Overview: Tax and Budget

EOI’s work to update and reform Washington state’s tax structure is a three-pronged approach:

Ending special tax preferences

Over the past decade, state policy makers have given out an ever-growing number of business tax breaks in the name of economic development, while our education system falls behind and commuters and goods sit mired in traffic. At the end of 2007, Washington had 567 tax breaks on the books. The legislature adopted fourteen new exemptions in 2008.

Some exemptions, such as those on food and prescription drugs, improve the tax system by making it less regressive. But the cumulative results of too many tax breaks are a smaller tax base and not enough revenue for strong public structures to support a flourishing economy and high quality of life, like education, transportation, and health care.

The economic downturn provides state policymakers the opportunity to embrace a more rational economic development strategy. We can expand investments in our public structures and support new economic growth by suspending selected business tax breaks to broaden the tax base and provide new funds, and increasing the small business B&O credit from $35 to $100 per month, to encourage small business creation and growth.

A high-incomes income tax

Washington’s state and local taxes fall heavily on low- and middle-income residents; yet public revenues are not sufficient to finance important public structures for economic development and personal opportunity, such as world-class education and transportation systems.

Other states have achieved more progressive and flexible tax structures by including a broad-based income tax in their mix of public revenues. Rather than slash investments or increase rates on existing regressive taxes, Washington could implement a new tax on the highest income state residents.

A tax on high incomes could raise enough revenue to allow a reduction in regressive sales or property taxes, while still raising new funds to invest in high priority services.

Broadening the sales tax base while lowering the rate

Heavy reliance on sales tax is a major factor in the regressivity of Washington’s tax system, since low- and moderate-income people spend a higher percentage of their income on items subject to sales tax than the wealthy do. Over-reliance on sales tax also contributes to the gap between revenues and demand for services, because Americans spend less of their income on items subject to sales tax than in the past.

Extending the sales tax to selected goods and services may be the simplest way to expand Washington’s tax base, both raising new revenue and strengthening the tax structure.

There is no rationale for charging sales tax on movie rentals but not theater tickets, for pet grooming supplies but not pet grooming services, for hair dye and razors but not hair salon services. Services are also more likely to be purchased by higher-income households.

Extending sales tax to select services would result in a big tax cut for the affected businesses, because their B&O tax rate would change from the 1.5% services rate to the 0.471% retail rate.

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