limited to select population subgroups listed above, and the household income thresholds are relatively low – $35,000 for the exemption program, and $40,000 and $57,000 for the Senior Citizens and Disabled Persons and the Homeowners with Limited Income programs, respectively. Second, the programs function as “circuit breakers” – because they are based on income, they are not automatically granted and must instead be applied for and renewed periodically (ITEP, 2005; Taylor, 2010). Third, their assistance is limited to either exemption from excess and special levies (and possibly regular levies) or postponement of property taxes until a qualifying event (e.g., selling one’s home) at which the deferred amount plus interest is due. Fourth, the deferment limits for the two deferral programs are based on the equity in one’s home (80 percent for Senior Citizens and Disabled Persons, and 40 percent for Limited Income Homeowners), and any deferral equates to a lien on the home until it is sold and/or conveyed (Taylor, 2010). In contrast to Washington’s property tax relief programs, the majority of other states (40 as of 2009) utilize Homestead Exemptions (an automatic discounting of the portion of the property value which is taxed), while some also offer low income credits to a much broader spectrum of their population than Washington – i.e., all low income homeowners. An extreme example is Illinois, which offers renters a credit based on a calculated portion of rent which is presumed to be passed on by landlords to tenants (ITEP, 2005, 2009). Such programs help offset the regressive feature of the property tax: as the ratio of the one’s home value to one’s income goes down when income rises, so does the relative amount of property tax paid. Accordingly, Washington’s relatively limited property tax relief programs help explain why the State’s property tax is more regressive overall than the national average – the State’s lowest income quintile pays four times the proportion of its income in property taxes as do the wealthiest 1%, compared to the nationwide average of 2.5 (see Figure 1).
  25. 25. A More Equitable Tax System for Washington is Worth the Struggle - 25 Tax Reform Alternatives Effective policy alternatives are often multifaceted and overlapping, rather than in pure opposition (Bardach, 2009). Accordingly, the following identifies three policy alternatives offering varying approaches toward equity for Washington’s tax system. Additionally, due to intense public and political debate on taxation, as well as the existing constitutionality questions on some types of tax reforms (e.g., a graduated income tax), the following alternatives have been crafted on a continuum from “No Action” toward moderate and comprehensive changes. Each alternative is then evaluated against the same weighted criteria, as further described in the subsequent section. Alternative A: No Action The “No Action” alternative provides an essential reference point from which to evaluate other alternatives which propose varying degrees of change (Bardach, 2009). Here, the no action alternative maintains the current state tax system and, thus, leads to continued concerns about its extreme regressivity, incompatibility with its neighboring states (namely, Oregon) and inadequacy for a 21st century economy. Furthermore, no action continues to operate on two unwise assumptions: first, citizens will continue to tolerate sales tax increases, as they are inevitable under Washington’s current unbalanced tax regime, despite the overall sales tax rate (state plus local and special rates) in some jurisdictions (e.g., Seattle) is approaching 10%; second, the B&O tax will persist as the state’s second largest tax source, despite its inherent favoritism of large, profitable corporations at the expense of small businesses (including start- ups), the latter which are the main driver of job growth in the current economy and the chief critics of this tax. Alternative B: Initiative 1098 I-1098 proposes a two-tiered income tax: a 5% tax rate on individuals with incomes above $200,000 (or couples above $400,000), and a minimum rate of $15,000 for individuals (or $30,000 for couples) plus 9% rate for individuals with incomes above $500,000 (or couples above $1,000,000). The income tax is estimated to apply to only 3% of Washington households. Of the projected $1 billion in net revenues, 70%
