Reforming Our
Table of Contents
History of Our Economy and Tax System
History
of Our Economy – June 6, 2008
Inequality
of Income and Wealth Have Been Increasing* – May 2,
2008
Our Tax
System’s History – May 2, 2008, June 6, 2008
Our Tax
System Has Become More Regressive – May 2, 2008
History
of Attempts to Adopt a State Income Tax – June 20, 2008
Our Present Tax and Budget
System
Our
Our
Our
Business and Occupations Tax – May 23, 2008
Tax Breaks for
Our Tax System is Unfair – April
11, 2008
Our Tax
System is the Most Regressive of Our 50 States – May 2, 2008
Our Tax
System Has Become Less Productive – May 2, 2008
Our Tax System
Doesn’t Produce Enough Revenue – May 16, 2008
Our Tax
System is Unstable
Recessions
Increase Our Unfair Taxation – May 2, 2008
Securing
Support for Reforming Our Tax System
– April 25, 2008
What is a
Good Tax System?* May 16, 2008
Why
Progressive Taxation – June 13, 2008
Alternatives
for Improving Our Tax System
Taxing
high incomes to improve public services, reduce regressive taxes – July 4,
2008
Needed
Reforms to Our Tax System – April
18, 2008
Obstacles to Reforming Our Tax
System
Denial
that Reform is Necessary – May 9, 2008
Distrust
of Reforms and Reformers
Political
Risk
Inaction
Strategies for Reforming Our
Tax System
Educate
Our Voters Before Attempting Political Action
Our tax system is (1) unfair, (2) doesn’t produce enough revenue, and (3) responds poorly to economic recession. Low income people are unfairly taxed too
much. High income people don’t pay to
maintain and improve sustain our physical and social infrastructure which
enabled their incomes. We don’t obtain enough revenue to support our
aspirations for equal access to quality public services. During recessions,
taxes produce less revenue and taxes often become even more unfair.
We can attempt to correct our
present tax system by raising or lowering any of our existing regressive
taxes. But this doesn’t work. If we raise any of them to produce more revenue,
we make them more unfair. If we lower
any of them to make them to make them more fair, we make them less
productive. And either way, they remain
unstable.
We deny these defects of our system. Perhaps sometimes accepting one, while
rejecting the others. We especially
avoid publicly discussing together these three flaws in our tax system. Following our conventional wisdom, we assume
that major changes can’t be made.
The only way we can correct our tax system is to substitute a
progressive income tax for some of our existing regressive taxes. This will make our tax system more
productive, more stable and more fair, lowering taxes for a great majority of
our people. Only high income people will
pay more taxes, as they should to repay the benefits they have received from
our social and economic heritage. We
need a progressive income tax.
Most of our
Our Tax
System, Past and Present
History of Our
Our Native Americans
lived near the
In the 1850s, Americans
came to provide logs and lumber for the
During the late 1800s,
Our
Our economic success is
creating new challenges. Our natural
environment is threatened. Due to our
inadequate tax system, our physical and social infrastructure has been unable
to keep up with demands. Unless we can
better manage our growth, we may become choked by it, losing many of our
economic advantages to other regions. For more.
Inequality of Income and Wealth
Have Been Increasing
From the late 1980s to the mid-2000s, the average income of our
poorest families increased by 5.5%, that of middle fifth of families by 11.8%
and that of top fifth by 41.3%. The
wealthiest fifth of families have average incomes 6.9 times as large as the
poorest fifth. This growth in income
equality is the 10th largest in the nation. The very richest families (top 5%) have
average incomes 11.2 times as large as the poorest one fifth.
Despite the recent years of economic prosperity, the living
standards of lower-income families stagnated or even declined. From the late
1990s to the mid-2000s, a period of economic growth, the incomes of poor
families in
The income of our wealthiest families has also been growing at a
faster rate than that of our average income families. The ratio has increased from 2 to 2.5 since
the late 1980s. This growth in income
inequality is the 9th largest in the nation.
The gap between our richest and poorest families is now the 27th
largest in the
Several factors produced large and growing income gaps in most
states:
• Growth in wage inequality.
