Reforming Our
Table of Contents
History of Our Economy and Tax System
History
of Our Economy – June 6, 2008
Inequality
of Income and Wealth Have Been Increasing* – May 2,
2008
Our Tax
System’s History – May 2, 2008, June 6, 2008
Our Tax
System Has Become More Regressive – May 2, 2008
History
of Attempts to Adopt a State Income Tax – June 20, 2008
Our Present Tax and Budget
System
Our
Our
Our
Business and Occupations Tax – May 23, 2008
Tax Breaks for
Our Tax System is Unfair – April
11, 2008
Our Tax
System is the Most Regressive of Our 50 States – May 2, 2008
Our Tax
System Has Become Less Productive – May 2, 2008
Our Tax System
Doesn’t Produce Enough Revenue – May 16, 2008
Our Tax
System is Unstable
Recessions
Increase Our Unfair Taxation – May 2, 2008
Securing
Support for Reforming Our Tax System
– April 25, 2008
What is a
Good Tax System?* May 16, 2008
Why
Progressive Taxation – June 13, 2008
Alternatives
for Improving Our Tax System
Taxing
high incomes to improve public services, reduce regressive taxes – July 4,
2008
Needed
Reforms to Our Tax System – April
18, 2008
Obstacles to Reforming Our Tax
System
Denial
that Reform is Necessary – May 9, 2008
Distrust
of Reforms and Reformers
Political
Risk
Inaction
Strategies for Reforming Our
Tax System
Educate
Our Voters Before Attempting Political Action
Our tax system is (1) unfair, (2) doesn’t produce enough revenue, and (3) responds poorly to economic recession. Low income people are unfairly taxed too
much. High income people don’t pay to
maintain and improve sustain our physical and social infrastructure which
enabled their incomes. We don’t obtain enough revenue to support our
aspirations for equal access to quality public services. During recessions,
taxes produce less revenue and taxes often become even more unfair.
We can attempt to correct our
present tax system by raising or lowering any of our existing regressive
taxes. But this doesn’t work. If we raise any of them to produce more revenue,
we make them more unfair. If we lower
any of them to make them to make them more fair, we make them less
productive. And either way, they remain
unstable.
We deny these defects of our system. Perhaps sometimes accepting one, while
rejecting the others. We especially
avoid publicly discussing together these three flaws in our tax system. Following our conventional wisdom, we assume
that major changes can’t be made.
The only way we can correct our tax system is to substitute a
progressive income tax for some of our existing regressive taxes. This will make our tax system more
productive, more stable and more fair, lowering taxes for a great majority of
our people. Only high income people will
pay more taxes, as they should to repay the benefits they have received from
our social and economic heritage. We
need a progressive income tax.
Most of our
Our Tax
System, Past and Present
History of Our
Our Native Americans
lived near the
In the 1850s, Americans
came to provide logs and lumber for the
During the late 1800s,
Our
Our economic success is
creating new challenges. Our natural
environment is threatened. Due to our
inadequate tax system, our physical and social infrastructure has been unable
to keep up with demands. Unless we can
better manage our growth, we may become choked by it, losing many of our
economic advantages to other regions. For more.
Inequality of Income and Wealth
Have Been Increasing
From the late 1980s to the mid-2000s, the average income of our
poorest families increased by 5.5%, that of middle fifth of families by 11.8%
and that of top fifth by 41.3%. The
wealthiest fifth of families have average incomes 6.9 times as large as the
poorest fifth. This growth in income
equality is the 10th largest in the nation. The very richest families (top 5%) have
average incomes 11.2 times as large as the poorest one fifth.
Despite the recent years of economic prosperity, the living
standards of lower-income families stagnated or even declined. From the late
1990s to the mid-2000s, a period of economic growth, the incomes of poor
families in
The income of our wealthiest families has also been growing at a
faster rate than that of our average income families. The ratio has increased from 2 to 2.5 since
the late 1980s. This growth in income
inequality is the 9th largest in the nation.
The gap between our richest and poorest families is now the 27th
largest in the
Several factors produced large and growing income gaps in most
states:
• Growth in wage inequality.
• Expansion of investment income.
• Government policies.
States Can Mitigate the Growth in Inequality
• Raise, and index, the minimum wage.
• Improve the unemployment insurance system.
• Make state tax systems more progressive.
• Strengthen the social safety net.
History
of Our
Based on
Excerpts from HistoryLink.org
Early Tax System Relied on Property Taxes
The 1911 Legislature
was notable for passing a wide-ranging package of progressive legislation that
included the state constitutional amendments providing for citizen initiatives,
referenda, and recalls of elected officials; workmen’s compensation; and an
eight-hour work day for women. In 1912, the Legislature passed an inheritance
tax that ranged from 1 to 12 percent. Motor vehicles were appearing, and in
1915 an auto license (excise) tax was added. Gasoline was first taxed in 1921,
at one cent a gallon. Property taxes
continued to rise, however -- nearly doubling from 1910 to 1920 -- as the
growing population and economy required more and better schools, roads,
hospitals, and civic infrastructure.
Sales Taxes Added to Tax System in 1935
The Revenue Act of
1935 was the most comprehensive tax overhaul in the state’s history. “With a
few additions and some tweaking, this system remains today – a tax structure
suited well enough for an economy based on commercial agriculture,
manufacturing, resource extraction, and locally based commerce” (Gates Report). With the act, the state’s principal revenue
sources shifted from property taxes to excise taxes -- taxes measured by a
transaction, such as the selling price of a car. In fiscal year 2003, taxes
authorized in the Revenue Act of 1935 generated 75 percent of all tax receipts
supporting the general fund, the state Department of Revenue reports.