  26. 26. A More Equitable Tax System for Washington is Worth the Struggle - 26 is dedicated to the Education Legacy Trust Fund for reduction of class sizes, development of learning opportunities, prekindergarten, and expansion of access to higher education, while the remaining 30% will fund the Health Trust Account for the Basic Health Plan, public health services, and long-term care services for seniors and people with disabilities. Additionally, the exemption level of the regressive B&O tax is increased to $4,800, which will exempt 80% of businesses from the tax – about 375,000 small businesses; and the state portion of the property tax is reduced by 20%, which is estimated to save the average King County homeowner $180 per year (WEHCTR, 2010). Figure 9 below summarizes I-1098’s annual revenue gains and losses for the State: Figure 9: Estimated Revenue Effects of Alternative B (Initiative 1098) Major Aspects Annual Revenue Change • Income Tax = 5% over $200,000 singles/$400,000 couples; or $1,687 million 9% over $500,000 singles/$1 million couples (married and domestic partners) • B&O Tax Credit: raise from $420 to $4,800 per year ($261 million) • Property Tax: cut 1/5 of state levy (local levies not affected) ($357 million) Estimated net new annual state revenue: $1,069 million Note. From Initiative 1098: The Right Tax Reform for Stronger Schools and Health Care, by Economic Opportunity Institute. Copyright 2010 by the author. Moreover, I-1098’s sponsor, WEHCTR, includes constitutional experts like Hugh Spitzer, who are certain that I-1098 will withstand legal challenges and be upheld as constitutional (WEHCTR, 2010). Also, WEHCTR designed I-1098 with key safeguards: a public vote is required for any income tax threshold or rate change, and regular audits and full public disclosure of spending are mandatory. Alternative C: A More Comprehensive Approach While I-1098 offers many attractive changes to the State’s tax structure which are likely to result in greater equity, it does not address all of the key ingredients of more equitable tax systems, as previously discussed. Specifically, I-1098 does not address the most regressive element of the tax system (the sales tax) and does not target the 20% reduction in the state property tax toward middle or lower-income
  27. 27. A More Equitable Tax System for Washington is Worth the Struggle - 27 homeowners. Accordingly, Alternative C provides a more comprehensive approach, applying two of I-1098’s provisions (the income tax and B&O tax credit) plus three additional features: 1. Funding for the Working Families Tax Rebate (WFTR) program at 30% of the federal EITC, comparable to the levels at which New York and Vermont fund their programs (Williams et al., 2009). Applying the Washington Budget & Policy Center’s estimate that funding the WFTR at 10% of the federal EITC would cost $60 million per year, funding the WFTR at three times the level (30%) would cost three times as much – $180 million (Schulz & Chapman, 2009). 2. Lowering the state portion of the sales tax by one percentage point – from 6.5% to 5.5% – would effectively reduce sales tax revenues by about 15%, costing approximately $1 billion in fiscal year 2009 dollars (Taylor, 2010). 3. Replacing I-1098’s 20% state property tax reduction with an expansion of current “circuit breaker” property tax relief programs, providing broader relief to the lowest income households. This would be funded at $246 million, more than doubling the total relief provided to property taxpayers in 2009, resulting in an estimated net revenue change of $0 – shown below in Figure 10: Figure 10: Estimated Revenue Effects of Alternative C Major Aspects Annual Revenue Change • Income Tax = 5% over $200,000 singles/$400,000 couples; or $1,687 million 9% over $500,000 singles/$1 million couples (married and domestic partners) • B&O Tax Credit: raise from $420 to $4,800 per year ($261 million) • Fund WFTR at 30% of federal EITC ($180 million) • Lower state portion of sales tax from 6.5% to 5.5% ($1,000 million) • Expand current “circuit breaker” property tax relief programs ($246 million) Estimated net new annual state revenue: net state $0 (revenue neutral) Critically, Alternative C’s revenue-neutral feature distinguishes it from Alternative B, helping it avoid the criticism that Alternative B has already received by the anti-tax contingent (namely, Tim Eyman) for asking taxpayers for more money (Gates, 2010).
