Washington state’s sales tax is one of the highest in the nation and has come under fire from progressive tax system advocates who say it disproportionately affects lower-income earners, but a recent Rasmussen national survey found that Americans regard it as the fairest of major tax structures.
This, and the tax’s revenue stability, are things state House lawmakers might consider as they discuss the state’s taxing structure during a series of public meetings over the next four years. It may also affect the long-term policy regarding online sales tax collection, something the state legislature approved during this year’s session and which is likely to face a legal challenge.
In the September 6-7 national telephone and online survey of 1,000 adults, Americans polled were given four types of taxes to choose from as “most fair”: sales tax, income tax, property tax or payroll tax. Almost 40 percent favored the sales tax, payroll was the least favored at 5 percent, and 18 percent of those polled were undecided.
However, the Rasmussen national survey also found that 30 percent of Americans considered an income tax the fairest, second only to the sales tax. Currently, Washington is one of seven states that does not have an income tax.
According to the Tax Foundation, 45 of 50 states collect some form of a sales tax, and 38 of those states include local sales tax. Washington’s sales tax was first adopted in 1933. The current rate is 6.5 percent, though additional local taxes can make it nearly 10 percent, making it the fifth-highest in the country.
The sales tax, along with the state’s business gross receipts (B&O) tax, are the primary sources of money for the state’s operating budget. In 2016, the two taxes made up nearly 80 percent of revenue for the Near General-Fund State and Opportunity Pathways account. However, some have favored lowering the sales tax rate and instituting a progressive income tax, arguing that the sales tax is “regressive”.
Also, “claims of ‘fair’, ‘regressive’ or ‘progressive’ depend very much on what is used as the denominator,” writes David John Marotta, president of the Virginia-based Marotta Wealth Management. In a 2013 Forbes article discussing a national sales tax to replace the income tax, he wrote: “You can argue that your lifestyle spending–lavish or frugal–is at least a measure of how rich you live. And it is easy to make the case that how rich you live should determine how much you should be taxed.”
While an income tax discourages productivity, a sales tax promotes savings, he added. “Less demand for consumer goods will reduce prices and also consumer debt. Families will be encouraged to have capital to save and invest as the tax burdens are removed on investments. Deferred consumption, money not spent, is the textbook definition of capital. And because a sales tax is a consumption tax, more people will defer consumption and have capital to invest instead. Money invested earns more money. Increased savings and investing help create a healthy country with better economic growth.”
Kriss Sjoblom is the Washington Research Council’s research director and senior economist. He told Lens that although sales tax critics claim people aren’t fully aware of their tax burden, “it’s fairly easy to figure out how much you’re paying.”
One reason Americans might regard the sales tax as fair is because people have much more control over when and how they pay it compared to other taxes, he added.
“The folks who want an income tax are just convinced that the sales tax is unfair and then underestimate the likelihood of getting folks to actually vote for an income tax (in Washington),” he said. “They believe that the increased ‘fairness’ will be working in their favor, but the voters don’t agree with them on that.”
The issue of tax fairness and its perception by the public was the subject of a book by Steven Shiffrin titled “Tax Fairness and Folk Justice.” In it, Shiffrin argues that “tax fairness is important, but it is not synonymous with redistribution. To the average person, tax fairness means something else, primarily receiving benefits commensurate with the taxes one pays, being treated with basic respect by the law and the tax authorities, and respecting legitimate efforts to earn income.”
The “fairness” question has also been raised about the sales tax application to retailers. Until this session, online retailers were not required to collect it unless they had a physical presence in the state. That changed this year as part of the state’s 2017-19 operating budget, which relies on roughly $400 million from online sales tax revenue.
Industry leaders such as Jan Teague believes the tax levels the playing field for Washington businesses. She is the president and CEO of the Washington Retail Association. In a guest editorial for the Spokesman Review, she wrote that “sales lost due to the unfair price advantage are forcing layoffs and threatening the survival of law-abiding brick-and-mortar retailers, particularly small businesses. Traditional retailers do not fear equal competition from online sellers, but are increasingly worried about how long they can hold out in a marketplace of different rules for online sellers.”
However, the tax will first have to survive expected lawsuits arguing that it violates the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. The court majority ruled that state governments could only collect sales tax from a seller if they had a physical presence in the state.
Beyond the issue of fairness, analysts have noted that Washington’s sales tax provides a reliable and consistent revenue stream, whereas states that depend on a progressive income tax are struggling to fill budget gaps. A recent fiscal survey by the National Association of State Budget Officers also concluded that 33 states in the nation are struggling with below-estimated revenue streams, while Washington has experienced above-projected revenue growth. According to the State Department of Revenue, annual sales tax revenue has consistently increased each consecutive year since 2010.