Analysis: State Treasurer’s grand tax reform plan is fatally flawed, shouldn’t move forward

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.

McIn­tire’s pre­scrip­tion for fix­ing this is as fol­lows:

• 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.