Monday, March 18, 2013

Washington State has a Revenue Problem

Washington State's revenue collection system was founded on the basis that it has a lot of land.  For decades, farm owners would be considered some of the wealthiest people for generations, producing a huge amount of food that is used both domestically and exported abroad.  In 2011, Washington had a Gross State Product of $355 Billion in economic output.  That's a huge number for a state of our size.  However, of that $355 Billion (US Bureau of Economic Analysis), Washington only collects a small fraction of that output in revenue.  In FY 2011, Washington collected only $17.4 Billion in taxes (US Census Bureau) which is only a meager 4.8%.  For a state such as ours, we should be collecting a significant amount more of revenue to fund the priorities that matter to Washingtonians.  As a state that prides itself on social justice issues as well as being in severe need of internal infrastructure improvement and expansion, it's important we fund these priorities by reassessing the kinds and sources of revenue we collect.  The per-capita annual salary for Washington is approximately $44,000 per year, the average annual salary is about $49,000 and a median annual salary of $55,000 (Office of Financial Management).  For a state that has a moderately strong middle class, we seem to be lacking in the area of revenue collection.

There are several reasons why our state is lagging behind in infrastructure and development.  One such reason is because of the lack of progressivity of our tax system.  The tax system currently in place does not distribute the tax burden in a way that maximizes revenue collection.  The state currently uses a one-size-fits-all tax code that collects revenue without taking incomes into account. The state taxes that account for the largest shares of revenue are the following: The Business and Occupation Tax, the Sales Tax, the Property Tax, and The Use Tax.

The Use Tax is a tax which basically states that if you own it, and you didn't buy it here, you have to pay tax for the right to own it.  Items which you pay sales tax on are exempt from the Use Tax.  Businesses often are required to pay this more than the average citizen, as businesses are subject to more inspection by the Department of Revenue and are required to keep detailed records of all their transactions.

The Sales tax, like the Use Tax is a tax based on the value of a purchase.  If you buy a non-prepared-food item, there is a 7.9% tax levied against the item at the time of purchase from a business.  So for a $1.00 item, you pay $0.08 tax.

The property tax is an annual tax levied against your property value, and that tax is adjusted by the value of your property each year.  There are means of protesting the county's reassessment of your property value, but usually the estimate comes below the market price by a few thousand per year.

The Business and Occupation Tax is a tax levied against gross receipts for a given business annually.  For example, if a business grosses $1,000,000 in sales, and the B&O tax for the business' type is 3%, then the state would receive $30,000 in tax revenue.  The rate varies based on the business' activity and type.

The above taxes all have a single thing in common...they disproportionately tax all income groups improperly.  The way Washington can solve it's revenue problems and bring the state back out of deficits and respond thoughtfully to the State Supreme Court's ruling that education must be fully funded as per State Constitutional Mandate, the state should explore retiring this archaic tax code which, in the day it was created, was appropriate for the time.  Furthermore, the state must challenge the assertion that the State Constitution prohibits an income tax.  I assert, personally, that income is property.  If you're a working person, then I would likely be right in assuming that your wages/income is your property, correct?  Now what keeps striking down the State's attempts at an income tax is the provision that taxes must be uniform in regards to a property type.  So, for example, property cannot be taxed at 4% of market value on this area, but then another property be taxed at 6% in another area by the State Government (counties may increase this for their revenue needs of course.)  The State Constitution didn't account for a tax on income, I would argue, and when The State Constitution was written, I personally believe that the creators of the document saw land as being the primary source of funding for public expenditures and wrote the constitution to maximize revenue from this source.

But today, with Washington moving more and more metropolitan and less agrarian, such a revenue system is unsustainable, and is now tied to an asset that shifts in value in the market cycle, causing severe revenue shocks to the State Budget when such cycles happen.  Further, there is a social justice argument to be had against a property tax.  For example, many farms in our state are barely squeaking by and have profit margins that are paper thin.  While burdened heavily by B&O and Use Taxes, they are also burdened by a severely harsh property tax which is levied on all the farmland they possess.  This presents a serious threat to a family farm which depends on land to exist.  In a time where property taxes are no longer the primary source of funding, it's important that we consider retiring the tax, as property taxes do not represent the income of a said farm or individual or family.  The property tax, in today's economy now represents an annual lease from the state.  Individuals who've

In regards to the B&O Tax, Sales Tax, and Use Tax, the source of problems with these revenue sources is that the tax is levied indiscriminately.  What that means is the following: 1) That it does not take individual financial circumstances into account when levying the tax...meaning that the single mom making $20k/year with three kids pays the same tax rate and amount as a person who makes $100,000/year.  Granted the person making $100k/year is going to make more monetarily, the effective tax rate is sharply lower than the one making $20k/year.