  28. 28. A More Equitable Tax System for Washington is Worth the Struggle - 28 Evaluative Criteria The alternatives introduced in the previous section indicate Washington has several options for reforming its tax system into a much more equitable one. Each alternative is analyzed using the following weighted evaluative criteria, listed from greatest to least importance: equity, political acceptability, adequacy, and ease of administration. Equity is given the highest priority (and a corresponding weight of 40%), as this paper’s objective is a more equitable tax system for Washington. Both political acceptability and adequacy are next in importance (hence, weighted at 25% each) because each is a similarly important limiting factor. For example, the State has not been able to muster enough support to pass an income tax since 1932 (either in the Legislature or among voters). Also, no tax system reform measure will be considered if it cannot generate at least the same level of revenue growth as the present system. In other words, reducing long-term revenue growth makes no economic sense. Finally, ease of administration is a minor, but necessary, consideration. Any significant changes to the tax system (e.g., implementing an income tax of some sort) are likely to necessitate some amount of new personnel and resources – namely, additional DOR personnel. However, almost every state with a personal income tax bases such a tax on the federal system, which is a much more efficient way of administering such a tax. Therefore, ease of administration is weighted at 10%. The analysis includes a discussion of each alternative’s advantages and disadvantages, and each alternative is numerically scored by applying the weighted criteria. The highest scoring alternative(s) which results is the recommended option. However, crucial to the alternatives analysis is the recognition of numerous tradeoffs: for one, greater equity can come at the cost of political acceptability. More specifically, adopting an income tax improves both equity and (in Washington’s case) adequacy because the result is a more balanced tax system, but faces significant political opposition (Senator Joe McDermott, personal communication, February 26, 2010; Marilyn Watkins, personal communication, March 9, 2010; WSTSSC, 2002). Therefore, while no alternative is a perfect choice, the weighted criteria used to evaluate and compare each alternative provide an analysis which attempts to sufficiently differentiate the three alternatives. The weighted criteria analysis is summarized in Figure 11 on the following page.
  29. 29. A More Equitable Tax System for Washington is Worth the Struggle - 29 Figure 11: Analysis of Tax System Alternatives using Weighted Evaluative Criteria Equity: The higher the score, the more progressive the resulting overall tax system. 5 = Highly Progressive; 4 = Progressive; 3 = Proportional (equal tax burdens among economic strata); 2 = Regressive; 1 = Highly Regressive Political Acceptability: 5 = Very Strong (likely to pass in the next legislative session, or as an initiative measure); 4 = Strong; 3 = Moderate; 2 = Weak; 1 = Very Weak (unlikely to garnish any support beyond isolated idealism) Adequacy: 5 = Long-term tax revenues are likely to grow faster than demand; 4 = Long-term revenues are likely to meet or exceed demand; 3 = Long-term tax revenues should equal demand; 2 = Demand will outpace long-term tax revenue growth; 1 = economically unviable Ease of Administration: This accounts for the amount of new personnel (e.g., tax compliance staff at the DOR) and other resources needed which would be reported in a typical Office of Financial Management (OFM) fiscal note. The higher the score, the lower the administrative burden. 5 = Very easy: no new resources needed; 4 = Easy; 3 = Moderate; 2 = Difficult; 1 = Too difficult to justify cost RAW SCORES* Equity Political Adequacy Ease of Acceptability Administration Alternative A: 1 4 2 5 No Action Discussion: Washington’s tax Discussion: Politically Discussion: Adequacy Discussion: No action equals structure remains the most acceptable. Governor is weary problems continue to greater administrative ease, as regressive nationally. Economic of tax system changes, and the exacerbate: an eroding sales revenue collection costs are hardships continue to plague Republican minorities in the tax base and sales tax evasion simpler to calculate under this the lowest income households. House and Senate are waiting to via increased electronic scenario than either Alternative Small businesses generate seize vulnerable seats held by commerce and cross-boarder B or C. fewer jobs and, thus, add less to Democrats who support tax shopping in Oregon. statewide economic growth. reform. Alternative B: 4 3 4 4 Initiative 1098 Discussion: Significantly Discussion: Moderate political Discussion: Improves Discussion: Administratively reduces the regressivity of the acceptability. Despite the adequacy by introducing a feasible, as the DOR can tax system by adopting an State’s history of unsuccessful limited income tax, which borrow from the Internal income tax which only applies income tax adoption, I-1098 tends to track overall economic Revenue Service for to those