Tax Freedom Day comes to the nation today, April 23, according to the Washington, D.C.-based Tax Foundation. That’s the day when average Americans have earned enough to settle their tax obligations to federal, state, and local governments and begin paying themselves.
For Washingtonians, it comes later, April 29. The Tax Foundation shows us having the fifth highest total tax burden in the nation.
The announcement provides a good excuse to consider taxes. With the fall election likely to turn on voters’ views of the economy, the perceived tax burden may be critical.
Before anyone gets too excited about that “fifth in the nation” ranking (generally shouted in capital letters in campaign press releases) let’s put it in perspective. Including the federal income tax skews the rankings. The top 1 percent of taxpayers pay 37 percent of the federal income tax. Meanwhile, an expanding web of credits and exemptions allows the bottom half of taxpayers to pay little or nothing in income taxes.
While my liberal friends still insist that the rich skate while payroll taxes hammer the working poor, that’s not relevant here. Simply put, our high ranking reflects the presence in this state of a cluster of some of the world’s wealthiest people. The taxes they send to the other Washington increase our state’s calculated federal tax burden.
State and local taxes tell us more about the decisions of our elected politicians. With federal taxes excluded, last year Washington ranked a still-high No. 16 in the nation. But with them in, we ranked No. 8.
I contacted Gerald Prante, a Tax Foundation economist, to see when the state-local tax numbers would be ready. He says they’re refining the way they calculate tax burdens among the states and should have something available in June.
The Tax Freedom Day release wasn’t the only tax study hitting the news this month. The Small Business and Entrepreneurship Council just issued its 2008 Business Tax Index, ranking the “best to worst state tax systems” for business. According to the SBEC, Washington has the fourth best business tax system in the country.
All you need to know about the study is that about half of the 16 factors they use to assess business taxes involve corporate or personal income taxes. It makes a difference. Seven of their top 10 states have no personal income tax.
So SBEC doesn’t like income taxes. Neither do most Washingtonians, but don’t make too much of that. States without income taxes tend to tax business more heavily.
Tuesday, the national consulting firm, Ernst &Young, released a comprehensive analysis of state and local business taxes for the Council On State Taxation, an association of multistate corporations. While rankings invariably reflect the ranker’s bias, the Ernst &Young report simply lays out the facts. The analysis identifies a substantially higher tax burden carried by Washington businesses. In 2007, businesses here paid 51 percent of all state and local taxes, compared with a national average of 44 percent. Business taxes in Washington amounted to 5.8 percent of the state economy. Nationally, the average was 5.0 percent.
Nationally, the overall level of taxation is down slightly, for reasons that suggest tough decisions ahead. Tax Foundation economists say “an unexpected slowdown in the nation’s economy and a massive one-time fiscal stimulus tax cut” hastened Tax Freedom Day this year. The stimulus package provides one-time relief, but we may soon face tax hikes by state and local government already feeling the effects of the slowdown.
Our state faces a $2.5 billion shortfall in the budget cycle beginning next year. It’s not enough for political leaders to say they’ll “handle” the problem if and when they reach it. We need to know their plans.
A general tax hike hurts taxpayers struggling with higher costs. Moreover, our tax system relies heavily on consumer spending and the economic activity it generates. Boosting taxes on consumers harms Main Street and the state treasury. Similarly, any increase in the already-high business tax burden will dampen economic recovery.
Would lawmakers risk investment and job creation to maintain current spending? And if they’re going to cut the budget, how will they go about it? What are their priorities?
Ask them.
Richard S. Davis, vice president-communications of the Association of Washington Business, writes every other Wednesday. His columns do not necessarily reflect the views of AWB. His e-mail address is richardsdavis@gmail.com.
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