The same argument can be made for business incomes.  Business gross receipts is by far the worst part of a business income balance sheet to shave a tax off.  A business' gross receipts does not give a full picture as to the profitability of a business.  To shave 10% off the top of a business' gross receipts (when you account for the lost markup from the sales tax, the 8% paid for Use Taxes, and the 0.9-2.9% for the B&O tax, this is about what is lost).  A Mom and Pop small business who squeaks out a meager $20-$30k in annual receipts  should not pay the same rate of tax as a company that is, say like Walmart or Boeing, who reap billions a year in annual sales.  Furthermore, a tax on net profits after all other taxes is the best way to ensure that we're taxing fairly and in a reasonable way.

Progressive income taxes are the way we ensure we give people and businesses a chance.  They allow start-ups to push through the most turbulent times of their business, the first five years, and provide them a means of building their networks and name recognition.  Further, they don't tax heavily during times where we're struggling, whether that be a shock to supplies of raw materials or fuel, or a nation-wide recession where everyone is equally hurting.  Ensuring businesses and people both are not paying taxes from money they don't have ensures we'll have a stable, strong, consistent rate of growth for the long-term, and that people will feel their contribution to society is both fair and justified.

It's important that the effective tax increase for individuals who's disposable income is large, while decreasing for individuals who's disposable income is either low, or non-existent.  How fair is it for a homeless person to pay 8% sales tax on an item he may need to get back on his feet, or for a hot meal from a food place after a day of panhandling?  How fair is it for the effective tax rate on someone making $1,000,000/year to have an effective tax rate of that less than a single-parent with three kids?  And how fair is it for a business who is losing money to be burdened with another liability created simply by their investments, purchases and their sales which have not materialized into the profits they are seeking.  And how fair is it for a multinational corporation who set up shop in our state to get out of paying a fair and reasonable tax on their earned profits?  The system does not create this level of fairness and justice, and needs serious reform if we're to solve the revenue problems facing our state.

What is the solution?

The solution is a comprehensive, restructuring of the tax code which abolishes the Sales Tax, B&O tax, and Use Tax, and tying the property tax amount paid to a graduated payment scale...meaning that as your income rises, the amount of the full rate on property you pay is adjusted.  For example, if the property tax rate is 2% of market value, and your value is set at $100,000.  The graduated system would be based on how far above the poverty line you are.  So if your annual income for your household is at or above 100% of the poverty line, you begin paying tax on your property, with 200% being the point where you pay the full 2% tax and 100% being zero property tax.  The rate of tax stays the same, but the effective tax changes with your income, taking into account, as pragmatically as possible, the circumstances within your household.

In regards to the income tax, the income tax should be graduated but still simple.  For personal incomes, the system should be matter of fact and straight forward.  To borrow some insight from Steve Forbes, an income exemption equal to State Minimum Wage times 40 times 52 would be the income tax exemption.  This represents someone working at minimum wage full time.  If you earn less than this, you should not pay taxes of any kind, because it's likely you do not have enough income to survive on your own.  This also creates a threshold for families earning minimum wage to save and eventually work their way out of a minimum wage job through saving and thrift...a kind of income buffer between taxation and the bare minimum.  Other qualities of our system would be the prohibition of refundable tax credits.  The reasoning behind this is because it creates incentive to cheat to get money back, and it burdens the Department of Revenue with servicing a program that would fall under the Department of Social and Health Services.  The revenue collection mechanism of a political entity should not be the deliverer of welfare benefits.  If the state deems it necessary to create an income support program, it should do so, so that the collection of these benefits are not dependent on filing taxes.  The only refund one should receive would be the one where they pay taxes into the system, and no other.

For business income taxes, the tax should be applied against a business' profits after taxes, overhead, and other material costs are accounted for.  No business should ever pay tax if they are losing money, and no business should be losing money as the result of a tax liability, which the sales and B&O tax create.  It is extremely harmful to tax a business before the other costs which demonstrate its loss or profit is shown.

The potential for growth under this system is astounding and great.  Businesses would flock here to set up shop.  Even though we have a high minimum wage, the simplified tax liabilities and simplistic means of compliance would contribute greatly to the economic environment of the state and appeal to larger companies setting up shop here.

No comments:

Post a Comment