In 1940, voters
approved a constitutional amendment allowing voters to pass extra levies with a
supermajority of 60 percent. Such “excess levies” became the primary support
for school construction and operations and backing public bonds for parks,
roads, and other local and state improvements. (“Pay as you go” levies, which
do not create public debt through bonds, require only a simple majority.)
In 1944,
Tax Breaks
Tax breaks in recent
years for various businesses are similarly justified by the promise of more
jobs or more business activity, but the amount of taxes avoided due to some of
these subsidies -- and their accelerating use -- has become a more
controversial aspect of the state’s tax system in recent years. A state Department of Revenue report
estimated the amount avoided by taxpayers in the 1999-2001 biennium at $46
billion. For the 2003-2005 biennium it will be $64.7 billion, but about $13
billion could be recovered if questionable exemptions were repealed, said Don
Taylor, revenue analysis manager at the state Department of Revenue. Exemptions have been patched on until there
are now more than 400 of them, including: commercial vessels, sales to
Tax and other benefits
accorded The Boeing Company in late 2003 to build its 7E7 Dreamliner in
Present Tax Sources of Revenue
The state’s 2003 tax
revenue came from sales/use taxes (48.6 percent); B&O tax (15.7 percent);
state property tax (12.1 percent); selective sales taxes (11.4 percent); real
estate excise tax (4.2 percent); other taxes and receipts (8 percent). For
comparison with other states. For
more about property taxes.
In a report issued on
August 18, 2004, the state Department of Revenue said state and local tax
burdens in
Many Failed Recommendations To Include an Income Tax
During all this
history, insufficient revenues and claims of unfairness have led to frequent
studies of our tax system. Nine
governor’s tax advisory councils have found the system “flawed” (Gates Report),
and most recommended some form of income tax, but no significant reforms ever
emerged from their conclusions. The many
attempts to include a personal or corporate income tax or both have all failed
due to rejection by our voters, failure to pass one or the other house of our
legislature, veto by our governor, or court order. For
more.
Our Tax System Has Become More Regressive – April 18, May 2, 2008
The CBP reports that “In fiscal year 1995, state and local taxes as
a share of personal income was 11.7 percent in
At the state level, it is estimated that the 1990s
tax cuts cost the state eight percent of its revenue. During the following
economic downturn, the state was faced with cutting important programs and a
downgraded bond rating.”
Tax rates were not cut in the 1990s. See a history of our sales tax rates. Incomes of high income people increased. As a result, tax revenues became a smaller
percentage of our economy. This
threatens our state’s ability to fund important public priorities including
education, transportation, health care, and preparation for another economic
slowdown.
While our
overall taxes are low compared to other states, our sales taxes are high: (4.8 percent of personal income). The taxpayers in
only one other state (
Attempts to Adopt a State Income Tax – June 20, 2008
The following
is based on HistoryLink.org essay 5735
Washington State Taxation
1921
Governor’s commission endorsed an income tax, but not yet
1929
Income tax passed the senate, but died in House rules Committee
1930
Governor’s commission recommended personal and corporate income taxes
1931
Both houses passed personal and corporate income tax, vetoed by Governor
1932
Personal and Corporate Income Tax initiative passed, but ruled unconstitutional
1934
Legislature proposed a constitutional amendment for an income tax, rejected by
voters
1935
A personal and corporate income tax passed, but was declared unconstitutional
1937
Voters reject an income tax
1941
Voters reject an income tax
1950
Corporate income tax passes, but found unconstitutional
1951
Personal income tax bill didn’t pass
1966
Governor’s Tax Advisory Council recommends personal and corporate income tax
1968,
Governor’s Tax Advisory Council recommends personal and corporate income tax
1969
Legislature passed income tax constitutional amendment, rejected by voters 2 –
1
1971
Governor’s Tax Advisory Council recommends personal and corporate income tax
1973
voters defeat income tax amendment by 3 to 1
1982
Governor’s Tax Advisory Council recommends personal and corporate income tax
1988
Governor’s Committee on
1993
Governor Lowry was excoriated for even suggesting feasibility of an income tax
2002
Washington Tax Structure Study Committee recommended 3.8% flat income tax.
2004
Democratic candidate for governor Ron Sims called for an income tax. His candidacy failed.
Frequent studies have occurred and virtually every
one has recommended the adoption of an income tax. It has been passed by initiative, by one or
both legislative houses, and by the government,
but on the few cases it has become law, the law has been overturned by
our state supreme court. The need is there,
but so far the means have been lacking.
Our Present
Tax and Budget System
Our
Excerpts from Washington State’s
Budget Process
The
Biennial Budget Cycle
OFM Issues Budget
Instructions
Ongoing Agency Strategic Planning
May 2008 Office of Financial Management Issues Budget Instruction
August 2008 Agencies Submit Budget Requests
Fall 2008 Office of Financial
Management Review and Governor’s Decisions
December 2008 Governor Proposes Budget to Legislature
January 2009 Legislature
Convenes (2nd Monday of January)
April/May 2009 Legislature Passes Budget
May/June 2009 Governor Signs Budget
July 1, 2009 Biennial Budget Takes Effect
Ongoing Performance Measure
Tracking
Roles and
Responsibilities in the Budget Process
State agencies are responsible for developing budget estimates and submitting budget
proposals to the Governor. Once the budget is enacted by the Legislature,
agencies implement approved policies and programs within the budgetary limits
imposed by legislation. Under
The Governor recommends a budget to the
Legislature consistent with executive policy priorities. Appropriation bills,
like other legislation, are subject to gubernatorial veto authority and may be
rejected in part or in their entirety within a defined number of days after
legislative passage. After a budget is enacted, the Governor’s general
administrative duties include monitoring agency expenditures and helping to achieve
legislative policy directives.
