King Rat (gkr) wrote,
King Rat

Washington State tax system

Some peopel seem to think Washington has high taxes. The data doesn't really bear that out though. We currently rank 13th in the nation in per capita taxes collected, but as a percetange of income we are around 20th. Nevertheless, the perception has fed numerous ill-conceived citizen initiatives. Although I-695 was struck down by the courts as being unconstitutional for including disparate issues within one initiative, the legislature and the governor were so afraid of the neo-conservatives that they enacted the core portion of I-695 anyway.

Essentially, the tax system in Washington is a give-away to the rich. In other words, we tax the poor much more heavily (as a percentage of income) than we do the rich, for services the rich take far more advantage of than the poor do. The last statement is actually conjecture, as I haven't looked recently at the Washington state budget to see where tax dollars go to. In addition, our reliance on a retail sales tax and the business and occupation tax make our tax burden largely hidden. Do you know that businesses in Washington are tax .5 to 2.5 percent on their gross sales? All businesses. So the goods that you buy have been taxes at successive steps along the way. This is passed along as higher prices and you don't even know how much.

Unfortunately, that hidden tax burden will make it really hard to enact meaningful tax reform in Washington. The commission that studied our tax structure (which I mentioned in a previous post), proposed two possibilities for major overhaul. First is replacing the sales and B&O taxes with a value added tax (VAT). Basically, each business only pays a tax on the value they add to a product. So a retail store only pays a tax on the markup they have on the product over the cost to purchase the product. It is not taxed on the cost of the product to them, as they currently are. Under one of the proposals, the VAT is itemized along the way so you can see the tax. In two of the proposals, the cost would be hidden like the current B&O tax is.

The second possible reform is to replace the retail sales tax and the property tax with an income tax. The problem with this is that people do not see the retail sales tax taking a large chunk of money out at one time. It is like a faucet that is constantly dripping. Unlike a massive pipe burst, you don't realize how much water you actually lose, even though it may be a lot. An income tax is more like a pipe bursting. It requires more time and effort on an individual's part, and it takes a much larger amount at one time. An income tax causes people to shudder because they see the large portion and it will make passing such a reform difficult.

However, we must reform in one of these ways or our state will have several disadvantages. First, both of the proposals reduce how regressive our structure is. Neither eliminates it, but they do even it out so that poor taxpayers pay closer to the median percentage of their income rather than a higher percentage. And wealthier taxpayers will see their taxes rise somewhat, to bring it close to the same percentage. The current understanding among many Washingtonians is that rich people pay higher taxes. As a percentage of their income, this is not true.

The second disadvantage is that we rely on business taxes much more than neighboring states and other states. This is causing some businesses to locate elsewhere, and consumers in border counties to tracel to Oregon and Idaho to purchase goods to avoid Washington's high sales taxes. By accepting one of the proposals, we align our tax rates to be closer to what other states tax businesses. In addition, our taxes are pretty rough on new or expanding business. They may have the same revenue, but higher costs to establish themselves or to expand. We currently tax them based on revenue. This discourages businesses from expanding or starting here, especialling during weak economic times when we need the activity to stimulate our economy. Both proposals would make the cost to start up businesses more even with established and non-expanding businesses.

And I have yet to see a coherent argument against an income tax. Most responses are that it is evil without explaining why.

Anyway, I suggest you read the report. Good reading.


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