Posted by: Tim Sweeney | January 13, 2014

Sales tax dependent system hits low income hardest

Our state’s revenues live and die by the sales tax. In fact, there is no other state that relies as much on the sales tax as Washington, according to a National Conference of State Legislature’s report.

Tim Sweeney is The Policy Junkie

Tim Sweeney is The Policy Junkie

The sales tax is so important that, Arun Raha, our state’s former chief economist during the troubled years of 2008 – 2012, would encourage people to go out and buy a new car, perhaps two.

While state revenues have picked up, there is a disturbing trend that suggests our state’s tax system, in its current form, will never be capable of keeping up with our needs. In its November 2013 report, the state’s Economic Revenue and Forecast Council noted that general fund state revenues have reached a record low relative to state personal income and this downward trend in the ratio of revenue to income has been going on since 1995. ( See Washington State Economic and Revenue Forecast, November 2013, page 51).

A clue as to why our state system is losing ground to our personal income can be found in a national analysis of non-elderly taxpayers based on income.

Because of our heavy reliance on the sales tax, Washington’s tax system hits hardest on lower income taxpayers as measured by percentage of income.  For instance, those earning less than $20,000 annually paid 16.9 percent of their income in state and local taxes. Those making between $38,000 and $60,000 paid 10.4 percent of their income in state and local taxes while those making over $430,000 paid only 2.8 percent.

A different analysis by our state’s Office of Financial Management found a similar disparity in tax burden by income, noting that the lowest 10 percent earner pays, as a percentage of income in taxes, four and half times that which is paid by a top 10 percent earner.

One counter argument is that even at the lower percentage, the higher income earners pay considerably more in taxes. Still, its clear our state tax system is broken if it digs significantly deeper into low and middle income taxpayers’ pockets than wealthier taxpayers, and it’s not capable of keeping pace with our economy and state and local needs.

Historically, the answer to an article like this has been to propose an income tax.  But Washington has been there and done that several times. The most recent attempt in 2010 was promoted by the father of the richest man in the state, Bill Gates, Sr. The ballot  initiative would have created a state income tax for individuals earning over $200,000, and couples earning over $400,000. In turn, the measure would have reduced the limit on statewide property taxes  and lowered business taxes. (I would have preferred a lowering of the sales tax.) Almost two-thirds of voters opposed the measure. Helping underwrite the opposition was Microsoft CEO Steve Ballmer.

Another reform proposal is to eliminate the current sales tax exemption on services. As our economy has shifted more toward services, our tax system has not captured that growth. As a result, taxable sales as a percentage of income has been declining.  Taxable sales as a share of income has dropped from 50 percent in the 1970s and 80s to 35.2 percent in 2013. (See Page 54)

Removing the exemption on personal services (legal, accounting, engineering, etc.) would not be easy. In previous legislative attempts to eliminate the exemption, professionals have successfully argued against repealing the exemption. It’s fair to point out that service providers pay a higher business tax for the honor of being exempt from the sales tax–but the revenue generated by the higher business tax is not as much as would be generated by a sales tax on services.

As I finished this article, Superintendent of Public Instruction Randy Dorn proposed a one cent sales tax increase to fully fund basic education.  “A general increase in the sales tax is not the best solution to this problem. But something has to be done,” said Dorn in his announcement.

I agree something has to be done and a sales tax increase is definitely not the best solution.

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Responses

  1. Riley, the link to read further comes up with “nothing found”. – Doug Smith

    Sent from my Samsung Epic™ 4G TouchThe Political Junkie wrote:

  2. Link to Read More from Sales tax dependent post is broken.

    Ruth 

  3. […] Dorn, has proposed raising the sales tax as a way of fully funding education. But, as discussed in an earlier article, our sales tax is a regressive tax that hits lower income households harder than higher income […]

  4. Most major stores property & portfolio research have sales at certain times of the foreclosure judgment.
    Ask tow companies where the auctions are held annually and sometimes quarterly.

    The auctions are not property & portfolio research only useful for the state.
    Not just anything though – the products that you
    sell, allowing you to bid higher than the previous bid.
    After you find the right tenants who may pay timely rent and do not step outside of that
    budget. Do not rely completely on reports.


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