• Expansion of investment income.
• Government policies.
States Can Mitigate the Growth in Inequality
• Raise, and index, the minimum wage.
• Improve the unemployment insurance system.
• Make state tax systems more progressive.
• Strengthen the social safety net.
History
of Our
Based on
Excerpts from HistoryLink.org
Early Tax System Relied on Property Taxes
The 1911 Legislature
was notable for passing a wide-ranging package of progressive legislation that
included the state constitutional amendments providing for citizen initiatives,
referenda, and recalls of elected officials; workmen’s compensation; and an
eight-hour work day for women. In 1912, the Legislature passed an inheritance
tax that ranged from 1 to 12 percent. Motor vehicles were appearing, and in
1915 an auto license (excise) tax was added. Gasoline was first taxed in 1921,
at one cent a gallon. Property taxes
continued to rise, however -- nearly doubling from 1910 to 1920 -- as the
growing population and economy required more and better schools, roads,
hospitals, and civic infrastructure.
Sales Taxes Added to Tax System in 1935
The Revenue Act of
1935 was the most comprehensive tax overhaul in the state’s history. “With a
few additions and some tweaking, this system remains today – a tax structure
suited well enough for an economy based on commercial agriculture,
manufacturing, resource extraction, and locally based commerce” (Gates Report). With the act, the state’s principal revenue
sources shifted from property taxes to excise taxes -- taxes measured by a
transaction, such as the selling price of a car. In fiscal year 2003, taxes
authorized in the Revenue Act of 1935 generated 75 percent of all tax receipts
supporting the general fund, the state Department of Revenue reports.
In 1940, voters
approved a constitutional amendment allowing voters to pass extra levies with a
supermajority of 60 percent. Such “excess levies” became the primary support
for school construction and operations and backing public bonds for parks,
roads, and other local and state improvements. (“Pay as you go” levies, which
do not create public debt through bonds, require only a simple majority.)
In 1944,
Tax Breaks
Tax breaks in recent
years for various businesses are similarly justified by the promise of more
jobs or more business activity, but the amount of taxes avoided due to some of
these subsidies -- and their accelerating use -- has become a more
controversial aspect of the state’s tax system in recent years. A state Department of Revenue report
estimated the amount avoided by taxpayers in the 1999-2001 biennium at $46
billion. For the 2003-2005 biennium it will be $64.7 billion, but about $13
billion could be recovered if questionable exemptions were repealed, said Don
Taylor, revenue analysis manager at the state Department of Revenue. Exemptions have been patched on until there
are now more than 400 of them, including: commercial vessels, sales to
Tax and other benefits
accorded The Boeing Company in late 2003 to build its 7E7 Dreamliner in
Present Tax Sources of Revenue
The state’s 2003 tax
revenue came from sales/use taxes (48.6 percent); B&O tax (15.7 percent);
state property tax (12.1 percent); selective sales taxes (11.4 percent); real
estate excise tax (4.2 percent); other taxes and receipts (8 percent). For
comparison with other states. For
more about property taxes.
In a report issued on
August 18, 2004, the state Department of Revenue said state and local tax
burdens in
Many Failed Recommendations To Include an Income Tax
During all this
history, insufficient revenues and claims of unfairness have led to frequent
studies of our tax system. Nine
governor’s tax advisory councils have found the system “flawed” (Gates Report),
and most recommended some form of income tax, but no significant reforms ever
emerged from their conclusions. The many
attempts to include a personal or corporate income tax or both have all failed
due to rejection by our voters, failure to pass one or the other house of our
legislature, veto by our governor, or court order. For
more.
Our Tax System Has Become More Regressive – April 18, May 2, 2008
The CBP reports that “In fiscal year 1995, state and local taxes as
a share of personal income was 11.7 percent in
At the state level, it is estimated that the 1990s
tax cuts cost the state eight percent of its revenue. During the following
economic downturn, the state was faced with cutting important programs and a
downgraded bond rating.”