The Office of Financial Management (OFM)
coordinates the submittal of agency budget requests and prepares the Governor’s
budget recommendation to the Legislature. Budget staff from OFM work closely
with state agencies to explain and justify planned expenditures. Analysts
evaluate all budget requests for consistency with executive policy priorities
and to ensure that proposed expenditures match fiscal constraints. OFM is also
responsible for maintaining the state’s central accounting system and
developing certain population and demographic forecasts.
Through appropriations bills, the Washington
State Legislature mandates the amount of money each state agency can spend
and, in varying degrees of detail, directs agencies where and how to spend it.
The House and Senate employ staff analysts to help
review and evaluate the state budget, and to prepare appropriation bills. As
with other legislation, if the two houses cannot agree on a budget or revenue
proposal to implement the budget, a conference committee of legislative representatives
may be convened to reconcile the differences.
The Economic and Revenue Forecast Council is
composed of representatives from both the legislative and executive branches.
Each fiscal quarter, the Council adopts an official forecast of General
Fund-State (GF-S) revenues for the current and (at some point) the ensuing
biennia. These forecasts, together with any reserves left over from previous
biennia, determine the financial resources available to support estimated
expenditures.
The Caseload Forecast Council was created by
the 1997 Legislature and began operations in the 1997-99 Biennium. The Council
consists of two members appointed by the Governor and four appointed by the
legislative political caucuses. The Council prepares official caseload
forecasts for state entitlement programs, including public schools, long-term
care, medical assistance, foster care, adoption support, adult and juvenile
offender institutions, and others.
The State Expenditure Limit Committee,
consisting of legislators and representatives of the Governor and Attorney
General, was established in 2000 to determine the state General Fund
expenditure limit created by Initiative 601.
Budget Development Approach
In general,
For the 2003-05 Biennium budget proposal,
More information on the Priorities of Government is
available on our
Website.
Budget and Accounting Structure
State government is organized into 124 agencies,
boards, and commissions representing a wide range of services. While many state
agencies report directly to the Governor, others are managed by statewide
elected officials or independent boards appointed by the Governor. Most
agencies receive their expenditure authority from legislative appropriations
that impose a legal limit on operating and capital expenditures. Appropriations
are authorized for a single account, although individual agencies frequently
receive appropriations from more than one account.
A few agencies are "nonappropriated,"
meaning that they operate from an account that is legally exempt from
appropriation. Expenditures by these agencies are usually monitored through a
biennial allotment plan. There is no dollar limit as long as expenditures
remain within available revenues and are consistent with the statutory purpose
of the agency.
The state’s budget and accounting system includes
more than 400 discrete accounts, which operate much like individual bank
accounts with specific sources of revenue. The largest single account is the
state General Fund. State collections of retail sales, business, property, and
other taxes are deposited into this account. Expenditures from the state
General Fund can be made for any authorized state activity subject to
legislative appropriation limits.
Other accounts are less flexible. Certain revenues
(for example, the motor vehicle fuel tax or hunting license fees) are deposited
into accounts that can only be spent for the purpose established in state law.
In budget terms, these are referred to as "dedicated accounts."
Budget
Drivers
In addition to new policies adopted by the
Governor, Legislature, or federal government, the state budget can also be
significantly influenced by demographic and economic factors. Differences in
these "budget drivers" affect the cost of services or the number of
persons requiring services. An example of the demographic connection appears in
K-12 education, where expenditures for the state’s constitutionally mandated
responsibilities for basic education are closely tied to the number of school-age
children in the state. Higher-than-average inflationary costs – such as those
for medical expenses – also affect expenditures in the state budget.
Spending
Limits in the State Budget
Major
Provisions of Initiative 601 (initially enacted in 1993, statute modified in
2005):
Fiscal Growth Factors
and General Fund-State Expenditure Limit
·
Establishes a
"fiscal growth factor" based on a ten-year average growth in personal
income.
·
Mandates an
annual expenditure limit on the aggregate of the General Fund-State and six
related accounts (Public Safety and Education Account, Equal Justice Account,
Water Quality Account, Violence Reduction and Drug Enforcement Account, Student
Achievement Account, and Health Services Account) to be calculated by the State
Expenditure Limit Committee each November, based on the fiscal growth factors
applied to previous year’s limit.
·
Requires the
Governor’s budget to be consistent with the expenditure limit, and restricts
annual expenditures from General Fund-State and related accounts to the limit.
·
Allows
temporary expenditures above the limit after declaration of an emergency and a
2/3 vote of the Legislature for a law signed by the Governor.
·
The
Emergency Reserve Account, created by Initiative 601, is repealed as of July 1,
2008, and replaced by theBudget Stabilization Account. Any fund balance
remaining in the Emergency Reserve Fund is transferred to the Budget
Stabilization Account.
Taxes and Fees
·
Requires
a majority vote of the Legislature to raise state revenues or make a
revenue-neutral tax shift. (2005 legislation)
·
Additionally
requires voter approval if the state revenue measure results in expenditures
above the expenditure limit.
·
Limits state
fee increases to the fiscal growth factor unless legislative approval is
received.
The Debt
Limit
There are
two debt limits imposed on the state’s ability to borrow funds to finance
government programs in the capital budget: the constitutional limit of 9
percent of general state revenues; and a more restrictive statutory limit of 7
percent of general state revenues. The state cannot sell general obligation
bonds if the debt service from that sale will cause total debt service to
exceed 7 percent of the average of general state revenues for the preceding
three fiscal years.
The size of bonded capital
programs affordable under the debt limit can change depending on:
·
The
amount of new projects in the capital budget,
·
Changes
in revenue forecasts that increase or decrease state revenues,
·
Changes
in the structure of borrowing (e.g., length of term on bonds), and/or
·
Changes in the interest rates at which bonds are sold.
