Washington's tax structure direly needs a makeover

Last week I spent a couple days in our nation's capital. After my meetings, I had time to stroll down the mall from the Lincoln Memorial, past the Washington Monument, and White House, toward the Capitol building. I saw families from across the United States and around the world posing for pictures, absorbing the history around them.

The National Mall is a good place to start a discussion of our state budget and taxes. Those majestic monuments to democracy and crowds of tourists are reminders of why we have government in the first place -- in the words of the U.S. Constitution, to "establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity."

We can't do those things on our own.

Washington state is facing a budget deficit next year. The national economic downturn means less tax revenue, but there will be more kids in school, more young adults trying to get into college, more seniors needing long-term care and more struggling families needing assistance. And the state, like everyone else, has to deal with higher prices.

Some are trying to turn the looming deficit into a partisan issue, claiming those in charge in Olympia have "overspent." But according to the National Association of State Budget Officers, many states are in worse shape than Washington. Thirteen states -- not including Washington -- have had to cut their budgets already this year, nearly equally divided between those with Democratic and Republican governors. Forty states -- again, not Washington -- have begun dipping into their reserves.

Gov. Gregoire, rightly, has ordered agency heads to find ways to save. But with over half the budget going to education, nearly 40 percent to such human services as child protection and health care, and most of the rest for courts, natural resources and bond payments, there aren't many places to cut. Most state money, in fact, gets invested right back in local communities, in the 295 school districts, the 45 institutions of higher learning, and salaries for nurses and social workers.

Most of the increased state spending over the past four years can be accounted for by population growth -- we add about 100,000 people each year, inflation, and make up from cuts during the last recession. We've also expanded full-day kindergarten and added space in colleges along with more financial aid.

The state has also found ways to tighten its belt. As a result, Washington's budget has stayed flat at about 6 percent of the state economy since the mid-1990s. And the number of state government employees has actually fallen as a share of overall employment in each of the last five years.

We could get through this economic downturn like the last one, by cutting children's health insurance, short-changing teachers, and spending down the rainy day fund. Or we could raise taxes. The trouble is that most of our state taxes fall hardest on working families already struggling to pay the bills.

Our tax system worked pretty well in the 1930s when it was designed. The economy today is quite different. It's time to change our tax system. In 2002, a high level commission headed by Bill Gates, Sr., recommended a thorough overhaul of state taxes, which the Legislature hastily shelved.

Maybe we should start with something less ambitious. How about a new high income tax that exempts the first $200,000 of family income, then begins at 3 percent and jumps to 5 percent on incomes over $1 million? It could be coupled with a reduction in either the sales or property tax. That way, most families would see their total tax bill decline. Only four out of 100 households would pay the new tax, and it would be those that have seen their incomes grow fastest and their federal taxes fall the most in the past decade.

Revenue from the new tax could be dedicated to our highest priorities -- education and health care.

We could actually come out of this economic slowdown with a fairer tax system that makes it easier for our state government to provide the necessary foundation for the just, peaceful, and free society our Founding Fathers envisioned.



Marilyn Watkins, policy director of the Economic Opportunity Instititue (www.eoionline.org), writes every other Wednesday. Her e-mail address is marilyn@eoionline.org.