Our Tax System: The Worst in the Country

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The special session of the Washington State legislature will end today with no resolution to our state’s budget dilemma. Yet another special 30-day session will begin immediately.

What a mess.

The facts about the need for a complete top-to-bottom overhaul of our tax structure are very clear and persuasive.  Yet our Republican and Democratic legislators live in opposing realities about the current state budget; no conclusion to this impasse is in sight. Further, the solutions being offered dance around the core issue: an unjust and increasingly inadequate tax system, from top to bottom.

Local economist Dick Conway appeared before my City Council committee last week and presented a report with sobering findings: Washington’s tax system is the worst in the country. He grades the state an F in the categories of fairness (ranked 51st out of 51 states and DC), adequacy (50th), stability (47th), and transparency (50th).

To reach this conclusion, he measured state and local tax revenues against personal income: a calculation termed the “effective tax rate.” An effective tax rate of 10% of personal income means you pay $10 in taxes for every $100 you earn.

Here are the facts about Washington’s state and local tax system that results in the poorest among us paying the highest effective tax rate and the wealthiest paying the lowest:

  • Since 1995, Washington’s overall effective state and local tax rate has dropped faster than all other states but one (South Dakota).
  • The average combined state and local tax rate across all states since 1970 is 10.6% of personal income. The forecasted 2015 rate for Washington is 9.3%, dropping to 8.2% by 2025.

Least Adequate in 10 Years

Washington’s tax system is woefully inadequate and structurally broken, unable to grow proportionally with the economy.

  • With the lowest-earning 20% of Washington households paying a 16.9% effective state and local tax rate, our state is by far the most regressive in its tax structure (Illinois is a distant second with a 13.8% effective tax rate for this population).

ITEP tax graph

Washington has the most regressive taxes of any state in the country. Shifting to a tax structure patterned after the national average effective tax rate of 10.6% would mean low-income families would pay much less in taxes, the middle class would pay about the same, and our wealthiest neighbors would pay more. (Graph courtesy of the Institute on Taxation and Economic Policy.)

  • If Washington had instituted an income tax of 10.6% on personal income in 2005 — AND eliminated the business and occupation tax (a corporate income tax on gross revenues), the sales tax and the property tax — the state would have still collected an additional $28.4 billion in the last 10 years, more than enough to adequately support our underfunded education system, provide more financial support for affordable housing, and fund our transportation system so vital to economic stability. Importantly, the unjust burden would be lifted off those living in poverty.

2005 - 2015 Budget Gap - with estimated lost revenue

As I love to say, facts are friendly. We should not let preconceived notions or biases trump these facts.

The people of Washington need to wrestle with this issue and the Legislature must advance a tax system that is fair, stable, transparent, and adequate to meet the pressing (and growing) needs of our state. We could do that by shifting to a personal income tax pegged at the national average rate for state and local taxes of 10.6%.*

*In the 1930s, the Washington State Supreme Court ruled that a graduated income tax (different rates for different income brackets) that had been approved by 70% of voters violated the state’s constitutional requirement for uniform property taxes, considering income as “property.” Some legal scholars argue the current Court might come to a different ruling. I’ve used a flat tax example here to simplify the discussion (and that is what Dick Conway used as an example), but graduated rates would result in a more progressive tax.