The Budget Stabilization Account
ESSJR 8206,
“Rainy Day Fund,” passed by the voters in November 2007, established the Budget
Stabilization Account (BSA), so known as the Rainy Day Fund.
al
·
1%
of general state revenues must be transferred annually to the BSA.
·
3/5
vote required to appropriate from BSA.
·
Exceptions
(constitutional majority vote):
°
Employment
growth < 1%
°
State
of emergency due to catastrophic event.
·
Takes
effect July 1, 2008 (FY 09).
Having no individual or
corporate income tax,
Sales tax rates include
a .065 state rate plus a local rate which varies from .010 to .025 depending
upon location. The total thus varies
from .075 to .090. For local rates at specific locations.
Property Tax Information
About 30
percent of total state and local taxes consist of property taxes. Property taxes continue to be the most
important revenue source for public schools, fire protection, libraries, and
parks and recreation. Various taxing
districts, including the state and local jurisdictions, levy property
tax. The individual taxing districts determine the amount of money needed.
Property taxes are
imposed upon the value of real and personal property. The value of real property is assessed by the
county assessor which by state law should equal 100% of market value. Based upon the value of the property within
each district, the county assessor calculates the
tax rate necessary to raise the money required by that district. The
amount of property tax due on an individual property is based on the
combination of tax rates and the assessed value of the property. For more.
Excise Tax Information
Besides
sales and property taxes, a wide variety of excise taxes are imposed upon
various services, goods and harms to the public. Many excise tax revenues are dedicated to
spending for certain purposes. For more.
Our
An inheritance tax is an assessment made on the portion of an estate received
by an individual. It differs from an estate tax which is a tax levied on an
entire estate before it is distributed to individuals. It is strictly a state
tax. Only eleven states still collect an
inheritance tax. They are:
Washington Has an Estate Tax
As for estate taxes, the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) phases out
the federal estate tax that culminates in full repeal in 2010. On a much faster
track, the legislation repeals over four years -- 2002 through 2005 -- the
federal estate tax credit to which state estate taxes are tied. In most states,
estate and inheritance taxes are designed in such a way that states face either
a full or partial loss of estate tax revenues as this credit is phased out.
States can avert this loss of revenue by "decoupling." Decoupling
means protecting the relevant parts of their tax code from the changes in the
federal tax code, in most cases by remaining linked to federal law as it
existed prior to the change.
Seventeen
states and the
Of
these, 12 states acted to decouple from the federal changes.
In
addition, five states and the
On February
3, 2005, Washington State Supreme Court unanimously held that
In response
to Hemphill, the Washington State Senate on April 19 and the Washington House
on April 22, 20, by narrow majorities, passed a stand-alone state estate tax
with rates ranging from 10% to 19%, a $1.5 million exemption in 2005 and $2
million thereafter, and a deduction for farms for which a Sec. 2032A election
could have been taken (regardless of whether the election is made). The
Governor signed the legislation. For more.
In the fall of 2006, anti-tax organizations in
In reality, the tax is only paid on 200 to 250
estates a year, those worth over $2 million ($4 million for a couple). More
than 99% of the state's taxpayers are exempt. Revenue from the tax is dedicated
to the Education Legacy Trust Account, used to reduce class size in K-12
education statewide and provide scholarships and additional financial aid to
nearly 18,000 low- and moderate-income college students.
In the end, the repeal effort was roundly defeated
by a margin of 62-38. Majorities in all but 3 of the state's 39 counties, even
in conservative western and southeastern
The estate tax applies to about 215
estates per year, raising about $100 million for education. Taxes range from 10
to 19 percent of the amount over the $2 million threshold. Family farms and
timberlands are exempt. For more.
Our Business and Occupations Tax – May 23, 2008
Adapted from a report by the Institute on Taxation and Economic Policy (ITEP)
Our
Take, for instance, the production and the purchase of a
dining room chair under each of these two types of taxes. Under a retail sales
tax (assuming that exemptions are in place for business purchases for use in
production), only the purchase of the chair by the consumer is taxed, with the
amount of sales tax explicitly stated on the consumer’s sales slip. Under a
GRT, the lumber that forms the basis of the chair, the machines that shape that
lumber into legs, back and seat, the sale of the assembled chair from
manufacturer to wholesaler, the sale of that chair from wholesaler to retailer,
and the sale of that chair from retailer to consumer are all subject to
taxation. These multiple impositions of the
GRT are incorporated either partially or entirely into
the final purchase price of the chair, usually without any explanation on the
consumer’s bill of sale.
In both theory and practice, the statutory tax rates
associated with a GRT are relatively low. For example,
Advantages of Broad-Based Gross Receipts Taxes
Broad-based gross receipts taxes may enjoy some
advantages over other types of taxes:
·
GRTs can expand the base
of economic activity subject to taxation. Because they are not based on income, GRTs may not be as
vulnerable to the same sort of avoidance schemes that have eroded corporate
income tax bases. GRTs may also be able to cover some out-of-state businesses
and some in-state sectors that corporate income taxes can not reach. GRTs are not
impervious to manipulation, though – experience from
·
GRTs may be a
comparatively stable source of revenue. Given their relatively broad economic bases, GRTs may
yield revenue streams that vary less from year to year than taxes predicated on
income, which can fluctuate considerably over time.
Of note, policymakers can realize the advantages
commonly associated with GRTs by using them as "backstops" within
their existing corporate income taxes; that is, GRTs could serve as alternative
minimum taxes, with businesses paying the higher of their GRT or corporate income
tax liabilities.
