Yesterday, State Treasurer Jim McIntire — who is responsible under state law for managing and overseeing the investment of the public’s money — unveiled a rather grand and ambitious plan for reforming the state’s tax code, which he says he hopes will be a “conversation starter”. The plan would dramatically alter Washington State’s tax structure (mostly in good ways), but at an unacceptable cost.
McIntire’s proposal, which does not have the support of the governor or any caucus of the Legislature, was drafted in consultation with Superintendent of Public Instruction Randy Dorn. Dorn has repeatedly called on the Legislature to put more money into public education to comply with the Court’s McCleary decision.
Dorn and McIntire both sit on the sidelines of the budgeting process. While each has a bully pulpit as an officer within Washington’s executive department, neither has a vote or much of a say in budget negotiations. Nor do McIntire and Dorn have the ability to alter the budget after it leaves the Legislature. (Governor Jay Inslee, on the other hand, has this power thanks to his line-item veto pen.)
The plan McIntire and Dorn have come up with certainly fits with the aphorism Go big or go home. While we appreciate their willingness to put bold ideas on the table and stand behind those ideas, they’ve produced a proposal that has something for everyone to dislike. It is too flawed, in our view, to merit further consideration.
Let’s take a look at an outline of McIntire’s plan, and then I’ll explain what we mean. McIntire begins by noting that our tax code is extremely regressive (it’s the worst in the nation) and also very unstable, owing to our reliance on consumption taxes for revenue. It’s simply not a system that can carry our state forward as we move further into the twenty-first century. That we agree with.
- Eliminate the state property tax, lower regular property tax limits, and limit excess local school levies;
- Set the B&O (business and occupation tax) rate at 1.0 percent for business services and at Boeing’s 0.29% for all others;
- Cut the state sales tax to 5.5 percent;
- Create a constitutional 5 percent flat rate income tax dedicated to education (with a $50,000 deduction for a typical family of four); and
- Require a three-fifths vote of the legislature to make any changes to the income, sales or B&O rates.
Let’s break down the problems with this proposal.
First, the bar for success is too high. Notice that McIntire and Dorn’s plan relies on a constitutional amendment, which requires a two-thirds vote of each house of the Legislature and a vote of the people to pass. That’s a huge lift.
A campaign of this magnitude and difficulty requires years of groundwork and a major, sustained investment of time, talent, and treasure, not to mention buy-in. It certainly isn’t something that could be done in the current session or the next one.
We’ve heard that Dorn is planning to retire as Superintendent of Public Instruction. If that’s true, by the time January 2017 rolls around, he’ll be leaving office, and won’t be in a position to advocate for this proposal as an elected leader.
We do not have the luxury of waiting or the capability to dither and procrastinate on tax reform any longer. In the short term, we need to take small and concrete steps to raise revenue to keep our vital public services from falling apart. Long-term, we need to lay the groundwork for bigger steps that will be a harder sell.
We’ve known for decades that our tax code needs overhauling, but in that time, we’ve mostly succeeded in making it worse, not better. Lawmakers have talked plenty about reform, and studied the problem, but haven’t acted.
Even when the Legislature was controlled by Democratic supermajorities in 2007 and 2008, the political will to pursue comprehensive reform wasn’t there.
Republican Governor Dan Evans, considered by many to be the finest and most effective governor in Washington State history (so popular, in fact, that he won three consecutive terms) tried repeatedly in the 1970s to pass a constitutional amendment explicitly allowing the state to levy an income tax.
Amazingly, Evans was twice able to secure a two-thirds vote of each house of the Legislature to pass an amendment. He even had the support of The Seattle Times in his efforts. (Back then, the Times editorial board was much more progressive).
But he was unable to persuade a majority of Washingtonians to agree, and the amendments died at the ballot box, leaving his tax reform efforts on ice.
The last time the people of Washington voted for a proposal to create an income tax was in the 1930s, during the early depression years.
Sadly, the Washington State Supreme Court struck down that initiative, which is why Evans and the Legislature sought to amend the Constitution instead of simply imposing an income tax through statute.
The logic the Court relied on to reach its decision makes no sense to us, and we suspect that today’s Court would discard the precedent if it had the chance to.
But today’s Legislature is not interested in levying an income tax. Democratic legislative leaders haven’t even put the idea on the table, preferring to join Governor Inslee in coalescing behind a modest capital gains tax.