Tax rates were not cut in the 1990s. See a history of our sales tax rates. Incomes of high income people increased. As a result, tax revenues became a smaller
percentage of our economy. This
threatens our state’s ability to fund important public priorities including
education, transportation, health care, and preparation for another economic
slowdown.
While our
overall taxes are low compared to other states, our sales taxes are high: (4.8 percent of personal income). The taxpayers in
only one other state (
Attempts to Adopt a State Income Tax – June 20, 2008
The following
is based on HistoryLink.org essay 5735
Washington State Taxation
1921
Governor’s commission endorsed an income tax, but not yet
1929
Income tax passed the senate, but died in House rules Committee
1930
Governor’s commission recommended personal and corporate income taxes
1931
Both houses passed personal and corporate income tax, vetoed by Governor
1932
Personal and Corporate Income Tax initiative passed, but ruled unconstitutional
1934
Legislature proposed a constitutional amendment for an income tax, rejected by
voters
1935
A personal and corporate income tax passed, but was declared unconstitutional
1937
Voters reject an income tax
1941
Voters reject an income tax
1950
Corporate income tax passes, but found unconstitutional
1951
Personal income tax bill didn’t pass
1966
Governor’s Tax Advisory Council recommends personal and corporate income tax
1968,
Governor’s Tax Advisory Council recommends personal and corporate income tax
1969
Legislature passed income tax constitutional amendment, rejected by voters 2 –
1
1971
Governor’s Tax Advisory Council recommends personal and corporate income tax
1973
voters defeat income tax amendment by 3 to 1
1982
Governor’s Tax Advisory Council recommends personal and corporate income tax
1988
Governor’s Committee on
1993
Governor Lowry was excoriated for even suggesting feasibility of an income tax
2002
Washington Tax Structure Study Committee recommended 3.8% flat income tax.
2004
Democratic candidate for governor Ron Sims called for an income tax. His candidacy failed.
Frequent studies have occurred and virtually every
one has recommended the adoption of an income tax. It has been passed by initiative, by one or
both legislative houses, and by the government,
but on the few cases it has become law, the law has been overturned by
our state supreme court. The need is there,
but so far the means have been lacking.
Our Present
Tax and Budget System
Our
Excerpts from Washington State’s
Budget Process
The
Biennial Budget Cycle
OFM Issues Budget
Instructions
Ongoing Agency Strategic Planning
May 2008 Office of Financial Management Issues Budget Instruction
August 2008 Agencies Submit Budget Requests
Fall 2008 Office of Financial
Management Review and Governor’s Decisions
December 2008 Governor Proposes Budget to Legislature
January 2009 Legislature
Convenes (2nd Monday of January)
April/May 2009 Legislature Passes Budget
May/June 2009 Governor Signs Budget
July 1, 2009 Biennial Budget Takes Effect
Ongoing Performance Measure
Tracking
Roles and
Responsibilities in the Budget Process
State agencies are responsible for developing budget estimates and submitting budget
proposals to the Governor. Once the budget is enacted by the Legislature,
agencies implement approved policies and programs within the budgetary limits
imposed by legislation. Under
The Governor recommends a budget to the
Legislature consistent with executive policy priorities. Appropriation bills,
like other legislation, are subject to gubernatorial veto authority and may be
rejected in part or in their entirety within a defined number of days after
legislative passage. After a budget is enacted, the Governor’s general
administrative duties include monitoring agency expenditures and helping to achieve
legislative policy directives.
The Office of Financial Management (OFM)
coordinates the submittal of agency budget requests and prepares the Governor’s
budget recommendation to the Legislature. Budget staff from OFM work closely
with state agencies to explain and justify planned expenditures. Analysts
evaluate all budget requests for consistency with executive policy priorities
and to ensure that proposed expenditures match fiscal constraints. OFM is also
responsible for maintaining the state’s central accounting system and
developing certain population and demographic forecasts.
Through appropriations bills, the Washington
State Legislature mandates the amount of money each state agency can spend
and, in varying degrees of detail, directs agencies where and how to spend it.