Disadvantages of Broad-Based Gross Receipts Taxes
Broad-based gross receipts taxes suffer from a number of
major shortcomings:
·
GRTs hit low-income
taxpayers the hardest. Like
any sales tax, GRTs are regressive, as poorer taxpayers often must spend
everything they earn just to get by, whereas wealthier taxpayers only need to
devote a fraction of their incomes to consumption.
·
GRTs are not sensitive
to a business’s ability to pay. Businesses that fail to turn a profit would still face a GRT;
businesses that are engaged in high-volume, low-profit-margin activities would
be adversely affected as well. Conversely, businesses with very high profit
margins could pay lower taxes under a GRT than under a corporate income tax.
·
GRTs lead to severe
pyramiding problems. Since
a GRT applies not just to retail sales but to all stages of the production
process, it may be levied on itself multiple times. For instance, the GRT paid
on the raw materials going into a particular product will later be subject to
GRT when the finished product is sold to a wholesaler. One examination of
·
GRTs tend to be hidden
from taxpayers. As
GRTs are generally imbedded, to some degree, in the price of goods and services
that consumers buy, they are far less visible than other forms of taxation.
This lack of transparency may lead taxpayers to focus greater attention – and
ire – on other forms of taxation, with predictable results.
·
GRTs may distort
economic decision-making. Given
the pyramiding problems associated with GRTs, they hold the potential to
discriminate against in-state suppliers (since purchasing from out-of-state
suppliers may allow businesses to avoid a GRT) or to create artificial
incentives for vertical integration (as integration would reduce the number of
times in a given production process that a GRT would be imposed).”
Like our sales tax, our business and
occupation tax is regressive, falling heaviest upon low income consumers who
spend the highest proportion of their incomes on products and services offered
by businesses which pay and pass along the tax.
It is also unfair to businesses, since businesses with high profits
compared to gross sales, pay proportionally less than businesses with low
profits compared to gross sales. Startups and other low profit businesses must
pay taxes on their sales, hampering their ability to become profitable. Since it is levied on sales transactions, our
business and occupation tax also encourages vertical integration, in which the
production process involves fewer sales transactions and less pyramided
taxation. Small businesses are affected
negatively more than large ones.
To make our business taxes more fair
for consumers and to avoid handicapping new and small businesses, we must
eliminate our business and occupation tax, substituting a corporate income
tax. Unfortunately, this requires the
difficulty of legislating a constitutional amendment. Such legislation would be opposed by wealthy
and strong corporations, which benefit from our present unfair tax system.
Such businesses as Alaska Airlines,
Amazon.com, Boeing, Costco, Microsoft, Nordstrom, PACCAR, Puget Sound Energy,
Washington Mutual, Weyerhaeuser would surely oppose a progressive income
tax. Many of these have lobbied for and
secured tax breaks and subsidies, within our current tax system.
Tax
Breaks for
Marilyn P. Watkins of our Economic
Opportunity Institute reports in An
Analysis of Tax Breaks in Washington State that:
“
Key Findings
Of 567 tax breaks, 302 would result in new public revenue if repealed.
·
The state would gain $12 billion in revenue, and local governments
would gain almost $3 billion.
·
The top 20 tax breaks account for most of the lost revenue. These
include popular exemptions that benefit all citizens, such as the sales tax exemptions
on food and prescription drugs.
Business tax breaks
have proliferated since the 1990s.
·
In the five legislative sessions from 2003 through 2007, the
legislature passed 77 business tax breaks that reduce state revenue in the
2007-09 biennium by nearly $600 million.
·
Aerospace industry tax breaks cost the state $207 million in 2007-09.
·
High tech and rural investment incentives that were renewed in 2004
cost the state another $200 million.
·
Investing in high-quality education and infrastructure is a better
route to sustainable economic development than piecemeal tax breaks.
·
The
report includes “recommendations for the
2009 Washington Legislature:
·
Ensure all business and economic development tax breaks are rare,
temporary in nature, and regularly re-evaluated.
·
Enlarge the Citizen Commission for Performance Measurement of Tax Preferences
and grant it greater flexibility.
·
Put tax breaks on the table for elimination in times of budget
shortfalls.
·
Begin a comprehensive overhaul of
For more information,
see Washington State Department of Revenue reports, as for example.
In recent legislative
sessions, the number of new tax breaks has been increasing. Swayed by the wish to create jobs, tax breaks
have been granted to such prosperous companies as Boeing and Microsoft. Our large companies benefit at the expense of
small ones from our Business and Occupation instead of having a corporate
income tax. Then they benefit
additionally by obtaining tax breaks. Just
as our taxation of individuals is regressive, so is our taxation of
corporations.
Based on Economic
Opportunity Institute Report
• is one of only 7 states with no form of personal income
tax;
• relies too heavily on a sales tax on goods sold in stores,
while purchases of services and over the internet sales are growing;
• is the only state that relies heavily on a business tax
based on gross receipts rather than profits.
• collects an average level of total state and local
property tax compared to other states. But in most states, property taxes stay
entirely in local communities. In
• has the most regressive tax system in the
Sources of
state revenue, 2005-07:
• State
taxes - $33 billion
• Federal
funds - $16 billion
• Licenses
and fees - $10 billion
• Borrowing,
transfers, and other - $4 billion
General Fund
Taxes, 2005-2007 – November 2006 Forecast
• Retail
sales $14.1 billion (53.1%)
• B&O $5
billion (18.9%)
• Property
$2.8 billion (10.5%)
• Real
estate $1.9 billion (7.1%)
• Public
utility $0.7 billion (2.5%)
• Other $2.1
billion (7.9%)
___________________________________
Total $26.5
billion (100.0%)
Comparison
of
Sales corporate income/B&O individual income property other .
