Wanted: Smart, Transparent, Fair, and Adequate Tax Policy

Home » Wanted: Smart, Transparent, Fair, and Adequate Tax Policy

480px-Brass_scales_with_cupped_traysWashington State’s tax system is terribly unfair. Our lowest income households pay a higher percentage of their income in taxes than do our highest income households. This is wrong. Don’t believe it? Read all about it here and here.

It lacks transparency—do you know what your household pays in total city, county, and state taxes each year? No, you don’t, and I don’t either. Read The Seattle Times’ FYI Guy to learn precisely why our tax burden is so opaque.

It’s not adequate to fund essential government services, like basic education and early learning opportunities for our children.

It’s not stable. Because of its reliance on sales taxes, governments in Washington State can see huge swings in revenue as the economy moves through its regular ups and downs.

What can we do to improve our tax system?

Tax discussions are difficult because they can be dry and wonky, and many of us are already concerned about affording our own family’s necessities, not to mention funding essential government services. But we need a statewide, robust policy conversation on how to solve the tax mess we have today.

Local economist Dick Conway, a man I know as a thoughtful, pragmatic, and thorough professional, has studied tax policy for decades. He recently updated his study of taxes in every state. Conway’s analysis looked at five characteristics of taxes: fairness, adequacy, stability, transparency, and economic vitality. His conclusion, as in his earlier work, is that Washington’s tax system “continues to be dysfunctional.” Conway argues that the solution is a flat-rate personal income tax that eliminates the need for other taxes.

This suggestion causes consternation in many people. Personal income tax! We don’t have one, they say, and we don’t need one.

Well, Washington State already has a corporate income tax; we call it the “business and occupation tax.” The tax is based on gross revenues, not net revenues, which means companies pay it even if they don’t make a profit. Large companies don’t object because the rate of the tax is relatively low (ranging from 0.13% to 3.3%, depending on business classification), but it can make things hard for small or new companies.

So, what’s the solution to this overly complicated, politically charged issue? Conway suggests a personal income flat tax of 10.5% annually, a rate that is in the narrow range of what the national, average household state and local tax burden has been, going back to 1970. Had Conway’s plan been in place in 2015, Washington State would have raised $38.3 billion in state and local taxes, about $4 billion more than was collected with the current tax system. That would have covered the estimated shortfall in education funding and left about $2 billion for other needs.

Whether or not Conway’s flat tax idea is the best is irrelevant at this point; we need to have a serious policy conversation about solutions. The outcome should be a tax structure that allows our lower-income neighbors to pay less, our middle-income neighbors to pay about the same, and our highest-income neighbors to pay more while, at the same time, introducing more transparency, more fairness, more stability, and more adequacy.

Seattle Times business columnist Jon Talton thinks we should consider a local income tax in Seattle to prompt a statewide conversation. Not everyone agrees, including Talton’s bosses, as this editorial in yesterday’s Seattle Times shows.

This is a conversation my colleagues and I will jumpstart this afternoon when the Council will likely adopt a policy resolution setting the framework for establishing a city-based income tax. As with many important matters, Seattle can lead the way toward a more fair, just, and sustainable tax system for the people of Washington. That would be good for everyone.