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Washington becoming low-tax state? One new report ranks state at No. 28 for tax burden, another puts it down at 36th

Post by Brad Shannon / The Olympian on March 22, 2013 at 8:29 am with No Comments »
March 22, 2013 9:24 am
Rep. J.T. Wilcox
Rep. J.T. Wilcox
Carlyle
Rep. Reuven Carlyle

The Washington, D.C.-based Tax Foundation put out its new report on state and local taxes this week and it shows Washington is a below-average state for taxes. The Evergreen State landed No. 28 out of 50 states for high taxes, which means 22 states were lower and 27 were higher when state and local government taxes were compared to total incomes.

The national report pegged Washington’s state-local tax burden at about 9.3 percent of incomes in 2010.

Washington ranked even lower in a January report from the state Department of Revenue – linked here – that puts it at No. 36, also for state and local tax burden when compared to income. The state report relied on Census data and, unlike the foundation, did not adjust the figures, which accounts for the differing rankings.

Tax burdens can be complicated to measure and compare – and in Washington alone the tax code has more than 600 exemptions or special rates.

Even so the two reports offer some context for the tax debate that is about to unfold at the Capitol, following Wednesday’s revenue forecast. It showed state-government revenues are growing slowly but leave the state with a budget shortfall of about $1.2 billion.

So far the Democrats have not put a serious revenue plan on the table to close that gap and raise another $1.4 billion or so for K-12 schools in response to a Supreme Court ruling. But Gov. Jay Inslee is expected to release a partial budget and revenue plan – including closure of tax exemptions – in the next week.

Inslee ran on a platform against raising taxes but did call for closing tax exemptions and earlier this year said his no-tax pledge would not be violated if the Legislature extended the business-and-occupations tax surcharge past its June expiration date.

Democratic Rep. Reuven Carlyle of Seattle says the state tax code is full of holes – or exemptions – that favor select industries, which he sees as a growing problem because the tax system is not keeping up with the growth in demand for state services.

“We are on a  race to the bottom to be a low tax, low service, low quality of life state. … I think at some point it’s time for a courageous conversation about the fact we are so much more than what we have become as a state,’’ Carlyle said in an interview earlier this month.

There is a flip side of being a lower-tax state, Carlyle said. ”There is pain when you double tuition. There is pain when you have a pathetically, humiliatingly low high school graduation rate. There is resentment when you have to close state parks. There is anger when you have insufficient, inadequate access to day care,” Carlyle said.

The Republican-controlled Senate and allies in the House are insisting on budget cuts without tax increases in order to funnel more money into K-12 public schools. They say closing tax loopholes is like raising taxes.

A common complaint from anti-tax lawmakers is that taxes can’t be raised without harming the economy, and Rep. J.T. Wilcox, R-Yelm, worked that theme into a press release after the revenue forecast.

“This continues to show we have a recovering, but fragile economy. People are still hesitant to spend, and employers are still hesitant to hire,” Wilcox said. ‘These hard-pressed taxpayers are already sending more money to Washington, D.C. due to the reinstatement of the payroll tax and federal health care implementation. Today’s report reinforces my belief that no is not the time to increase taxes. Raising taxes would only add more uncertainty to our economy, slowing the potential growth of jobs for the thousands who remain unemployed and underemployed.”

To be fair, neither the Republicans nor the Democrats have been able to say over the years what the right level of taxation – or services – is for Washington.

But the Revenue report says Washington’s tax burden is now near the low end of the past decade and well below earlier eras, like the 1970s when the tax burden peaked at $128 per $1,000 of income:

“For the last ten years, Washington’s tax burden by the income measure has varied from a high of $111.99 in 2006 to a low of $93.34 in 2009, with rankings ranging from 26th to 37th. The Fiscal Year 2005 tax burden ranking of 37th was the second lowest since the tax comparisons have been compiled. For the most recent year, Fiscal Year 2010, Washington’s tax burden is $96.08 resulting in a ranking of 36th.”

Because the Tax Foundation and Revenue Department reports used different methods, the state report says Washington’s tax rate ranks lower but is paradoxically higher, at 9.6 percent of income, than the 9.3 percent rate reported by the foundation.

Revenue spokesman Mike Gowrylow says the Tax Foundation adjusts its figures for the share of a state’s taxes that are exported to other states or imported. Alaska’s oil taxes, for instance, are exported to other states where crude is shipped and refined and oil products are consumed, and Washington business-and-occupations tax is paid by some out-of-state firms doing business here.

“However, we believe they import more taxes into Washington than they export from Washington because they don’t fully understand our unique B&O tax,” Gowrylow said.

There is more to the story.

The Revenue report shows the state tax burden ranks No. 10 of 13 western states.

The Tax Foundation says Washington’s business-tax climate is sixth best overall in the country. In one category, Washington ranks No. 1 for not having an income tax but it is near the bottom for its high sales tax. The foundation also considers the business-occupations tax, which is levied on gross receipts, to be the worst kind of business tax.

The Evergreen State ranks higher on per capita taxes – No. 13, according to the Foundation, and No. 21, according to Revenue. The state report says per capita state taxes were $4,016 in 2010, which it said was below the national average.

Washington’s tax structure has other effects. The heavy reliance on sales taxes, augmented by so-called sin taxes on liquor and cigarettes, tends to hit lower-income residents more heavily than those who earn more.  Gas taxes can have a similar effect.

This is why the state tax system keeps earning national attention as the most unfair to the poor.

A report by the Institute on Taxation and Economic Policy – which we wrote about in January – rates Washington state’s system as the worst in the country in terms of how much harder it hits the poor and middle-class than the rich.

The same lack of an income tax, which gave the state good marks for business climate, is a clear factor.

ITEP found that all states’ tax systems are weighted in favor of the wealthy, which means those well off pay a smaller share of income on state and local taxes than do the poor. But Washington was at the top of what ITEP calls the “Terrible Ten.”

“In these ‘Terrible Ten’ states, the bottom 20 percent pay up to six times as much of their income in taxes as their wealthy counterparts. Washington State is the most regressive, followed by Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana, and Alabama,” the report’s executive summary states.

Despite that outcome, Washington’s relatively higher incomes mean that residents pay more in income taxes than many other states – in the aggregate, which includes taxes paid by the state’s billionaires.

And this tax burden – when added to state and local tax burdens shared by the rich or poor – made the state’s so-called tax freedom day the fourth latest of all the states in 2012, according to the Tax Foundation.

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