Editorial: What would you change about state’s tax system?

By The Herald Editorial Board

Here’s your chance not just to complain about taxes but — perhaps — help make Washington state’s tax system more equitable and easier to understand.

A work group of state lawmakers and other state and local officials are continuing efforts to consider potential reforms to the state’s system of taxes by the Legislature in coming years.

While the state Tax Structure Work Group has completed a series of online town halls that took public comment on the tax system and several proposed reforms, the work group still is taking comment through online surveys — one brief, the other more detailed — that allow state residents to comment on several ideas being considered.

The surveys ask questions about tax fairness; options for maintaining or reforming the state’s current system of sales, property, business and occupation and other taxes; and different proposals that would reduce or replace the state’s current slate of taxes.

The work group — which includes lawmakers from both parties and chambers and representatives from the governor’s office, the state Department of Revenue, the Association of Washington Cities and the Washington State Association of Counties — is looking at changes to the state’s tax system that would provide more equity and fairness, greater stability and predictability in meeting the state’s revenue needs and more transparency regarding the tax system.

The work group is expected to consider public comments and continue discussions over the coming year, with the potential for legislation in 2023.

The potential reforms seek to be revenue-neutral, meaning the intent is not to raise more or collect less in taxes and revenue but to find a better combination of taxes that would improve the tax structure.

And there’s no where to go but up for the state in terms of tax fairness.

Washington state ranks at the very bottom of the 50 states in the most recent report by the Institute on Taxation and Economic Policy, a nonpartisan tax policy advocacy group. Its report, “Who Pays?” is its state-by-state assessment of tax systems. ITEP ranked Washington last for tax fairness, leading its “Terrible Ten” states, based on the percentage that the state’s lowest-income families pay in taxes against how little the state’s wealthiest pay in taxes.

“Washington has the most unfair state and local tax system in the country. Incomes are more unequal in Washington after state and local taxes are collected than before,” its sixth edition of the report found.

Take a look: Washington state families in the lowest 20 percent for income — those making less than $24,000 a year — pay about 17.8 percent of what they earn as taxes, while the top 1 percent — those making at least $545,900 or more a year — pay just 3 percent of their income in taxes. Those in the middle 20 percent, with incomes between $44,000 to $70,100, pay 11 percent of their income in taxes.

That disparity — giving Washington the dubious distinction of having the most regressive tax system in the nation — is the result of a system that has no income tax and instead relies heavily on state and local sales taxes.

ITEP, in its “Who Pays?” report, finds that the states with the most equitable tax systems put lower reliance on regressive sales taxes, and instead use progressive income tax brackets and rates that are broad-based; and offer targeted and refundable low-income tax credits.

Of the state’s total tax revenue for 2020 of $26.83 billion in 2020 about 45 percent — $12.1 billion — was generated by sales taxes, according to the state Department of Revenue; another 11 percent — $3 billion — came from sales tax on tobacco, alcohol and the state’s tax on gas and diesel fuel. Business and operation taxes, also called B&O, generated 17 percent of revenues — $4.6 billion; while property taxes accounted for 14 percent of revenue or $3.6 billion. Other taxes made up the remaining 13 percent, $3.6 billion.

Where does that money go? About 47 percent supports K-12 public education; 33 percent is spent on human services; nearly 7 percent on higher education; and the balance goes toward general government, natural resources, debt service and other expenditures.

Among proposals under consideration and included in the online survey:

One, regarding property taxes — currently limited to no more than a 1 percent increase without approval of voters — would tie increases to the state’s population and inflation.

A second would waive the property tax for the first $250,000 of assessed value of a primary residence and would replace lost revenue with a 1 percent wealth tax on stocks and bonds worth more than $1 billion.

A third would reduce the states sales tax by 2 percentage points; reduce the property tax by 25 percent and waive the first $250,000 in assessed property value and eliminate the B&O tax, while adopting flat income taxes for corporations and individuals.

A fourth, with the reductions and eliminations outlined above, would adopt progressive rates for corporate and personal income taxes.

Washington state has no income tax; voters approved a state income tax in 1931, but the law was successfully challenged in 1933, with the state Supreme Court ruling it unconstitutional. Further court cases and elections have kept the state’s tax package free of an income tax, but some have suggested that the ruling targeted a graduated income tax and that a flat tax on income might pass constitutional muster. Adopting a graduated income tax would require a two-thirds vote of the Legislature and a constitutional amendment approved by voters.

The state’s residents and businesses will have their own takes on what’s fair and what’s not regarding the state’s tax system and any proposals for reform being considered; but that’s why those thoughts are needed now.

The co-chairs for the work group — state Sen. Keith Wagoner, R-Sedro-Woolley, and state Rep. Noel Frame, D-Seattle — likewise, disagree on the best options for reform, “but we are aligned on the process,” Wagoner told Washington Wire in September.

“And I think that’s been really helpful. (Frame) and I … disagree on a lot of things. But let’s agree on a process where we can hear from the people. That’s what this is all about.”

Take the survey

Washington residents can take the Tax Structure Work Group’s short or longer survey at taxworkgroup.org/survey. More information about the work group, the state’s tax system and the proposals under consideration — including calculators that show what your tax bill might be under different proposals — are available at taxworkgroup.org/learn.