Saturday, May 23, 2009

Tax Reform: If not now, when?

Washington's tax system is a disaster. Unlike other states, the tax system is based on inability to pay. Higher income residents pay a much smaller share of income in taxes than the lower income residents and every analysis shows that it is the most regressive tax system in the country. No state is as dependent on the sales tax as Washington since we have no income tax. The only other states without an income tax are significantly less depedent on the sales tax. These states get most of their revenues from oil and gas severance taxes or in the case of Nevada, revenues from gambling. Washington is the anomaly.

Meanwhile, the sales tax is highly volatile and grows more rapidly in a boom (creating more spending) and declines more rapidly in a bust (devastating government services). Furthermore, the portion of the sales tax base you can actually get at is shrinking as untaxed services have become a bigger proportion of the economy thus the tax is inelastic, not growing at the same rate as income.

Business taxes are regressive as well with a business and occupations tax that is imposed based on gross income rather than profits. New businesses are taxed heavily as they struggle to become profitable as they grow.

The income tax has become the third rail in Washington politics with politicians of both parties fearful of even saying the word. But clearly the biggest problem is the courts. In the past, the elected state supreme court has ruled that income is property and must follow the constitutional guidelines that property taxes must be uniform. Thus, reforming our tax system would require a 2/3 majority of each house and a vote of the people Likely story.

The argument that income is property is antiquated and bizarre. Before income taxes became the norm in the 1930s, state courts in many areas of the country ruled against income taxes making the same argument. Only Washington jurists may have "stayed the course".

There are several attorneys who argue that perhaps we should take another run at it. The court would have the opportunity to review the income as property argument and perhaps catch up with the rest of the country and perhaps even reviews changes in economic analysis since the 19th century. Maybe they will realize that in both economics and accounting there is a different than income and an asset. It's a least worth a try.

Sen. Lisa Brown made a valiant attempt to put income taxes on the agenda during the recent legislative session. While public opinion polling looked good, during the legislative session allies were unable to commit since revenues would come in far to late to stem the budget cuts this session. Setting up a progressive tax system would take over 18 months.

As the smoke clears from the legislative session, this could change. This could be the time.

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