Committee to Study
Washington State’s Tax Structure
(ESSB 6153, Section 138)
“... to determine how well the current tax
system functions and how it might be changed
to better serve the citizens of the state in the
21st Century.”
Due November 30, 2002
Committee Appointments
Governor appointment
• William Gates, Sr.
Caucus appointments
•
•
•
•
Sen. Lisa Brown
Gary Strannigan
Rep. Jim McIntire
Rep. Jack Cairnes
Academic appointments
;;
• John
Beck
Gonzaga University School of Business Administration
• Neil Bruce
University of Washington Economics Department
• Dick Conway
Consultant, Governor’s Council of Economic Advisors
• Lily Kahng
Seattle University School of Law
• Debra Sanders
Washington State University School of Accounting
• Hugh Spitzer
Attorney, University of Washington
Problems with our current tax structure
Regressivity
Percent of Income Paid in Tax
Lower income households pay a higher percentage of their
income in state and local taxes than do higher income
households.
16%
14%
Total Excise and Property
12%
Property Tax
10%
Excise Tax
8%
6%
4%
2%
0%
Up to
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
Household Income
Source: Washington Excise and Property Tax Microsimulation Model
$100,000 $130,000
over
$130,000
Problems with our current tax structure
Exportability
State and local taxes are more burdensome because the retail
sales tax paid by households is not deductible from federal
income taxes.
Problems with our current tax structure
Adequacy
It is politically difficult to build and maintain adequate reserve
funds during good economic times.
Initiatives have impacted long run adequacy.
Initiatives and state-imposed reductions in tax bases have
impacted local adequacy.
Problems with our current tax structure - Adequacy
Percent of
1971 value
1300
Excluding tax base and rate changes, over the past 30 years
General Fund revenues have grown more slowly than the
economy (personal income).
1100
900
700
The Economy
Revenues
(excluding tax base and rate
changes)
(Personal Income)
500
300
100
1971
1973
1975
1977
Source: Office of Financial Management
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Problems with our current tax structure
Volatility
Washington’s mix of taxes causes revenues to increase more than
personal income during good economic times and less than
personal income in economic downturns.
Growth Rates
Sales Tax is more volatile than the
economy (personal income).
Personal Income
Retail Sales Tax
Inflation and other trends have been eliminated. Growth rates are due only to volatility .
Problems with our current tax structure
Erosion of the Tax Base
The increasing share of services in consumer spending, along
with increased opportunities for making purchases out of state,
result in taxable retail sales growing more slowly than the
economy as a whole over the long run.
Individuals can avoid sales tax by shopping in bordering states
with lower sales tax rates or by making remote purchases.
Problems with our current tax structure
B&O taxes are not neutral
Some Washington firms are able to avoid the B&O tax by shifting
their income generating activities (such as manufacturing) to
other states.
B&O tax pyramiding (at least 2:1) results in non-neutralities
between different industries and between vertically integrated
and non-integrated firms
Problems with our current tax structure
Business taxes are “hidden”
To the extent that business taxes are passed on to consumers,
business taxes are not transparent.
Menu of Major Alternatives
Problems Addressed
Neutrality
Business Value Added Tax (VAT)
Goods and Services Tax (GST)
Neutrality,
Transparency, Erosion
Neutrality, Transparency
“Progressive” VAT (low-income relief)
Regressivity
Flat Rate Personal Income Tax
Regressivity
Graduated Personal Income Tax
Regressivity
Flat Personal and Corporate Income Tax
Regressivity
Representative Packages
Value Added Tax Alternatives
Existing Taxes Reduced
or Replaced
#1
Business
VAT
Revenue Neutral
VAT Tax Rate
Replace B&O tax
2.2%
#2 Goods &
Services Tax
Replace sales/use and
B&O taxes
9.0%
#3
Reduce sales/use tax
from 6.5% to 3.5%
Replace B&O tax
3.9%
Progressive
VAT
#1 Subtraction Method VAT at 2.2%
Replaces B&O
NO CHANGE IN REGRESSIVITY
Percent of Income paid
in Tax
20%
Initial Tax Burden on Households
Major State and Local Taxes
15%
10%
Current Law
5%
Replace B&O
0%
Up to
$30,000
$40,000
$50,000
$60,000
$70,000 $80,000 $100,000 $130,000
$20,000
Household Income
Source: Washington Excise and Property Tax Microsimulation Model
Over
$130,000
#2 Goods and Services Tax
Percent of Income paid in Tax
20%
Initial Tax Burden on Households
Major State and Local Taxes
15%
10%
Current Tax System
5%
Replace RST and B&O
0%
Up to
$30,000
$40,000
$50,000
$60,000
$70,000 $80,000 $100,000 $130,000
$20,000
Household Income
Over
$130,000
#3 “Progressive” VAT
Percent of Income paid in Tax
20%
Initial Tax Burden on Households
Major State and Local Taxes
15%
Current Law
Replace B&O & Reduce RST
10%
5%
0%
Up to
$30,000
$40,000
$50,000
$60,000
$70,000 $80,000 $100,000 $130,000
$20,000
Household Income
Over
$130,000
Percent Reliance on Major State and Local Taxes
#2 Goods and Services Tax
0%
20%
40%
60%
80%
Current Tax
System
49%
13%
30%
Alternative Tax
System
49%
13%
30%
U.S. Average
25%
General Sales Taxes
11%
29%
Selective Sales Taxes
100%
27%
Property
Income
Percent Reliance on Major State and Local Taxes
#3 “Progressive” VAT
0%
20%
Current Tax
System
49%
Alternative Tax
System
U.S. Average
40%
43%
25%
11%
60%
80%
13%
13%
100%
30%
30%
29%
6%
27%
General Sales Taxes
Selective Sales Taxes
Property
Income
#4 Flat Rate Personal Income Taxes
Existing Taxes Reduced or Replaced
A Reduce state sales/use tax from
6.5% to 3.5%
Revenue Neutral
Income Tax Rate
2.6%
B
Reduce state/use sale tax to 3.5%
and replace state property tax
3.8%
C
Replace state sales/use tax
5.5%
D
Replace state sales/use tax and
state property tax
6.7%
#5 Graduated Personal Income Taxes
Revenue Neutral Rates for Joint Returns
Existing Taxes Reduced or
Replaced
$0 to
49,900
$49,900 to
120,650
$120,650
and over
A
Reduce state sales/use tax
from 6.5% to 3.5%
1.0%
2.7%
4.5%
B
Reduce state sales/use tax
from 6.5% to 3.5% and
replace state property tax
2.2%
3.5%
6.0%
C
Eliminate state sales/use tax
2.7%
5.7%
8.7%
Note: The income break points for single filers are $0 to 24,950, up to $60,325 and over $60,325.
