State relies on an unfair, insufficient tax system

Washington state won’t ever be confused with the offshore tax havens discussed in the Panama Papers — not enough palm trees — but a recent comparison of the tax systems of Idaho, Oregon and the Evergreen State is raising questions about basic tax fairness and the state’s ability to meet its obligations, particularly to public education.

State Sen. Reuven Carlyle, D-Seattle, asked the state Department of Revenue to run a comparison of revenue sources for the three states, using figures from the 2014 fiscal year, public radio station KUOW (94.9 FM) reported Tuesday. The comparison shows that if Washington employed the mix of taxes used in Oregon or Idaho, the state would have generated $9.6 billion more using Oregon’s formula and $10.2 billion more using Idaho’s system.

What’s different about the three systems? Where Washington relies heavily on sales and property taxes, Oregon generates nearly all of its revenue from a progressive income tax between 5 percent and 9.9 percent. Idaho has a sales tax similar to that of Washington but gets the majority of its revenue from an income tax rate between 3.6 percent and 7.4 percent. (Both Oregon and Idaho have property taxes, but those revenues are reserved for local taxing districts; the state takes no share.)

Carlyle told KUOW he’s not using the figures above to support a push for an income tax in Washington. Instead, he says it makes the point that modest changes to the state’s tax structure could result in a significant improvement to the revenue picture.

Reliance on sales tax, both at the state and local levels, was a problem during the last recession when consumers pulled back on spending, resulting in less revenue. Another hit to revenue from sales tax has been the move by individuals and businesses to make more of their purchases online, where state sales taxes aren’t typically collected.

The sales tax also has the disadvantage of being a regressive tax, one that requires lower-income families spend a greater portion of what they make on taxes.

Last year, the Institute on Taxation and Economic Policy, a nonpartisan and nonprofit research group, said Washington state had the nation’s most unfair state and local tax system, leading its list of the “Terrible Ten Most Regressive.” The state’s poorest 20 percent pay 16.8 percent of their income as taxes, while the middle 60 percent pay 10 percent of income as tax. Those in the top 1 percent pay only 2.4 percent of their income as tax.

An over-reliance on sales tax no longer offers the revenue — or the basic fairness — that the state’s residents require.

The Legislature is under a state Supreme Court order to amply fund basic education and end its reliance on local school levies to provide a significant portion of the salaries of teachers and other school staff. State Treasurer James McIntire has said previously that complying with the court’s McCleary mandate could require the state to spend an additional $3.5 billion each year.

The state’s crisis in funding its mental health system, along with its other responsibilities and its habit of moving funds around to cover immediate needs — not to mention the recent inability to wean itself from the tobacco tax to raise the smoking age to 21 — demonstrate the need for additional revenue.

We’ve suggested before that the Legislature consider, at least as a starting point, McIntire’s tax reform package, which would reduce the taxes on sales, property and business and occupation, and institute a flat 5 percent income tax.

There are other options.

Gov. Jay Inslee and others in the Legislature have previously suggested a capital gains tax. Although some have attempted to paint it as a backdoor to an income tax, the capital gains tax as proposed last year doesn’t tax income but the profits from the sales of stocks and other investments, exempting the first $50,000 in gains for married couples, providing enough protection for middle-class investors.

Voters in November also will have an opportunity to consider a carbon tax, the revenue from which would go toward reducing the state sales tax rate by 1 percentage point.

A recent Rutgers study on school funding noted that Washington ranked ninth among states in its economic productivity in 2013. But its ranking of that productivity compared to what each state spent that year for education, placed Washington 46th, fifth from the bottom.

A state with the economic vitality we enjoy shouldn’t be struggling to meet its obligations, particularly in its paramount duty to students.

What lawmakers can’t do is expect that the current tax system, with its over-reliance on sales tax, will be sufficient to meet the needs of the state and its people.

That well has run dry.