Editorial: Everett’s budget crunch points to larger tax issue

By The Herald Editorial Board

“It’s not a super exciting budget,” Everett Mayor Cassie Franklin offered at the start of an interview with The Herald, prior to last week’s address for next year’s $543.7 million operating budget.

It’s not that the budget is lacking in support that will again sponsor upcoming community events, festivals and organizations as well as promotion of local businesses, development of the city’s parks and support for child care and early education efforts; all that on top of the daily business of running a full-service city.

After five years of trying to backfill a structural deficit that had the city paying out more in the expenses of its daily business while taking in less in the way of revenue, the lack of excitement Franklin alluded to is in the necessity of putting off community discussions and decisions that would allow her administration to do more than make cuts to services and the employees who provide those services. Between 2018 and the 2023 budget, the city has cut the equivalent of nearly 42 full-time employees, while the city’s population has grown and the demand for services has increased.

Last year, even in the midst of the covid-19 pandemic, Franklin’s budget declared the city had made all the cuts it could and anticipated being able to put revenue and other budget questions to residents and voters that could start to move the city toward resolving the structural deficit and more sustainably and equitably support a thriving city.

This year, that effort has been swamped, the mayor said in her budget address, “by circumstances beyond our control.”

“The economic and human toll of the pandemic has greatly increased the need for public services, at a time when the highest inflation rate in 40 years makes those services even more expensive to deliver,” Franklin said in her address.

To allow the city’s residents and businesses the cushion to face those financial burdens, the administration is putting off discussion of new revenue and adopting some short-term — but not sustainable — solutions to pare the city’s costs, including putting off maintenance of buildings, vehicles and equipment and deferring payments toward the city’s long-term liabilities; in order to maintain basic services.

Yet, the budget and revenue issues faced are not unique to Everett or even other local governments.

Among the nagging constraints that all local governments face are a state law that caps property tax revenue increases at 1 percent without voter approval; and sales tax rates that are reaching the upper limit of consumers’ patience. Shoppers in Everett, for example, pay a sales tax of 9.9 percent — with 6.5 percent going to the state and 3.4 percent to the city — nearly a dime added to every dollar spent.

Businesses and residents themselves throughout the state also continue to struggle with the consequences of that same package of taxes.

The state’s businesses — especially small businesses and those with thinner profit margins — are disadvantaged by the current business and occupation (B&O) tax, which taxes gross receipts rather than net profits.

State residents, meanwhile, are burdened with a package of sales and property taxes that are considered the most regressive in the nation, meaning that lower- and middle-income families pay a greater percentage of their income as taxes than do wealthier families.

In its 2018 state-by-state report on state taxes, the Institute on Taxation and Economic Policy noted that the state’s lowest-paid fifth of families, making less than $24,000 a year, paid 17.8 percent of their income as taxes; the middle fifth, making between $44,000 and $70,100, paid 11 percent of their incomes as taxes; while the top fifth, making $116,000 or more, paid between 7.1 percent and 3 percent, that slim 3 percent slice reserved for the top 1 percent, making at least $545,900 a year.

At the same time, the state may be facing another McCleary-like crisis — which challenged the state to meet its constitutional obligation to amply fund K-12 education — this time over construction and modernization of schools. School districts, many in rural areas, have found great difficulty in recent years in convincing district voters to approve levies for operation and bonds for school construction. Late last year, the Wahkaikum School District in southwest Washington, filed suit against the state for failing to provide all students with safe and modern school buildings.

Simply put, the state’s tax structure isn’t working for its residents, its businesses or its schools and governments. It’s time for the state Legislature to begin consideration of meaningful reforms.

This is not to say that state officials and lawmakers are unaware of the limitations and inequities in the state’s package of taxes. In recent years, a bicameral and bipartisan group of lawmakers has been working with state agencies and meeting with state residents to examine potential areas of reform. The Tax Structure Work Group is nearing a final report and potential tax policy reforms for the Legislature to consider next year and beyond.

With final recommendations yet to come, the group’s most recent report outlines some of the scenarios discussed that may help shape possible reforms. The scenarios range in complexity from limited changes to broader packages that consider several reforms.

Some of the options include:

Changing the limit on the property tax to a formula based on state population and inflation, rather than the cap of 1 percent;

Reducing the property tax and replacing that revenue with a wealth tax;

Replacing the B&O tax with a value-added tax and a tax on employee compensation, or a margins tax, similar to one used in Texas, and the compensation tax; or

Eliminating the B&O tax, and reducing sales and property taxes, while adopting personal and corporate income taxes, at either flat or progressive rates.

All involve advantages, drawbacks and differing odds of adoption. Even given the opportunity for significant reductions to sales and property taxes, major sentiment remains against an income tax in the state and would likely be challenged on state constitutional grounds, as the earlier adopted but not yet implemented capital gains tax, now before the state Supreme Court, has shown.

But, given a tax structure that is widely viewed as regressive for taxpayers, a burden on businesses and limiting for local government, state lawmakers — and the rest of us — need to start hashing out the best options for a reconsideration of the state’s tax structure; for all concerned.