If you’re poor and you live in Washington state, you wind up forking over almost 17 percent of your income in state and local taxes. That’s according to a recent report from the Institute on Taxation and Economic Policy.
But if you live in, say, Boise or Coeur d’Alene, Idaho, state and local taxes only eat up 8.5 percent of your income.
The reason boils down to how the two states collect revenue. Washington relies heavily on a sales tax, along with property tax and a gross receipts tax on business called the business and occupation tax. All of that means low-income people shoulder a much bigger tax burden as a percentage of their income than the richest 1 percent. And that earns Washington the dubious distinction of having the most unfair state and local tax system in the country, according to ITEP.
By contrast, ITEP says Idaho's combination of a progressive personal income tax, corporate income tax, sales and excise taxes and property tax is one of the least regressive systems in the country (it ranks 43rd in their ranking of unfair state tax systems).
KPLU asked two state lawmakers, Democratic Rep. Reuven Carlyle, who represents North Seattle and chairs the House finance committee, and Republican Rep. Cary Condotta, who represents Wenatchee and Lake Chelan and also sits on the finance committee, to sit down for a wide-ranging conversation about tax reform, specifically how they think the system should be changed and how Washington state could tackle reform politically.
Surprisingly, Idaho kept coming up over and over again.
'That's Embarrassing For Some Of Us To Say And To Admit, But It's True'
“There is no one, from a Seattle Democrat to a Lake Chelan Republican, if they really looked at the numbers, who wouldn’t switch Washington state’s tax system with Idaho’s as an example,” Carlyle said. “And that’s embarrassing for some of us to say and to admit, but it’s true.”
And his counterpart from across the aisle agrees.
“I haven’t heard anyone complaining about the tax system in Idaho,” Condotta said. “Now, I’m not supporting a big, high, progressive income tax, but I think the only way we’re going to shift taxes off of property tax, off of the very regressive sales tax and get business competitive is to have some sort of personal tax. You can call it whatever you want, but if you don’t shift to that, you’re stuck with the other three. You can rearrange the chairs on the Titanic, but you’re not going to come up with a solution.”
Condotta owned a motorcycle shop for many years and says he experienced first-hand the inequities of Washington’s tax system. Because the business and occupation tax is levied on total revenue instead of on profits, businesses that sell expensive things such as cars or motorcycles but have slim profits wind up paying more taxes than businesses with lower sales and higher profit margins.
“We didn’t get exemptions or tax adjustments at our size because we’re too small,” Condotta said. “I could see years where I was paying … the equivalent of a 40 or 50 percent corporate income tax and that just didn’t feel right to me.”
Burden On Businesses
And Condotta says another concern is that overall, the tax burden on businesses here is high. He says tax from businesses makes up about half of Washington’s general fund, compared with an average of a third in other states west of the Mississippi.
Carlyle agrees there’s a disproportionate burden on business.
“The only way to fix that is to broaden the base,” he said. For example, the state could add a capital gains tax, such as the one Gov. Jay Inslee has proposed, and eliminate some of the tax breaks lawmakers have created over the years.
“We have effectively and figuratively carved out through 650 tax breaks many parts of the aerospace industry, the technology industry, the agriculture industry and the timber industry over the course of decades and decades. And rather than carve out industry by sector or company or interest, I’d rather carve out small business,” Carlyle said.
Carlyle says our tax system is becoming less and less adequate for meeting the state’s needs. He says only 33 percent of what you buy is covered by sales tax, since the state doesn’t collect sales tax on services. And voters have chosen to put a one-percent cap on property tax growth. As a result, he says that since 1995, Washington state has dropped from 11th in the nation in combined state and local taxes to 35th.
“Now, that’s not good or bad. The question is: Does it meet the needs of our state?” Carlyle said. “And as a consequence, what we’ve done is doubled tuition. As a consequence, we’re under court order for failing to fully fund public education. So we have a big structural problem.”
Regional economist Dick Conway recently published an analysis called Washington State And Local Tax System Dysfunction and Reform in which he points out that Washington's state and local effective tax rate dropped from 11.4 percent in fiscal year 1995 to 9.6 percent in fiscal year 2011. During that time, the national average has been about 10.6 percent.
He says if Washington's effective tax rate had been the national average of 10.6 percent from 2005 to 2011, state and local governments would have collected more than $14 billion in extra revenue.
Tackling The Third Rail: An Income Tax
But if this conversation is leading to an idea that’s politically toxic in many parts of the state, namely an income tax, how do lawmakers persuade voters that it’s not a big money grab?
Condotta says the plan would likely require a constitutional amendment locking in tax rates that would be put to voters for approval.
“It’s up to us to develop a package which, first, does the job and convinces the majority of people that it works, and second of all, gives them confidence that we’re not just trying to increase taxation. I don’t think that’s the case,” Condotta said. “As a matter of fact, in the proposals I’ve seen, seven out of 10 people would have a tax reduction in the state of Washington.”
Carlyle agrees, though he says locking tax rates into the constitution would be a “very difficult conversation to have.”
“But that’s the kind of give-and-take we have to have as a state in order to have meaningful change,” he said.
Editor's Note: We're taking a closer look at Washington's tax system through a week-long series. This is the fifth installment of “Where’s the Dough? On the Hunt for Washington’s Missing Tax Dollars." The first installment explored the history of the state's tax system, and the second story took a closer look at the efficacy of tax exemptions. The third piece looked at the tax incentives Washington approved for Boeing, and the fourth storyexamined tax breaks for consumers.