The House and Senate employ staff analysts to help
review and evaluate the state budget, and to prepare appropriation bills. As
with other legislation, if the two houses cannot agree on a budget or revenue
proposal to implement the budget, a conference committee of legislative representatives
may be convened to reconcile the differences.
The Economic and Revenue Forecast Council is
composed of representatives from both the legislative and executive branches.
Each fiscal quarter, the Council adopts an official forecast of General
Fund-State (GF-S) revenues for the current and (at some point) the ensuing
biennia. These forecasts, together with any reserves left over from previous
biennia, determine the financial resources available to support estimated
expenditures.
The Caseload Forecast Council was created by
the 1997 Legislature and began operations in the 1997-99 Biennium. The Council
consists of two members appointed by the Governor and four appointed by the
legislative political caucuses. The Council prepares official caseload
forecasts for state entitlement programs, including public schools, long-term
care, medical assistance, foster care, adoption support, adult and juvenile
offender institutions, and others.
The State Expenditure Limit Committee,
consisting of legislators and representatives of the Governor and Attorney
General, was established in 2000 to determine the state General Fund
expenditure limit created by Initiative 601.
Budget Development Approach
In general,
For the 2003-05 Biennium budget proposal,
More information on the Priorities of Government is
available on our
Website.
Budget and Accounting Structure
State government is organized into 124 agencies,
boards, and commissions representing a wide range of services. While many state
agencies report directly to the Governor, others are managed by statewide
elected officials or independent boards appointed by the Governor. Most
agencies receive their expenditure authority from legislative appropriations
that impose a legal limit on operating and capital expenditures. Appropriations
are authorized for a single account, although individual agencies frequently
receive appropriations from more than one account.
A few agencies are "nonappropriated,"
meaning that they operate from an account that is legally exempt from
appropriation. Expenditures by these agencies are usually monitored through a
biennial allotment plan. There is no dollar limit as long as expenditures
remain within available revenues and are consistent with the statutory purpose
of the agency.
The state’s budget and accounting system includes
more than 400 discrete accounts, which operate much like individual bank
accounts with specific sources of revenue. The largest single account is the
state General Fund. State collections of retail sales, business, property, and
other taxes are deposited into this account. Expenditures from the state
General Fund can be made for any authorized state activity subject to
legislative appropriation limits.
Other accounts are less flexible. Certain revenues
(for example, the motor vehicle fuel tax or hunting license fees) are deposited
into accounts that can only be spent for the purpose established in state law.
In budget terms, these are referred to as "dedicated accounts."
Budget
Drivers
In addition to new policies adopted by the
Governor, Legislature, or federal government, the state budget can also be
significantly influenced by demographic and economic factors. Differences in
these "budget drivers" affect the cost of services or the number of
persons requiring services. An example of the demographic connection appears in
K-12 education, where expenditures for the state’s constitutionally mandated
responsibilities for basic education are closely tied to the number of school-age
children in the state. Higher-than-average inflationary costs – such as those
for medical expenses – also affect expenditures in the state budget.
Spending
Limits in the State Budget
Major
Provisions of Initiative 601 (initially enacted in 1993, statute modified in
2005):
Fiscal Growth Factors
and General Fund-State Expenditure Limit
·
Establishes a
"fiscal growth factor" based on a ten-year average growth in personal
income.
·
Mandates an
annual expenditure limit on the aggregate of the General Fund-State and six
related accounts (Public Safety and Education Account, Equal Justice Account,
Water Quality Account, Violence Reduction and Drug Enforcement Account, Student
Achievement Account, and Health Services Account) to be calculated by the State
Expenditure Limit Committee each November, based on the fiscal growth factors
applied to previous year’s limit.
·
Requires the
Governor’s budget to be consistent with the expenditure limit, and restricts
annual expenditures from General Fund-State and related accounts to the limit.
·
Allows
temporary expenditures above the limit after declaration of an emergency and a
2/3 vote of the Legislature for a law signed by the Governor.
·
The
Emergency Reserve Account, created by Initiative 601, is repealed as of July 1,
2008, and replaced by theBudget Stabilization Account. Any fund balance
remaining in the Emergency Reserve Fund is transferred to the Budget
Stabilization Account.
