Four solutions for Washington state’s budget dilemma

January 27, 2015 | Marilyn Watkins

WA Budget Overview 2015 - thumb

Click image to download PDF

Adopting a budget will be the main task of Washington’s legislature in 2015. The state’s elected leaders face a big challenge. Income inequality is constricting family budgets and the whole economy, here in Washington and nationwide. Washington also has an outdated tax system that no longer fits our economy.

As a result, public revenues from sales and business taxes are growing a lot more slowly than the costs of educating our kids and providing basic services and infrastructure. To pass a state budget that provides a solid platform for thriving families and broadly shared prosperity, our legislature must raise progressive new sources of revenue and approve new policies to tackle inequality.

Washington’s economy needs a stronger foundation

Our state budget sets the foundation on which our economy and state residents can thrive. But the combination of recession, growing income inequality, and an outdated and inflexible tax system is undercutting that foundation.

  • Washington has the 4th highest number of kids per teacher among all the states, and ranks 42nd in our level of investment in K-12 education.
  • The share of state funding for higher education has fallen steadily for two decades, and plummeted with the recession. Among all states, Washington had the 9th highest tuition hikes between 2008 and 2012.
  • Early learning, mental health services, child protection, senior health, state parks, and other key services have been underfunded through the recession.

Over the past 20 years, Washington’s budget has declined as a percentage of the state’s economy. If revenues came in today at the rate they did in the year 2000, Washington would have an additional $3 billion each year to invest in education and other priorities. Many economists agree that cutbacks in government spending have prolonged the recession.

WA Budget Overview 2015 - chart 1

Improving services for an opportunity economy?

Washington is projected to collect about $2.7 billion more in 2015-17 than in the 2013-15 biennium – enough to cover the growing population of school kids and others, but no improvement in services. However, both the voters and the courts have told the legislature that services must improve.

In November 2014, Washington voters passed Initiative 1351 to lower class sizes in all grades. That requires more teachers, more class rooms – and more money. In the McCleary decision, the Supreme Court said the legislature must invest enough to insure that all kids have access to an education that will fully prepare them for life in the 21st century. Together those come to about $4 billion in added costs for 2015-17.

We also must invest more in early learning and higher education if we want to help all kids achieve their potential. Then there’s everything else the state does, like protect mentally ill people, children, and seniors. Most state services were cut to the bone during the Great Recession and also need more funding to protect public health and safety.

Income inequality and a flawed tax structure

Most other states modernized their tax systems years ago with a state income tax, so they can reap some benefit from the skyrocketing wealth of the 1% and plow those resources back into early learning, small class sizes, and affordable college educations. But Washington still relies on a 1930’s-style system based on the sales tax. As a result, we have the most regressive tax structure in the nation, with low and moderate income households and small businesses paying too much, and the wealthiest individuals and corporations paying relatively little.

Sales tax revenues are growing more slowly than Washington’s population and economy for two main reasons. One is that people now spend more of their income than in earlier years on things that aren’t taxed: either services, such as health care and education, or on goods purchased over the internet, where sales tax collection is spotty. The other reason is the growing concentration of wealth among the top 1 or 2%, while incomes stagnate for the majority. Wealthy people simply cannot spend all their income.

WA Budget Overview 2015 - chart 4

Solutions for Washington’s budget dilemma

1. Progressive new revenues: Governor Inslee has proposed two new revenue sources for the state that will begin to address the fundamental shortcomings of our tax system. One is a 7% tax on capital gains from selling stocks and bonds. Retirement accounts and the first $25,000 would be exempt, so only the wealthiest would pay. The other is a new carbon tax that would be paid by the largest corporate polluters in the state. It would provide new money for education and transportation projects, while reducing pollution and slowing climate change.

2. Ending tax breaks: Washington’s tax code is full of special preferences for industries ranging from aerospace manufacturing to agriculture. Governor Inslee proposed ending a few tax breaks in his draft budget, but also added some new ones, including for high tech companies. A much more rigorous evaluation is necessary of which tax breaks actually create jobs and middle class consumers rather than merely padding shareholder profits and adding to the problems caused by income inequality.

3. Tackling systemic tax reform: Ultimately to provide educational opportunity for all in our state, while protecting public health and safety and establishing the foundations for thriving communities, Washington will have to modernize its whole tax structure. Over a decade ago, a bipartisan Tax Structure Study Committee recommended adopting a personal income tax, lowering the sales tax, and reforming business taxes to make the system less regressive, more stable, and better able to fund essential services.

4. Tackling income inequality: Providing individual opportunity and raising incomes for low and moderate income working families will also help our state’s revenue picture. More money in the pockets of hard working families means more economic activity, more jobs, and more public revenue. The 2015 legislature can help rebalance our economy by:

  • increasing the state minimum wage to $12;
  • passing statewide paid sick and safe leave so workers don’t lose income when they get sick or have a sick child;
  • approving family and medical leave insurance, to provide paid leave for new parents and workers with serious health conditions or seriously ill family members;
  • strengthening equal pay opportunity for women; and
  • fully funding educational reforms from early learning through university.

Excerpted from Washington 2015 Budget Guide: Solutions for building an opportunity economy in the Evergreen State »

Posted in Tax and Budget, Tax Reform

Comments

  1. Gomer Thomas says:

    The problem with lowering the sales tax and adding an income tax is that a great many low and middle income people in Washington see it as just a way to take more of their money. They fear that the sales tax will be raised again in the future, and the income tax will be applied to lower and lower incomes, so that we will end up with a tax that is just as regressive as the one we have now, but with a bigger tax bite.

    This is not what is actually happening in states that do have an income tax, but the monied interests in Washington have successfully convinced voters that this is what will happen here.

    The only solution is to pass a constitutional amendment that will protect low and middle income tax payers — a measure that cannot just be changed by the next legislature. Such an amendment should cap sales taxes at a modest figure, say 4%, cap real estate taxes at a modest figure, say 1.25% or so, with both of these apportioned among the state and local governments and tax districts (unless voters in the district being taxed agree to a higher number for their district), shield the lowest tax payers from any income tax at all and spell out graduation ratios that ensure the overall tax burden will be at least level, if not progressive. The reaction to income tax proposals in the past guarantees that a legislated income tax will not succeed, and that an income tax without iron clad limits on other taxes will not succeed.

  2. Caroline Correa says:

    Fully support the plan the Governor is proposing

Leave a Reply

Search the blog

Subscribe to the blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Like what you’re reading?
Reader support helps preserve our independent voice for the middle class - please chip in to help out!