As they have for decades, voters control the state budget

In asking Washington voters to endorse a three-year, half-cent increase in the state sales tax, Gov. Chris Gregoire lamented the toll the recession has taken on state tax revenues. Prominent-ly displayed on a nearby easel was a chart showing tax revenues shrinking as a share of personal income since 1995.

The clear implication: Washington households and businesses can afford to pay more.

Similarly, the Associated Press wrote, “If state revenue had kept pace with the income of residents over the past two decades, Washington would collect enough money to have a $10 billion budget surplus in the current cycle.”

And if wishes were horses ...

Tax burdens rise and fall with the business cycle. There’s no magic formula to determine the right tax burden, let alone the correct distribution of the tax burden.

Beyond the “low rate, broad base” mantra, economists disagree on most details. Besides, politics is the gin in the tax martini; economics, the barely whispered vermouth.

With lawmakers back in Olympia confronting a $2 billion budget shortfall, tax politics top the December agenda. So it’s important to put the state’s revenue position in context.

Gregoire and the AP are correct: State revenues have fallen as a share of the economy. But it’s mostly because taxpayers rejected the higher burdens.

Let’s go back, as the AP did, to 1995, which represents a high mark for taxes. In 1993, the Legislature substantially increased business taxes to plug a budget hole. For services the rate jumped 67 percent; other sectors experienced smaller, though not inconsiderable, increases.

The tax hikes sparked the 1993 taxpayers’ revolt that led to passage of Initiative 601, limiting growth in state spending to a combination of population plus inflation and requiring a supermajority vote to increase taxes. The anti-tax sentiment also contributed to substantial Republican gains in the 1994 elections.

With an improved economy and new Legislature, most of the increases were unwound by 1998.

Taxpayers weren’t finished, though. In 1999 voters repealed the motor vehicle excise tax. Although the state Supreme Court found the repeal initiative unconstitutional, the 2000 Legislature followed voters’ wishes and replaced the MVET with $30 car tabs.

No flaw in the tax structure reduced the tax burden – taxpayers did, repeatedly. State general fund revenues fell from 7 percent of personal income in 1995 to 6 percent five years later.

Over the next decade, there were other changes: higher sin and death taxes, limits on property taxes, some new tax incentives. But for the most part, revenues held steady as a share of the economy until the recession. In 2009 they hit 5 percent.

Washington is particularly vulnerable in this recession. State revenues here are extraordinarily tied to real estate and construction. Both sectors suffered when the housing bubble burst. Moreover, consumers have lost equity and become understandably frugal, particularly with respect to big-ticket items. The revenue decline represents lost business, not increased discretionary income. Even firms with substantial cash reserves hesitate to invest, sidelined by global and domestic uncertainty and stagnant demand.

In passing Initiative 601, voters linked spending to population and inflation, not personal income. Applying this alternative standard to state revenues, we again find the tax burden has fallen a bit. From $1,985 per person in 1995, the inflation-adjusted tax burden has declined to $1,920 in 2011.

It’s likely voters will again determine whether all this justifies a tax increase.

Gregoire wants to raise the sales tax. It’s the most efficient and predictable source of new money, and there are few alternatives. Business taxes here are already high. Most tax breaks are either uncontroversial or unlikely to generate much money if repealed. Further, targeting employers guarantees a ballot battle, threatens jobs and prolongs uncertainty.

Charts and graphs won’t convince voters that they have extra money for the government. Legislators must make the case for higher taxes by justifying their budget decisions.

The issues are basic. Is state government operating efficiently and delivering good quality? Have lawmakers set the right priorities? If we want more, can we afford it?

And, finally, the threshold question: Are we willing to increase our own taxes, or do we just want someone else to buy stuff for us?

Bainbridge Island resident Richard S. Davis is president of the Washington Research Council. Email him at rsdavis@simeonpartners.com.