with the greatest ability only targets the richest growth than other taxes. coordinating and enforcing to pay. The large B&O tax Washingtonians. Also, most However, some adequacy is income tax collection. Such is credit increase levels the homeowners and small sacrificed by the reduction in the practice of the majority of playing field significantly for businesses are likely to support the State Property tax (the states with an income tax. small businesses. this alternative. most stable of all major taxes). Alternative C: 5 2 4 3 A More Comprehensive Approach Discussion: Adds Alternative Discussion: Low political Discussion: Greater overall Discussion: Administratively B’s progressive elements to the acceptability. While I-1098 adequacy: the addition of a feasible, as collecting and tax system. Additionally, only targets the richest limited income tax, which enforcing income tax payments, provides sizable funding of the Washingtonians, taxpayers are tends to track overall economic as well as managing EITC WFTC and property tax circuit much more tolerant of the sales growth better than other taxes, payments simplified by breaker programs, as well as tax than the property tax or plus a sales tax rate reduction modeling the IRS, which the reduces the sales tax (the most possibility of an income tax. equals a much more balanced majority of states with an regressive element), to further The Legislature recently relied system overall. However, the income tax and EITC program assist the lowest income on sales tax expansions and targeted property tax relief do so. However, would Washingtonians. The result is a selective increases to balance likely means some adequacy is necessitate more resources to much more equitable tax the budget. forfeited, as the property tax is implement than Alternative B. system. the most stable type of tax. *Each alternative’s raw score is multiplied by the importance weight for each criterion, then summed for the Total Weighted Score (as shown below): WEIGHTED Equity Political Adequacy Ease of Total Weighted SCORES (40%) Acceptability (25%) Administration Score (25%) (10%) Alternative A 1 x .4 = 0.4 4 x .25 = 1.0 2 x .25 = 0.5 5 x .1 = 0.5 2.4 Alternative B 4 x .4 = 1.6 3 x .25 = 0.75 4 x .25 = 1.0 4 x .1 = 0.4 3.75 Alternative C 5 x .4 = 2.0 2 x .25 = 0.5 4 x .25 = 1.0 3 x .1 = 0.3 3.8
  30. 30. A More Equitable Tax System for Washington is Worth the Struggle - 30 Recommendation Among the three alternatives identified, Alternative C (Total Weighed Score: 3.8) edges out Alternative B (Total Weighted Score: 3.75) as the best course of action. However, these two alternatives’ scores are nearly identical, so both merit strong recommendation. The potential outcomes of both alternatives are far better under the evaluative criteria than the “no action” alternative. Also, both are realistic next steps for Washington to take, given the historic difficulties the State has faced in reforming its tax system, and can pave the way for more progressive changes in the future. Conversely, taking no action to address Washington’s inequitable tax system (i.e., Alternative A) is an undesirable option. Furthermore, it is acknowledged that the results of the analysis could change if the criteria are weighted differently. For example, if the importance weights for equity and ease of administration were reversed (and all raw scores kept the same), Alternative B would rate highest. Thus, an analyst’s particular values will affect the evaluative criteria chosen, the weights assigned to each criterion and, ultimately, the total weighted scores. Conclusion As the global economy advances, the extreme regressivity of Washington’s tax system increasingly threatens the State’s capacity to ensure a high quality of life for all its citizens. Fortunately, the problems of Washington’s unique tax system are common among many states. Accordingly, public policy research and advocacy abound in this area. The Gates Commission report is an excellent starting point because of its relevance, thoroughness of research, and breadth of application. Nevertheless, while elected officials have many of the answers within reach, politics must be put aside so that tax system reform for greater equity can finally become reality in Washington. The economic benefits of doing so are many, and will allow the state to become more competitive during the remainder of the 21st century. In addition, further research should be undertaken on comparing Washington’s tax system to those of all other states, enhancing awareness of both the problems with Washington’s tax system as well as which other states’ tax systems offer the most applicable solutions for our State. Therefore, a more equitable tax system for Washington is worth the struggle.
  31. 31. A More Equitable Tax System for Washington is Worth the Struggle - 31 Figure 12: A Selective Comparison of 2007 Tax Distributions by State Note. From Who Pays? A Distributional Analysis of Tax Systems in all 50 States. (3rd ed.), by Davis et al. Copyright 2009 by the Institute on Taxation & Economic Policy.
  32. 32. A More Equitable Tax System for Washington is Worth the Struggle - 32 Figure 12: Continued
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