US average 32.7% 6.0% 34.1% 1.7% 17.5%
Source: Federation of Tax Administrators and Washington
Department of Revenue
Total state
spending:
• Omnibus
operating budget - $51.3 billion
•
Transportation budget - $2.2 billion operating, $3.8 billion capital
• Capital
budget - $5.6 billion
General Fund
spending:
General Fund
Spending, 2005-07 (in billions)
Public
Schools $11.1 (43%)
Higher
Education $2.9 (11%)
Human
Services $9.6 (36%)
Government
Operations $0.8 (3%f)
Natural
Resources $0.4 (1%)
Other $1.6 (6%)
Total $26.5
(100.0%)
General Fund
Reserves $1.142
K-12 School
Spending, 2003-2004 (state, local, and federal revenues):
Source:
School Funding: http://www1.leg.wa.gov/documents/Senate/SCS/WM/SwmWebsite/Publications/BudgetGuides/2008/K12Guide2008FINAL.pdf
Organization and funding of Public Schools
http://www.k12.wa.us/safs/PUB/ORG/06/2006OrgFin_Final.pdf
Affordable Housing: http://www.wshfc.org/admin/2007AnnualReport.pdf
http://www.wshfc.org/admin/2008-2009HFPlan.pdf
Defects of Our Tax System
Comparison of
state income tax rates
State
income tax rates – Tax Policy Center
Our Tax System is Unfair – April 11, 2008
Our Tax
System is the Most Regressive of Our 50 States – May 2, 2008
The
Washington State Budget and Policy Center reports, “While
overall taxes in
It is not surprising if most of our people, who
have faced spending a higher percentage of their income on taxes, are leery of
the adoption of another form of tax. The
will have to be convinced that substitution an income tax for the more
regressive taxes that they have been paying, will provide them a tax cut.
Our tax system is most
regressive - itep
Our Tax System Has Become Less Productive – April
18, May 2, 2008
Our tax system
has become less productive
Our tax system
has become less productive
Our tax system has
become less productive
http://www.ofm.wa.gov/budget/manage/adequacy/ofm20020208.pdf
Our Tax System
Doesn’t Produce Enough Revenue – May 16, 2008
Our Tax System is Unstable
Recessions
Increase Our Unfair Taxation – May 2, 2008
During recessions, many of our people experience
stagnant or falling incomes, especially our lower income people. Sales and property taxes produce less
revenue. Needed expenditures for
assisting the poor and stimulating the economy increase. Cutting social services to reduce
expenditures harms low income people. If
sales or property taxes are increased to produce more revenue, low income
people who spend more of their income on taxed goods and services will be
affected more than high income ones.
Lower income people may face both falling income and tax increases.
Working
families tax credit - Tax Justice Digest
Working
families tax credit - CBP
Helping low
wage families – Lisa Brown
Securing Support for
Reforming Our Tax System – April 25, 2008
A
comprehensive history of consideration of a Washington State income tax
shows that it has sporadically been recommended. Various early attempts to adopt an income tax
were ruled unconstitutional. The last
major political attempt to adopt an income tax (with necessary constitutional
changes) occurred in the early 1970’s.
It failed. This failure is still
cited as indicative of opposition to an income tax.
More than thirty years
have passed since then and economic conditions are much better now than they
were during the severe Boeing downturn then.
Our state tax revenues have declined as a percent of our personal income
from 8.2% to 6.8%, a decline of 17%. So
as our finances have improved, we are being taxed less. Compared to other states, we are taxed less,
have less revenues and our education and other social services are
suffering. However due to increasing
income inequality and the unfairness of our tax system, many people are not
being taxed less in proportion to their income and are even being taxed more.
In recent years,
Can voters be persuaded
that substituting an income tax will not only produce adequate revenue, but
also result in more fairness, with most of them paying fewer total state taxes?
Anecdotally, we often hear that the
answer is “no”. Voters are convinced
that adding another form of tax will result in their being forced to pay more
total state taxes. Voters are convinced
that state legislators always want more revenue, which is often wasted. So legislators continually seek to raise
taxes. If an income tax is initially
substituted for some excise, sales or property taxes, these various taxes will
later be increased. So most of us will
simply end up paying more taxes.
If enough voters believe
these statements and can’t be influenced to change, then we will be unable to
promote an income tax. If fewer voters
believe these statements, or many of the ones who do can be influenced to
change, then we can promote an income tax.
Our major challenge is that we don’t know what proportion of voters
believe these statements, or whether and how they can be influenced to change
these beliefs.
Before promoting any political action to adopt a
Our Vision
What is a Good Tax
System? May 16, 2008
1.
A
high-quality revenue system comprises elements that are complementary,
including the finances of both state and local governments.
3.
A
high-quality revenue system relies on a balanced variety of revenue sources.
7.
A
high-quality revenue system is responsive to interstate and international
economic competition.
9.
A
high-quality revenue system is accountable to taxpayers.
Among our Washington State Department of
Revenue’s reports is the Tax Structure
Study which asks the
following questions about
our tax system: (1)
Elasticity/Volatility, (2) Stability, (3) Equity/Fairness, (4) Adequacy, (5) Economic
Vitality, (6) Economic Neutrality/Efficiency, (7) transparency/Lumpiness, (8)
Administrative Simplicity, (9) Harmony With Other States, and (10) Home
Ownership.
These two sets of principles for evaluation tax systems mostly contain
the same principles, as can be understood by reading their more detailed
descriptions. The Tax Structure Study
concludes its evaluation of our tax structure by saying: “The Committee’s view is that the current structure is so flawed
in meeting the most important criteria that it must be judged as
unsatisfactory.