#4 Flat Rate Personal Income Taxes
16%
Initial Tax Burden on Households
Percent of Income paid in Tax
14%
Major State and Local Taxes
12%
10%
8%
6%
Current Tax System
Sales Tax at 3.5% and Replace Property Tax
4%
Replace Sales Tax
2%
Replace Sales and Property Taxes
0%
Up to
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Household Income
$80,000
$100,000 $130,000
Over
$130,000
#5 Graduated Rate Personal Income Taxes
16%
Initial Tax Burden on Households
Tax Paid as a Percent of Income
14%
Major State and Local Taxes
12%
10%
8%
6%
Current Law Tax System
4%
Sales Tax at 3.5%
Sales Tax Replaced by Personal Income Tax
2%
Sales and Property Tax Replaced by Personal Income Tax
0%
Up to
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Household Income
$80,000
$100,000
$130,000
Over
$130,000
Percent Reliance on Major State and Local Taxes
#4 and #5 Flat and Graduated Income Taxes
53%
WA TAX SYSTEM
39%
Sales Tax at 3.5%
14%
27%
U.S. AVERAGE
Replace Sales
and Prop Tax
OREGON
14%
21%
21%
11%
0%
General Sales Taxes
12%
14%
33%
14%
32%
30%
25%
39%
34%
20%
33%
54%
40%
Selective Sales Taxes
60%
Property
80%
100%
Income Taxes
Long Term Adequacy
Personal Income Tax v. Sales Tax
450%
Flat Rate Personal Income Tax at 5.5%
400%
350%
Personal Income (Economy)
300%
250%
200%
150%
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
19
84
19
83
19
82
19
81
19
80
100%
19
Growth Percent
Sales Tax (Constant Base & Rate)
Improvements to the Current System
Continue to impose an estate tax.
• Tax in the amounts of the state credit allowed under
prior federal law.
• Adequacy - Prevents an increase in regressivity by
maintaining an existing tax on high-income
households.
• No change. Current yield estimated at:
FY 2005
$114.8 million
Extend the sales tax to consumer services.
 Adds beauty shops, amusement, recreation and cable
TV to definition of retail sale.
 Adequacy - extends the base to a growing area of
consumption not subject to tax.
• Equity - resolves inequities in our tax system, e.g.,
video rentals are taxed and movie tickets are not.
• Estimated revenue gain:
CY 2005
$229.6 million
Join other states in enacting streamlined sales
tax legislation.
• Multistate effort to create simpler, more uniform system for
collection of sales tax.
• Erosion of the base, equity - leads to collection of retail
sales tax on remote sales.
• Neutrality - consumers could no longer avoid tax by
shopping on the Internet.
• Economic vitality - would improve the competitive position
of WA retailers.
• Simplicity - uniformity would make sales tax simpler for
multi-state retailers.
Extend the watercraft tax to motor homes and
travel trailers.
• Consider raising existing rate from 0.5% rate to 1%.
• Equity - motor homes and travel trailers can be
substitutes for vacation homes which are taxed.
• Regressivity - upper income households spend more
on motors homes/travel trailers as a percent of
income.
• Estimated revenue gain:
1% Rate = $47.5 million in CY 2005
Create a constitutionally mandated “rainy day”
fund.
• Enact a constitutional amendment mandating a
“rainy day” fund.
• Volatility - sets aside revenues in years when they
exceed income growth.
• Adequacy - would help prevent permanent
decreases in the tax base during good economic
years.
Exempt construction labor from sales tax.
• Only a few states impose a sales tax on labor portion
of construction.
• Exempt labor portion of construction contract.
• Problems addressed:
Economic Vitality
Tax Harmony
Simplicity
Volatility
Regressivity
Homeownership
• Estimated revenue loss:
CY 2005
$400 million
Increase the B&O small business credit from
$35 to $70 a month.
• Increase the small business credit to $70/month.
• Raise the reporting threshold from $28,000 to $56,000
in gross.
• Economic vitality - new and expanding firms have
high tax burdens. This improvement would assist
new and expanding businesses that start out small.
• Estimated revenue loss:
CY 2005
$28 million
Other improvements to current system
Problem Addressed
Simplify local B&O tax
Avoid or reduce dedicated taxes
(except user fees)
Periodically review tax incentives to
determine if they’ve outlived their
purpose.
Neutrality, economic
vitality
Simplicity
Adequacy, economic
vitality