Committee recommends Wash state income tax; lawmakers dubious
By PAUL QUEARY The Associated Press
12/3/02 8:35 PM
The Washington State Tax Structure Study Committee's recommendations, submitted to a joint House-Senate committee, don't endorse a specific version of the income tax, but offered several alternatives for lawmakers to consider.
"The most important problem with the current system is in terms of fairness," said Gates, an attorney and the father of Microsoft Chairman Bill Gates.
However, it's unlikely that the recommendations will prompt drastic action from the Legislature, even though lawmakers commissioned the study. Lawmakers will grapple with a looming $2 billion budget shortfall when they convene next year -- and the committee's proposals wouldn't provide any more money than the current system.
Also, proposed constitutional amendments to allow an income tax have failed miserably at the polls in the past, most recently in 1973.
"Everyone will say that we've just got an old dead horse out here to beat on him some more," Gates said. "That's not our problem."
The current state system relies almost entirely on the retail sales tax, the business and occupation tax, and the state's share of the property tax.
The system is widely criticized as unduly burdensome on the poor, who pay a larger percentage of their income in sales taxes, and on new businesses that are taxed on their gross proceeds whether they make profits or not. The commission's charge was to propose alternatives.
The poorest households pay nearly 16 percent of their income in state and local taxes, according to the committee's report, while the rich pay as little as 4.4 percent. Meanwhile, Washingtonians miss out on the opportunity to deduct state income taxes from their federal tax bill -- to the tune of more than $1 billion a year.
Most of the committee's alternatives are variants on a flat income tax, which would fall more equitably on people of differing incomes. The federal income tax is graduated, falling more heavily on the rich.
One of the options, reducing the 6.5 percent state sales tax to 3.5 percent and eliminating the state property tax, would require a 3.8 percent income tax rate to produce the same amount of money.
The result would be a flatter system, with the poorest households
paying roughly 13 percent of their income in state and local taxes
and the richest paying about 7 percent.
That's partly because the plan would shift about 9 percent of the state's total tax burden from businesses to households by cutting the sales tax for businesses.
Another option -- imposing a 6.7 percent income tax that would replace
the sales tax and the state property tax -- would roughly equalize
the tax burden on all households at about
The poor would still pay a slightly higher percentage of their incomes because they are hit harder by excise taxes on alcohol, tobacco and gasoline. Meanwhile, the rich and middle class would benefit more from the federal tax deduction, which is only available to taxpayers who itemize.
Gates and other members of the committee acknowledged that overhauling the tax structure would be a difficult sell for the public.
"People like the tax devil that they know and they're nervous about something they don't know," said Hugh Spitzer, a law professor at the University of Washington and vice chairman of the committee. Spitzer speculated that public opinion might change if people understood how much they would pay in taxes.
Lawmakers seemed dubious about the short-term prospects of major tax reform.
"The income tax, we just don't see that happening," said Sen. Dino Rossi, R-Sammamish, the incoming chairman of the Senate Ways and Means Committee. "We have 2 billion of our own problems right now."
Rossi and other Republicans tend to view proposals to impose an income tax as a veiled attempt to raise taxes overall.
Even Democrats generally inclined to favor an income tax seemed uncertain what to do with the committee's proposal.
"What will we do with it? I don't know," said Rep. Jeff Gombosky, D-Spokane, the chairman of the House Finance Committee. "We're going to give it its due consideration."
Imposing an income tax would likely require a constitutional amendment -- which must attract support from two-thirds of the House and Senate and a majority of voters statewide. However, Spitzer argued that the state Supreme Court rulings that an income tax approved by voters in 1932 was unconstitutional are now decades out of date, which might allow lawmakers to impose the tax with a simple majority and trust the courts to uphold it.
However, given the recent string of successful anti-tax initiatives proposed by Tim Eyman, it's unlikely the Legislature could avoid a statewide vote of some kind, even if lawmakers tried.
"The reality is that there will be no income tax in this state
unless the people vote on it,"
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Washington State Tax Structure Study:
The Associated Press
INCOME TAX -- Use an income tax to reduce or replace the state sales tax and eliminate the state property tax. The plan would make the state's tax structure less regressive -- collecting more from the rich and less from the poor. Most households would pay more because business gets a big tax break when the sales tax goes down, but individuals who itemize could deduct the income tax from their federal taxes, helping offset the increase.
VALUE-ADDED TAX -- Replace the state's unique tax on gross receipts of businesses with an equally unique "subtraction-method value-added tax" designed to avoid the pyramid effect of the B&O tax, which falls heavily on the production of complex products. For example, a cabinetmaker would pay tax on only the value he added to the raw lumber he bought, subtracting the cost of the lumber itself, because the mill was already taxed on its proceeds from selling him the lumber.
RAINY-DAY FUND -- Create a constitutional rainy-day fund that would help offset revenue shortfalls during bad economic times -- and would be off-limits in good times.
TAX SERVICES -- Extend the sales tax to cover consumer services such as beauty shops, amusement, recreation and cable television.
TAX REMOTE SALES -- Adopt a multistate proposal to streamline sales tax collections, allowing easier taxation of mail-order and Internet sales.
TAX LAND YACHTS -- Extend the excise tax on watercraft to motor homes and travel trailers, which are currently registered for the same $30 as passenger vehicles.
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