·
·
There is great value in having harmony with other states and
particularly with neighbor states. Our tax structure is quite unique and its
differences make opportunities for taxpayers to engage in behaviors to avoid
taxation. Prominent among such phenomena is the stream of traffic from our
state across the Columbia River to buy goods in
·
Our proportion of state taxes collected from businesses compared
to households is dramatically different from norms: 46 percent from business in
·
Our B&O tax is a dramatic violator of the principle of
neutrality among like businesses. The pyramiding of this tax on goods as they
move through the production chain is a fundamental problem that requires
correction.
·
The differentiation made by the federal income tax rules in
permitting deduction of state income taxes but not of state sales taxes
represents a loss to our taxpayers who itemize. The inability to deduct sales
tax amounts to about $500 million in loss each year to Washingtonians.
·
Our heavy reliance on the retail sales tax exposes us to the
very patent diminishing of the sales base. It is clear that out-of-state and
Internet purchasing is on a continuous rise, and there is no assurance that a
means can be devised to enable us to impose a tax on these transactions.”
It should be added that our
tax system doesn’t obtain enough revenue to support our aspirations for equal
access to quality public services. During recessions, taxes produce less
revenue and taxes often become even more unfair. Our tax system meets the 5th and 6th
principles in the first list above. It
fails all the other 9 principles. The tax
Structure Study goes on to examine changes that should be considered,
including the inclusion of an income tax.
Another commentary will examine these possible changes.
Why Progressive Taxation? June 13, 3008
Two arguments are made for progressive taxation.
1.
Concentration of income and wealth harms our Democracy.
2.
High income and wealthy people don’t deserve the income and wealth they
have obtained at public expense.
In their Wealth and Our Commonwealth, William H.
Gates Sr. and Chuck Collins present the first argument in chapter one and the
second argument in chapter five.
Concentration of Income Harms Our Democracy
Although both are true, I prefer
the second argument. Since the first
argument is most often used, let’s begin by elaborating it. With wealth, one can buy power. Especially since our courts have declared
that money is a form of free speech. One
person with great wealth can influence public opinion, our legislators and
executive officers as much as thousands of people without great wealth. This remains true, even after the internet
has provided inexpensive means to millions to express their opinions. And after restrictions on campaign
contributions.
When a few wealthy people can
influence legislation more than many who aren’t wealthy, our government is no
longer democratic. It serves the few at
the expense of the many. If the
transformation of wealth into political power can’t be stopped, the solution
must be to limit the creation of wealth.
Progressive taxation can be used to do this. Historically, this is the reason that our
founding fathers and other Liberal leaders since have advocated and initiated
estate taxes and then highly progressive income taxes.
Lowered Tax Rates for Higher Incomes
But since the 1980s, a majority
of Americans have felt financially squeezed between rising costs and stagnant
incomes. More family members have become
employed. We have borrowed as much as we
could. We have asked for lower
taxes. Taxes have been lowered, but
primarily for our high income and wealthy people.
Beginning in the 1980s, our
income tax rates applying to higher incomes have been markedly reduced. Income tax rates for lower incomes have also
been reduced a bit. But these reductions
for lower incomes have been offset by increased FICA taxes supposedly initiated
to build a surplus for paying social security benefits when our baby boomers
retire. These increased FICA taxes were
not used to build a surplus. They were
spent for government activities which would otherwise have been paid for by
more progressive income tax revenues.
Increased Income Discrepancy
Increased specialization,
competition due to globalization and de-unionization has increased the income
discrepancy between our higher and lower income people. Lowered tax rates have increased after tax
income discrepancy even more. Increased
money flows to our wealthy have left the bulk of our population unable to
provide the consumer demand to support our economy. Our weakened economy disproportionately
lowers the income of lower income people.
People demand more tax cuts, which end up favoring the wealthy instead
of the squeezed less wealthy. Inadequate
revenue also produces government deficits, increasing government debt and limits
upon social services, disproportionately affecting lower income people.
It is clear that other factors
and lower tax rates for the wealthy are producing increased income and wealth
discrepancy, which is harming our economy and people. Unfortunately this is not clear to many of us
with lower incomes and less wealth.
Hoping to become wealthy ourselves, or not realizing that when wealthy
people pay less taxes, then the rest of us must pay more, we allow large tax
reductions for our wealthy, which harm our democracy and our economy.
Maintaining our Social Inheritance
The second argument is actually
simpler. Instead of arguing that income
discrepancy harms our democracy and economy, it argues that the income
discrepancy is not justified in the first place. It argues that much of the higher income and
wealth was never earned. It is a
fraudulent taking from our public. It
should never be allowed.
It is common knowledge that
production (which leads to income) depends upon capital and labor. Before taking profits, a producer must first
pay for the capital and labor which others provide. But it is not common knowledge that
production also depends upon our physical and social infrastructure, which
previous generations have created and maintained.
Without our legal, educational,
communication, transportation and other institutions and facilities, much of
our production would not be possible.
This is obvious if we notice how the absence of this infrastructure in
other countries severely restricts their production. Just as the producer must pay for the capital
and labor which is used, the producers should also pay for the
infrastructure. Just as past generations
have created and maintained our infrastructure, we should create and maintain
our infrastructure for our future generations.
To avoid these payments is to cheat our public. The payments which are not made are not the
legitimate property of the producer.
One way to recover the money
resulting from the use of our infrastructure is a VAT tax, so commonly used by
other economically developed countries.
Another way is a progressive income tax, which taxes most those who most
benefit from our institutional and public capital inheritance. The income tax goes beyond the VAT tax in
taxing money which results not only from production, but also from returns on
investments which also depend upon our institutional inheritance. Since much of high income people’s income
comes from returns on investments, an income tax ican be more progressive than
a VAT tax.