They recognize the groundwork has not been laid yet. There’s a lot of education and outreach that needs doing before we can move from conversation to action.
In the meantime, smaller-scale actions (like creating a capital gains tax) need to be taken to bolster confidence in state government and shore up our treasury.
The second problem with the McIntire/Dorn proposal is that it eliminates the state property tax levy, while leaving the business and occupation tax in place.
For those who don’t know, the B&O tax is a tax on a business’ gross receipts. It’s widely considered to be unfair and problematic. But, bizarrely, the McIntire/Dorn proposal keeps the B&O tax instead of scrapping it, while at the same time eliminating the state property tax levy… which is exclusively devoted to our state’s schools and is a much more stable source of revenue than the sales tax.
McIntire, who served as a member of the Washington State Tax Structure Study in 2001–2002, ought to be familiar with the conclusions of that report, which called for the B&O tax to be done away with. As the report’s conclusions section declares:
Our business and occupation tax is a dramatic violator of the principle of neutrality among like businesses. The pyramiding of this tax on goods as they move through the production chain is a fundamental problem that requires correction.
Nobody in Washington seems to like the B&O tax… and no other state in the Union levies a comparable tax… so why keep it?
We think McIntire’s approach here is backwards.
We should keep the state property tax levy (though change it to be more progressive) while repealing the business & occupation tax. We could replace it in whole or in part with a value-added tax (VAT) as the study committee recommended, pollution penalties from cap and trade, or a tax on business income.
The details can be worked out, but the bottom line is, removal and replacement of the B&O needs to be part of any credible progressive tax reform plan.
The third problem with the McIntire/Dorn proposal is that it sets up an income tax with a flat rate instead of a graduated rate.
Convincing the people of Washington to support a state income tax is going to take a lot of work. So long as we’re putting in the effort to build public support for this incredibly important change, we ought to go with a graduated income tax that is based on ability to pay. Wealthy families should be asked to pay a higher rate than lower and middle income families, like they do at the federal level.
A graduated income tax is both fair and sensible.
Consider the analogy of a sports club where members are asked to pay dues. The club’s golf course, basketball court, and fields (for volleyball, gridiron, soccer, baseball, etc.) can’t be maintained for free. Someone has to keep up the grounds and monitor their security. Hence, club members pay dues, and dues are means-based. The most well-off members of the club serve as its patrons and benefactors, and may even offer to match contributions made by less-wealthy members.
That’s the same principle we need governing our tax code.
Contrary to what the radical right says, it’s not about punishing success. It’s about paying it forward. There are no self-made men or women in this country. Everybody who succeeds in business does so using the infrastructure and public services paid for by the taxpayers, and should contribute back, so that our communities remain strong and vibrant. It’s patriotic to be a taxpayer.
The fourth and most serious flaw in the McIntire/Dorn plan is the proposal to require a three-fifths vote of the Legislature to change the rates of the state’s major taxes going forward. We are completely, firmly opposed to this.
Budgets and budgeting decisions should be reached by majority vote, as provided for in Article II, Section 22 of our Constitution.
Our founders gave careful thought to what threshold was appropriate for passage of legislation, and they settled on a majority vote, because it’s the only standard that makes sense in a democracy. They thoughtfully gave us a plan of government that balances majority rule with minority rights. We should not upset that balance.
I’m guessing that McIntire and Dorn included this element in the hopes that it would lead to some Republican buy-in. But it won’t. Republicans are simply not interested in a grand bargain with Democrats on tax reform.
Neither is the man that many of them take their cues from: Tim Eyman.
Eyman will settle for nothing less than total capitulation from Democrats. He’s presently working to qualify an initiative to the ballot that tries to blackmail lawmakers into passing a constitutional amendment to overturn League of Education Voters. His incredibly destructive I‑1366 would cut the state sales tax from 6.5% to 5.5%, resulting in the loss of about a billion dollars per annum, if the Legislature doesn’t do as he wishes by April of next year.
McIntire and Dorn certainly deserve credit for prodding the Legislature to think bigger. Unfortunately, the plan they’ve put on the table to serve as a “conversation starter” is a nonstarter. It gets too much wrong, and therefore shouldn’t be the basis for what the progressive community in Washington uses to construct a winning framework for a comprehensive, meaningful overhaul of our tax code.