Income tax advised for state, but no time soon

Joseph Turner; The News Tribune

11/27/02

Are you ready for a state income tax? No? Well, neither is the Legislature - at least, probably not this coming year.

A committee created by the Legislature 18 months ago is recommending a state income tax as a way to stabilize Washington's tax structure. But it's unlikely state lawmakers will begin serious consideration of such a massive change in the 2003 legislative session.

"Given the makeup of the current Legislature, I doubt that any of (the recommendations) will be adopted," said former state Sen. Gary Strannigan of Everett, who is representing Senate Republicans on the 11-member Washington State Tax Structure Study.

Republicans will control the Senate, while Democrats will control the House when the Legislature convenes Jan. 13.

Besides, Strannigan added, "Big changes in the Legislature take five years or so."

Rep. Jim McIntire (D-Seattle), who represents House Democrats, agreed the Legislature is unlikely to make a major overhaul of the state taxes next year.

The committee of economists, business scholars and legislators found the existing combination of sales, property, business and occupation taxes - and how they are collected - are fundamentally unfair to low- and middle-income people, unfair to many businesses and fluctuate too much.

Consequently, most committee members are recommending a flat-rate personal income tax to reduce the state sales tax and eliminate the state portion of the property tax. There are several variations of what percentage of income should be collected, whether it should be a flat tax in which everyone pays the same percentage, or a graduated tax in which higher-income households pay a higher rate.

There also are several combinations of what other taxes should be lowered or eliminated so there is no increase in overall taxation.

Under one scenario, the state could impose a 3.8 percent flat tax on a household's gross income, and the current 6.5 percent state retail sales tax could be lowered to 3.5 percent and the state portion of the property tax could be eliminated.

However, the state's property tax authority could be given to local governments and schools.

Under another scenario, the state could impose a 5.5 percent income tax and eliminate the state sales tax entirely. People can deduct state income taxes on their federal income tax returns, as well as property taxes. But Congress eliminated the deduction for sales taxes in 1986, Strannigan said.

Committee members said a flat-rate income tax is less volatile than a sales tax. An income tax would benefit low-income households, while eliminating the sales tax would shift the overall tax burden from businesses to households, according to the committee.

Committee member Hugh Spitzer, a Seattle attorney, said the state constitution doesn't have to be changed for the Legislature to impose a flat-rate income tax. The income tax proposal that was thrown out by the state Supreme Court in 1935 was a graduated income tax - different rates for different incomes.

A flat-rate tax would satisfy the state constitutional requirement that taxes be levied in a uniform manner, he said.

Changing the constitution takes a two-thirds vote in the House and Senate, plus a simple majority vote by the public.

Even if Spitzer is right, it wouldn't be politic of the Legislature to adopt a flat income tax on its own, McIntire said.

"The reality is that there will be no income tax in this state unless the people vote for it," said McIntire, an economist who teaches at the University of Washington. "There's no way my caucus (House Democrats) would do it without a referendum - now or in the future."

The study was begun 18 months ago, led by Seattle lawyer Bill Gates Sr.

The committee will present its recommendations to the Legislature on Dec. 3, which will formally kick off public discussion of its report.

Among other options recommended by the committee:

•Eliminate the business and occupation tax - which is paid on gross receipts - and replace it with a value-added tax that reduces the taxes owed by a retailer by the amount that already have been paid on an item by a supplier.

•Extend the current sales tax to personal services, such as barber and beauty services.

•Impose a 1 percent personal property tax on motor homes and boats. Vessel owners currently pay a 0.5 percent excise tax each year. Motor homes pay a $30 registration fee.

•Review tax exemptions every 10 years to see if they still make sense in light of changing economic times.

•Change the constitution to require a "rainy day" reserve fund.

•Increase the number of small businesses that are exempt from paying business and occupation taxes.

Joseph Turner: 253-597-8436
joe.turner@mail.tribnet.com

CHART: TAX TRADE-OFFS

This chart shows how much money is collected each year from various state taxes and the level of flat-rate income tax that would be needed to replace those taxes if they were reduced or eliminated.

Current taxes Annual amount Equivalent

collected income tax

Reduce sales tax from 6.5 to 3.5 percent $2.964 billion 2.6 percent

Reduce state sales tax to 3.5 percent

and eliminate state property tax $4.537 billion 3.8 percent

Eliminate 6.5 percent state sales tax $6.694 billion 5.5 percent

Eliminate 6.5 percent state sales tax

and state property tax $8.240 billion 6.7 percent

SIDEBAR: Tax committee members

Members of the Washington State Tax Structure Study committee:

• Bill Gates Sr. (chairman), Seattle attorney and chief executive officer, Bill & Melinda Gates Foundation.

• John Beck, Gonzaga University, School of Business Administration.

• Sen. Lisa Brown (D-Spokane), chairwoman, Senate Ways and Means Committee, former economics professor and public policy professor, Gonzaga University.

• Neil Bruce, chairman of University of Washington Economics Department.

• Rep. Jack Cairnes (R-Covington), member of House Finance Committee.

• Dick Conway, principal of Dick Conway and Associates, a Seattle economic research and consulting firm.

• Lily Kahng, Seattle University School of Law.

• Rep. Jim McIntire (D-Seattle), UW economics professor.

• Debra Sanders, Washington State University School of Accounting, Information Systems, and Business Law.

• Hugh Spitzer, public finance attorney with Foster Pepper & Shefelman in Seattle and affiliate professor at the UW Law School.

• Gary Strannigan, former state senator, former executive director Citizens for a Sound Economy, government relations manager for Safeco.

On the net

• The Washington State Tax Structure committee can be found online at http://dor.wa.gov/content/wataxstudy/wataxstudy.htm