A Simple Progressive Tax
At both our national and
state level, our personal and corporate income taxes should be a simple
progressive flat income tax. A flat tax
with little or no deduction is not progressive.
But with a deduction equal to medium income, it becomes more progressive
than our present national income tax.
For example, assume that the deduction is the medium income for
corporations or households of various compositions. Everyone whose income is less than the medium
would pay no tax. Income above the
medium would be taxed at a flat rate.
Suppose that the national
income tax rate is 40% and the state income tax rate is 5%. Assume the medium family income for a two
adult family is $50,000,. The following
amounts would be paid.
Family Federal
% of State % of
Total % of
Income Tax
Income Tax Income Tax Income
50,000 0 0 0 0 0 0
100,000 20,000 20
2,500
2.5 22,500
22.5
200,000 60,000
30 7,500
3.75 67,500
33.75
500,000 180,000 36
22,500
4.5
202,500 40.5
1,000,000 380,000 38
47,500
4.75 427,500 42.75
The general formula is tax
= (income times tax rate) – (medium income times tax rate). See how simple it is to calculate your own
tax. Similar tax tables could be
calculated for different types of households and for corporations.
Federal estate and State
inheritance taxes should also be progressive flat taxes, with the flat rate
levied on the value of all estates (inheritances) minus the medium value of all
estates (inheritances).
Alternatives for Improving Our
2002 Tax
replacement alternatives
2002 Washington
tax alternatives – Bill Gates
2003 Tax policy for State
Legislators
http://forwashington.org/analysis/simstaxplan200409.php
http://www.itepnet.org/wa0804.pdf
2008 We need an income tax
– Washington CAN
Taxing
high incomes to improve public services and reduce regressive taxes
Excerpted
from
Washington
State’s seventy year-old tax structure is built on an ever-shrinking base, and
taxes fall most heavily on those least able to afford them. This discussion
brief outlines options for a limited tax on the highest income households,
coupled with a reduction in sales or property tax. The result would
be a fairer
tax system that keeps pace with economic growth and provides the revenues for
high-priority public investments in education and infrastructure that are
necessary for shared prosperity.
Key Findings
Our state’s
existing tax system is outdated and unfair.
·
·
By failing to capture revenue from a changing economy, we
are starving our state of needed investments in education, transportation, and
health.
A tax on
high incomes will raise revenue that grows with our economy.
·
A tax on incomes over $200,000 would fall on the top 4% of
households. It would raise $2 billion per biennium at 3%, and $3.4 billion at
5%.
·
A “millionaires” tax would be paid by 0.1% of households.
It would raise $780 million per biennium at 3%, and $1.3 billion at 5%.
·
A tax on interest, dividend, and capital gains income with
middle class and senior exclusions would raise up to $1.9 billion.
New progressive
taxes paired with reductions in regressive taxes will reduce inequities in our
state’s tax structure.
·
Pairing new progressive taxes with reductions in regressive
taxes could net $400-$760 million each biennium.
·
Lowering the state portion of the sales tax from 6.5% to 6%
would cost $1.3 billion a biennium and save the typical
·
Cutting the state portion of the property tax in half would
cost $1.5 billion a biennium and save the average homeowner $330 annually.
Obstacles to Reforming Our Tax System
Denial that Reform is Necessary – May 9,
2008
Our tax system is (1) unfair, (2) doesn’t produce enough revenue, and (3) responds poorly to economic recession. Low income people are unfairly taxed too
much. High income people don’t pay to
maintain and improve sustain our physical and social infrastructure which
enabled their incomes. We don’t obtain enough revenue to support our
aspirations for equal access to quality public services. During recessions,
taxes produce less revenue and taxes often become even more unfair.
But we deny these defects of our system. Perhaps sometimes accepting one, while
rejecting the others. We especially
avoid publicly discussing together these three flaws in our tax system. Following our conventional wisdom, we assume
that major changes can’t be made.
I believe that we can overcome our denial, first
through education, then through creating a broad-based coalition and only
afterward, through obtaining necessary political support. The first step is addressing the problems of
our present tax system. We must educate
ourselves about these problems. The
inadequate steps to address some flaws at the expense of worsening others. The prejudices, fears and distrust of our
people which serve as major barriers to discussion and effective action.
The longer badly needed reform
will take, the sooner we should begin. Let
our education begin now.
Distrust of Reforms and Reformers
Political Risk
Inaction
Strategies for Reforming Our Tax System
Educate Our Voters Before Attempting Political
Action
The only way we can correct
our tax system is to substitute a progressive income tax for some of our
existing regressive taxes. This will
make our tax system more productive, more stable and more fair, lowering taxes
for a great majority of our people. Only
high income people will pay more taxes, as they should to repay the benefits
they have received from our social and economic heritage. We need a progressive income tax.
Most of our
--------------------
Our
Fairness requires that productive people and
organizations should pay not only for their capital and labor inputs, but also
for our social heritage (physical and social infrastructure) that makes their
production possible. People with higher
incomes have benefited the most from our social heritage. They should pay higher taxes, not lower
taxes, than people with lower incomes.
We need a progressive tax system to maintain and enhance our physical
and social infrastructure and our safety net.
Our
state tax system doesn’t produce enough revenue to provide our residents access
to quality health, education, welfare, transportation and other public
services. With present revenues, we
cannot pay our public employees, including teachers, a fair wage, reduce class
size, increase services for students with special needs or provide other needed
services. To provide better services in
one area, we must provide worse services in another. Increasing present regressive excise, sales
and property taxes to increase our revenues causes most of our people to pay
even more taxes than they should. Our
voters rightfully reject such tax increases.