Welcome to the Voters Want Better Choices Platform for Tax Reform – Permanent Defense’s answer to Tim Eyman’s destructive ideas.  The following six sections contain specific proposals for tax reform in Washington State.

A statement of what Permanent Defense believes appears first, followed by more information about each reform.

Each section also contains a number of specific links for more information.

Permanent Defense would like to acknowledge the contributions of the Washington State Tax Structure Study to this platform. Many of the suggestions in our platform were inspired by the study, which was itself inspired by other works on tax reform.  At the end of most of the sections is a link to the relevant section of the study where more information can be found.

We will continue the fight for tax reform in Washington State because Washingtonians deserve a fair, equitable, and just tax system.

Homestead Exemption

We believe in a homestead exemption for middle and low income households, that is revenue neutral and addresses the regressive nature of our current property tax.

A Homestead Exemption would:

• shield from all state and local property taxes a portion of the value of a household’s primary residence,
• shift burden from less expensive homes to more expensive homes, as well as to non-residential property,
• reduce property taxes for most homeowners without cutting public services,
• and deliver tax relief to those families and taxpayers who need it most.

Currently, corporations and wealthy families and individuals pay less in property taxes thanks to special exemptions and the current nature of the property tax structure. The Homestead Exemption addresses this imbalance and gives relief to middle and lower income families without slashing taxes.

During the 2004 legislative session, a bipartisan group of 16 representatives led by Rep. Sharon Santos (D) and Rep. Toby Nixon (R) sponsored HB 3076, “An Act Relating to Property Tax Relief.”, which would have enacted a homestead exemption. The introduction of the bill signaled enthusiasm for a sensible approach to property tax relief. Permanent Defense and other proponents of the Homestead Exemption will continue to advocate this proposal in the future.

More about homestead exemptions

• Essay: Yes on the Homestead Exemption! (Permanent Defense Archive)
• Homestead Exemption Center (Permanent Defense Archive)
• Institute on Taxation and Economic Policy: Homestead Exemptions
• Text of House Bill 3076 (Washington State Legislature)

Graduated Income Tax

We believe in the enactment of a state income tax to replace the sales tax as a much fairer and more progressive source of revenue for the State of Washington.

A state income tax would:

• Redistribute the tax burden across income groups, saving money for middle and lower income households,
• Reduce the federal income tax by allowing households to deduct a portion of their state tax burden,
• Improve competitive position of Washington businesses by eliminating or decreasing business sales tax,
• and replace the retail sales tax, allowing people who are out of work to save money on basic necessities.

An income tax provides for a less regressive tax system. It is based on one measure of ability to pay – income. It is relatively neutral and efficient because it has a broad base and a low rate. With the enactment of an income tax would come the repeal or reduction of the sales tax, and a reduction in property taxes. Its enactment would also increase tax harmony with other states.

A state income tax also greatly improves the competitive petition of Washington’s businesses by reducing or repealing the sales tax. Thus, tax avoidance via Internet and cross-border shipping will cease to be a major problem. Currently, businesses pay 46 percent of state and local taxes in Washington, as compared to 30 percent for the average of seven Western states. High business tax burdens reduce the economic vitality of Washington, discourage firms from locating here, and invite firms already located in Washington to consider other locations.

A flat personal income tax is more preferable than a graduated income tax unless exemptions are allowed under the income tax, in which case a graduated income tax would be a better choice.

More about income taxes

• Washington State Tax Structure Study – Chapter 7 (State Income Tax)
• Washington taxpayers deserve fair, stable system (Post-Intelligencer editorial)
• Wikipedia: Income Tax (basic explanation)

Value Added Tax

We believe in the implementation of a value added tax (VAT) which would replace the business and occupation tax as a neutral, economically sensible, and more viable alternative. A value added tax would:

• Eliminate the pyramiding of the current business and occupation tax, which hurts business,
• Make Washington State more friendly for businesses, especially small businesses,
• Achieve neutrality for commercial enterprises and increase fairness,
• and be less burdensome to businesses because the cost of intermediate goods is not subject to tax.

The current Business & Occupation (B&O) tax is unfair to Washington businesses mainly because of the effect of pyramiding. Pyramiding of taxes is the payment of taxes by different companies on the same goods or services.

This occurs when goods or services of one company are inputs for another’s production and or sales. Thus, a tax is paid multiple times on a product as it moves through the production chain. The B&O tax pyramids an average of 2.5 times.

Instead of taxing just gross receipts, the VAT taxes gross receipts less cost of intermediate goods. This eliminates the effect of pyramiding and provides for a more neutral tax system.

The subtraction method VAT is the simplest way for businesses to measure their value added and is Permanent Defense’s preferred replacement for the B&O tax.

