Experts stress Washington tax stability as other states suffer revenue drops

Experts Stress Washington Tax Stability As Other States Suffer Revenue Drops
Debate persists over the "fairness" of Washington's tax code. However, tax experts warn that attempts to make taxes "fairer" often lead to fiscal uncertainty and volatile revenue streams, a problem facing many states with progressive taxes. Photo: usc.edu

State House lawmakers plan to hold public meetings throughout Washington over the next biennium to discuss the state’s taxing system, a roadshow-style tour funded by the 2017-19 operating budget. Though some may use it as an opportunity to push for a more progressive tax code, fiscal analysts say legislators need to keep in mind the importance of maintaining revenue stability and predictability.

Kriss Sjoblom told Lens that “efforts to make them (taxes) more fair seem to make them inevitably more unstable.” He is the Washington Research Council’s research director and senior economist.

Although the tax portion of Washington’s economy has decreased over the years, the opposite has occurred with actual revenue growth. Between the 2015-2016 fiscal years alone, it increased by 8.8 percent, $18.7 to $20.3 billion. Actual revenue has also repeatedly come up higher than projected by the Washington State Economic and Revenue Forecast Council.

Meanwhile, a recent fiscal survey by the National Association of State Budget Officers found 33 other states in the nation are struggling with less-than-projected revenue streams. It’s something Washington policymakers need to keep in mind if and when they contemplate changes to the tax code, says Washington Policy Center Government Reform Director Jason Mercier.

“This is all about the goal of what your tax structure is,” he said. “For me, the taxes are the contracts we have signed with government to provide fundamental services. It’s not to change behavior, it’s not to impact policies, it’s not to redistribute wealth. It’s to fund core functions of government in a stable way so we don’t have massive roller coaster budgeting.”

Those who advocate for a progressive tax system frequently take aim at the state’s heavy reliance on the sales tax, one of the highest in the nation, arguing that it disproportionally impacts lower-income earners. Not only has that claim been called into question by tax experts, but Mercier says it ignores a key benefit the sales tax provides; strong revenue certainty.

Also, rather than an enormous tax collected through a handful of individuals, sales tax involves small transactions carried out continually by residents throughout the state, he added. This can prevent revenue swings during economic downturns.

“The same tax applies no matter who the individual is or who the activity is,” he said. “That’s not to say we don’t need changes.”

One area where the sales tax exhibits instability is the construction portion, said Sjoblom. “In a typical state, the sales tax is paid on the physical materials that go into a building. And that happens in Washington, but we also tax the construction labor in the building. So, we get more sales tax from construction than the typical state does,” but that revenue is sensitive to the housing market. Eliminating the sales tax on construction would create greater stability, but is unlikely to happen, he added.

Though the property tax may not be popular with Washingtonians, it’s another stable, predictable revenue source that applies equally to all, Mercier said. “If I own property, I pay the same percentage tax as everybody who owns property.”

Meanwhile, states such as Connecticut rely on an individual and capital gains income tax, among the highest in the country, and is now facing a $2.2 billion budget deficit. It’s due in part to the loss of corporations such as Aetna and General Electric, but revenue loss is also expected as the result of high-income earners taking up residence in other states.

The instability of the capital gains income tax has also been demonstrated in states such as California, which has the second highest capital gains tax rate in the world along with a progressive individual income tax. An Office of the California Legislative Analyst report warned that if a 2018 recession occurred, the state would lose $40 billion in revenue, much of that due to those two taxes alone.

Should Washington ever adopt a similar tax structure and suffer a recession, state lawmakers would be stuck with both a budget deficit and residents unlikely to support new taxes to make up for it, Sjoblom said.

“People believe that when economy is going south that it’s just kind of unfair to try and raise their taxes,” he added. ”Some people do fine in a recession. Some people really are hurting.”

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