As a tax-and-spend debate is about to unfold at the Capitol in Olympia, a new report rates the tax burden borne by Washingtonians as just below average.
The Washington, D.C.-based Tax Foundation last week ranked Washington No. 28 out of the 50 states for the percentage of income paid by residents in state and local taxes in 2010. The report pegged Washington’s state-local tax burden at about 9.3 percent of incomes in 2010, lower than 27 other states.
For Democrats concerned that the tax system is not keeping up with the growth in demand for state services, such calculations are not surprising.
Democratic Rep. Reuven Carlyle of Seattle says Washington cannot be considered overtaxed and that the state tax code is full of holes — or exemptions — that favor select industries. He and other House Democrats believe some new revenues are needed to close the budget gap and answer a state Supreme Court ruling in the McCleary case, which said Washington was not amply funding basic education.
“We are on a race to the bottom to be a low-tax, low-service, low-quality-of-life state. I think at some point it’s time for a courageous conversation about the fact we are so much more than what we have become as a state,” Carlyle said in an interview earlier this month.
Wednesday’s revenue forecast showed state-government revenues are growing slowly but leave the state with a budget shortfall of about $1.2 billion.
So far the Democrats have not put a serious revenue plan on the table to close that shortfall and raise another $1.4 billion to $1.7 billion for K-12 schools. House Appropriations chairman Ross Hunter, D-Medina, said Friday that he doesn’t expect to itemize the targeted loopholes until he has a budget ready to release and votes to support it.
But Gov. Jay Inslee is expected to release a partial budget and revenue plan — including closure of tax exemptions — in the next week.
Inslee once vowed to veto tax hikes. But he also called for closing tax exemptions and shortly after taking office said his no-tax pledge would not be violated if the Legislature extended the business and occupations tax surcharge past its June expiration date.
The Republican-controlled Senate and allies in the House say closing tax loopholes is akin to raising taxes. They are insisting on budget cuts without tax increases in order to funnel more money into K-12 public schools.
“Twenty-eight out of 50 is midrange. We would rather be lower,” Senate Republican Leader Mark Schoesler of Ritzville said. “We think that leaving more money in citizens’ pockets is better than having it in government’s pockets.”
The Tax Foundation tax burden ranking is partly a reflection of the state’s relatively high income levels. The state ranks 13th in the nation for per-capita taxes when not compared against personal income.
The anti-taxers warn that tax hikes would harm the fragile economy, and Republican Rep. Gary Alexander, ranking minority on House Appropriations, says the state’s relative ranking for tax burden is not relevant.
“The most important perspective for me in Washington state is (that) with the need to put people back to work, if we add tax burden, that will have an adverse impact on (growth),” Alexander said. “It’ll potentially cause our recession to continue rather than come out of it.”
Neither Republicans nor Democrats have been able to say over the years what the right level of taxation — or services — is for Washington.
A January report from the state Department of Revenue said Washington’s tax burden is now nearly at its lowest point in the last decade and well below earlier eras.
There is a flip side of being a lower-tax state, Carlyle said.
“There is pain when you double tuition. There is pain when you have a pathetically, humiliatingly low high school graduation rate. There is resentment when you have to close state parks. There is anger when you have insufficient, inadequate access to day care,” he said.
Weighing in from the sidelines, Democratic state Treasurer Jim McIntire told a gathering of the Association of Washington Business last week that Washington’s tax code puts too much burden on business.
As he delivered that message to a receptive audience, McIntire also told the group he is having quiet talks with lawmakers on a longer-term reform plan that could go to voters.
The thrust of McIntire’s message is that the state tax system was created in the 1930s when Washington had a goods-based economy. Today, it has a services economy and the tax system hasn’t kept up.
Eventually, McIntire said, individuals will have to pick up some of the slack if the state is to have a tax system that lets its businesses remain competitive. But he is not offering any specific solution, just trying to boost leaders’ interest in the topic.
Schoesler said he agrees the tax impact on businesses is too high and he welcomes a discussion on the tax system. But he said state spending needs to be further controlled before reform is attempted.
Ironically, the Tax Foundation says Washington’s business tax climate is sixth-best overall in the country. The foundation dislikes the state’s business and occupations tax that is levied on gross receipts, not profits, and also marks down the state for its sales tax. But Washington rises in the rankings because it lacks an income tax.
The same lack of an income tax, which gave the state good marks for business climate in the Tax Foundation report, is a reason the poor pay more proportionally. A report by the Institute on Taxation and Economic Policy in January said Washington’s tax system is the worst in the country in terms of how much harder it hits the poor and middle class than the rich.Brad Shannon: 360-753-1688