More about value added taxes

• Washington State Tax Structure Study – Chapter 6 (Value Added Tax)
• Institute on Taxation and Economic Policy: Value Income Taxes (Policy Brief)
• Wikipedia: Value Added Taxes (basic explanation of VAT in other countries)

Repeal or Reduce The Sales Tax

We believe in the repeal or drastic reduction of Washington’s extraordinarily high, regressive sales tax and the implementation of other, more progressive alternatives to take its place.

Washington’s sales tax is among the highest in the nation. Because Washington has no income tax, it collects almost half of its revenue from general sales taxes and almost another 14 percent on selective sales taxes (i.e., taxes on cigarettes and liquor). Total, that’s about 60 percent of Washington’s entire tax revenues.

The graph below illustrates that Washington relies more heavily on the sales tax than the national average. Data is from Fiscal Year 2000.(1)

By repealing or drastically reducing the sales tax, the tax burden is redistributed. Washingtonians do not pay the same sales tax.

While the rate is the same, when measured against income, it’s clear that the shares are not equal. Wealthier families and individuals spend less of their income on taxable items than do middle and lower income families and individuals. Sales taxes thus fall heaviest on those with the lowest incomes.

A study by the nonpartisan Office of Program Research, which serves the state House of Representatives, found that households with incomes under $20,000 paid 7.1 percent of their incomes in sales taxes. It fell to 3.9 percent for households at $40,000-$60,000 in income and 2.5 percent for those over $130,000.(2)

More about sales taxes and regressivity

• Washington State Tax Structure Study – Chapter 3 (State Tax Structure – 1)
• Q&A: Who pays the most and least – and why (Seattle Times – 2)
• Institute on Taxation and Economic Policy: WA’s Regressive Tax System
• Progressive & Regressive Taxes Explained

Strengthen Constitutionally Mandated Rainy Day Fund

We believe in the maintenance of a constitutionally mandated “rainy day fund” to deal with cyclical crises in state revenue and reduce the need for large cuts in government spending during economic down times.

Permanent Defense supported 2007’s SJR 8206, the constitutional amendment that created our twenty first cenury rainy day fund. The amendment provides that one percent of state revenues be deposited in the fund every year.

During bad times, such as the economic collapse currently threatening our state’s stability, the Rainy Day Fund provides emergency support for our common wealth.

More about rainy day funds

• Washington State Tax Structure Study – Chapter 8 (Incremental Alternatives)
• State Rainy Day Funds: What To Do When It Rains (Center on Budget and Policy Priorities)

Sunset Review of Exemptions and Incentives

We believe in the passage of legislation that automatically suspends exemptions and business incentives and subjects them to a review process every four years, at which point they could either be renewed or repealed.

Numerous tax exemptions and business incentives have been enacted by the Legislature over the last several decades. But how many of them have ever been reviewed, or even repealed because they were no longer needed? Lucrative exemptions are undermining the state’s revenue base and forcing average taxpayers to shoulder more of the tax burden.

Exemptions narrow the tax base and tend to make the structure more volatile. Some, such as the Homestead Exemption, are useful, but many others have outlived their usefulness and need to be revoked.

The Legislature should establish a schedule for a periodic review of all tax exemptions, grouped by purpose or function, to ensure that these exemptions continue to serve the public purposes for which they were enacted. The Legislature should also implement a sunset review of each new tax exemption prior to its enactment.

More about exemptions

• Washington’s Tax Reform Should Start with Closing Corporate Exemptions
• Department of Revenue: Tax Exemptions – 2000

Conclusion

It’s not difficult to conclude that reforming our state’s extremely regressive tax structure will be a difficult challenge.

But it is a challenge that we must accept. We must overcome many hurdles in our path.

It’s hard to be educated about taxes due to their complex nature. Our goal is that this platform will provide a more concise summary of what real reform looks like. Additionally, we’ve provided dozens of links for more information about each topic. As previously mentioned, the Washington State Tax Structure Study is a particularly good report on Washington’s existing tax system and how it can be reformed.

There are several other sites which have extensive information about tax reform and tax fairness. Permanent Defense recommends:

• Washington United for Fair Revenue. Composed of organizations dedicated to tax fairness, this website has a number of resources and helpful links.
• Institute on Taxation and Economic Policy. Several of its policy briefs are listed as sources and links in the above sections. ITEP does a good job of explaining taxation and debunking arguments in its short, well presented PDF briefs.
• Department of Revenue. The Statistics & Reports section contains a treasure trove of information, including graphs, charts, and visual presentations. Comparisons of state and local taxes are included.

Thanks for reading.