After Oregon: Progressives Call for Tax Reform

February 9, 2010 | Marilyn Watkins

Cross-posted from Olympia Newswire:

We can’t focus tax hikes on the wealthy as easily as Oregon with its progressive income tax. But here’s what we can do instead.

Washington’s $2.6 billion budget gap presents state lawmakers with a two-for-one opportunity to lay the groundwork for a more prosperous future. By raising revenue to protect important public structures like K-12 education, health care for seniors, and affordable colleges and universities, policymakers can simultaneously correct some of our tax system’s fundamental shortcomings.

For decades, the state’s tax base has been shrinking. Over half our general fund revenue comes from the sales tax, but people are now spending less on goods covered by sales taxes and more on services that aren’t. Initiative campaigns have rolled back other taxes, and the state legislature has gone on a business tax give away spree. On top of that, Washington’s richest residents pay less in state and local taxes than anywhere else, while lower income residents pay more.

During economic boom times, those weaknesses don’t matter so much. We can still fund basic services and even make modest improvements in education and health care. But during a recession, tax receipts plummet. Last year our elected officials opted for an all cuts budget that decimated health services, increased class sizes, and sharply raised college tuition.

This year, Governor Gregoire and legislative leaders have committed to raising taxes to protect services essential for our economic security today, and growth and prosperity in the years ahead. Since any tax increase will face intense opposition from well-heeled lobbyists, legislators might as well act in ways that will do the most good in the long run. That means selecting tax increases that will: 1) expand the tax base, 2) discourage behaviors and practices that raise public costs, and 3) be paid by those most able to afford it — including corporations whose shareholders live mostly in other states.

Here are a few exemptions to ax and sins to tax:

Ending just two big deductions in the business and occupation (B&O) tax would bring in $296 million this budget cycle, enough to fund universal full-day kindergarten and expand access to quality preschool.

One of the deductions, for investment earnings of nonfinancial firms, actually encourages corporations to invest money in the stock market rather than upgrade their facilities and hire new workers. Another deduction, for interest earned on first mortgage loans, was passed in 1970. Maybe it helped people buy homes in the days when a local bank actually held the mortgage. Now mortgages are bundled, securitized, and sold on the international market. A recent court case involving HomeStreet reveals this tax break has become a corporate loophole. It’s time to end it.

A new tax of 1 cent per ounce on bottled water and soft drinks, including iced tea and “power” drinks, would raise over $485 million this year. That would allow expansion of the Basic Health Plan and health services to children and seniors. Some of the cost will be borne by out-of-state shareholders. But some will be paid by the consumer and thus lower consumption of sugary drinks, reduce obesity, shrink health costs, and lessen petroleum consumption – which in turn would reduce the impacts of climate change and thereby contribute to world peace. What more could you want from a tax increase?

We can’t focus tax hikes on the wealthy as easily as Oregon with its progressive income tax. But we can double the estate tax, which only falls on estates over $2 million, boost taxes on private airplanes, and extend sales tax to cosmetic surgery. Together these would raise $83 million – about the amount needed to “buy back” cuts to the general assistance program for our most vulnerable adults.

These improvements, along with an increase in the hazardous substance tax proposed by the Toxics Coalition, the fee increase endorsed by the Hospital Association to leverage more federal Medicaid dollars, more loophole closures recommended by the Governor and the Citizen Commission on Tax Preferences, and a handful of other measures to broaden the tax base, would eliminate this year’s yawning budget gap.

By closing tax exemptions that no longer serve a compelling public purpose and carefully choosing new sources of revenue, lawmakers can stabilize funding for quality schools, affordable health care, and a safety net for the most vulnerable. Moreover, by expanding and strengthening our tax base now, we’ll set the stage for a broad-based and robust recovery from the Great Recession.

For years our elected leaders have known we need to reform the tax structure in order to make the kinds of investments that will keep our state prosperous. Let’s start with these small steps.

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Posted in State Economy, Tax and Budget

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