Taxes and Fees
·
Requires
a majority vote of the Legislature to raise state revenues or make a
revenue-neutral tax shift. (2005 legislation)
·
Additionally
requires voter approval if the state revenue measure results in expenditures
above the expenditure limit.
·
Limits state
fee increases to the fiscal growth factor unless legislative approval is
received.
The Debt
Limit
There are
two debt limits imposed on the state’s ability to borrow funds to finance
government programs in the capital budget: the constitutional limit of 9
percent of general state revenues; and a more restrictive statutory limit of 7
percent of general state revenues. The state cannot sell general obligation
bonds if the debt service from that sale will cause total debt service to
exceed 7 percent of the average of general state revenues for the preceding
three fiscal years.
The size of bonded capital
programs affordable under the debt limit can change depending on:
·
The
amount of new projects in the capital budget,
·
Changes
in revenue forecasts that increase or decrease state revenues,
·
Changes
in the structure of borrowing (e.g., length of term on bonds), and/or
·
Changes in the interest rates at which bonds are sold.
The Budget Stabilization Account
ESSJR 8206,
“Rainy Day Fund,” passed by the voters in November 2007, established the Budget
Stabilization Account (BSA), so known as the Rainy Day Fund.
al
·
1%
of general state revenues must be transferred annually to the BSA.
·
3/5
vote required to appropriate from BSA.
·
Exceptions
(constitutional majority vote):
°
Employment
growth < 1%
°
State
of emergency due to catastrophic event.
·
Takes
effect July 1, 2008 (FY 09).
Having no individual or
corporate income tax,
Sales tax rates include
a .065 state rate plus a local rate which varies from .010 to .025 depending
upon location. The total thus varies
from .075 to .090. For local rates at specific locations.
Property Tax Information
About 30
percent of total state and local taxes consist of property taxes. Property taxes continue to be the most
important revenue source for public schools, fire protection, libraries, and
parks and recreation. Various taxing
districts, including the state and local jurisdictions, levy property
tax. The individual taxing districts determine the amount of money needed.
Property taxes are
imposed upon the value of real and personal property. The value of real property is assessed by the
county assessor which by state law should equal 100% of market value. Based upon the value of the property within
each district, the county assessor calculates the
tax rate necessary to raise the money required by that district. The
amount of property tax due on an individual property is based on the
combination of tax rates and the assessed value of the property. For more.
Excise Tax Information
Besides
sales and property taxes, a wide variety of excise taxes are imposed upon
various services, goods and harms to the public. Many excise tax revenues are dedicated to
spending for certain purposes. For more.
Our
An inheritance tax is an assessment made on the portion of an estate received
by an individual. It differs from an estate tax which is a tax levied on an
entire estate before it is distributed to individuals. It is strictly a state
tax. Only eleven states still collect an
inheritance tax. They are:
Washington Has an Estate Tax
As for estate taxes, the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) phases out
the federal estate tax that culminates in full repeal in 2010. On a much faster
track, the legislation repeals over four years -- 2002 through 2005 -- the
federal estate tax credit to which state estate taxes are tied. In most states,
estate and inheritance taxes are designed in such a way that states face either
a full or partial loss of estate tax revenues as this credit is phased out.
States can avert this loss of revenue by "decoupling." Decoupling
means protecting the relevant parts of their tax code from the changes in the
federal tax code, in most cases by remaining linked to federal law as it
existed prior to the change.
Seventeen
states and the
Of
these, 12 states acted to decouple from the federal changes.
In
addition, five states and the
On February
3, 2005, Washington State Supreme Court unanimously held that
In response
to Hemphill, the Washington State Senate on April 19 and the Washington House
on April 22, 20, by narrow majorities, passed a stand-alone state estate tax
with rates ranging from 10% to 19%, a $1.5 million exemption in 2005 and $2
million thereafter, and a deduction for farms for which a Sec. 2032A election
could have been taken (regardless of whether the election is made). The
Governor signed the legislation. For more.
In the fall of 2006, anti-tax organizations in