We're No. 1: WA State's broken tax system exposed

Peter Callaghan; The News Tribune


Up here in the Great Northwest, we like to think of ourselves as special. That's what we tell ourselves, anyway.

But just how special was revealed again this month by a study published in "Governing," a magazine devoted to state and local government.

Not only are Washington and Oregon among the 11 states listed as having broken tax systems, the two states are No. 1 in two dubious competitions.

Washington is the state most heavily reliant on the sales tax. According to census data, we receive 63.6 percent of our state taxes from the sales tax (the national average is 32.1 percent).

And Oregon is by far the most reliant on the income tax, with 74.4 percent of its state revenue coming from that source. The next highest state is New York at 59 percent, and the national average is 37.1 percent.

Such overreliance on one source makes the states vulnerable to wide swings in tax collections. We lurch from having too much revenue in boom times to having too little in recessions.

And our tax systems are made worse when we react to one another. For example, Washington riddled its sales tax with exemptions to compete with Oregon, which has no sales tax. And Oregon's past attempts to add a sales tax have been thwarted in part because our system looks so bad.

"You couldn't make the situation up," said Katherine Barrett, one of two project editors. "It's pretty ridiculous."

"If you don't live there and have to deal with it, it's fascinating," said her husband and collaborator, Richard Greene.

Academically, a tax system should be balanced among the big three - income, sales and property. Barrett compares it to a stock portfolio in which stocks and bonds perform differently in different economies and protect investors from risk.

But while Oregon's overreliance on income tax is hurting it more this year, Washington's overreliance on a Depression-era sales tax presents bigger problems long-term. We've shifted to a service economy, but most services aren't subject to the sales tax - here or in other states. The study quoted a tax professor who said depending on the sales tax in a changing economy is "like riding a horse that is rapidly dying."

The study (on the Web at www.governing.com/gpp/2003/gp3intro.htm) was conducted with support from the Pew Center on the States. It argues that the budget crisis gripping all but a handful of states is not completely due to the recession or 9/11. It also can be blamed on the way tax systems are designed and to bad decisions by elected officials. When the stock market bubble artificially boosted tax collections, most states broke two fundamental rules, the study noted. Using these one-time revenues, states paid for ongoing expenses, and they cut tax rates.

Every state thinks it is overtaxed. Barrett said she found tax complaints in South Dakota, which ranks 50th in state and local tax burden. But the study also found that Washington won't get much sympathy from taxpayers in other states. A comparison of state and local tax burdens as a percentage of personal income - the best measure of relative burdens among states - showed Washington ranked 32nd. Oregon ranked 39th.

Still, any mention of tax reform is quickly labeled a backdoor path to an income tax and, in turn, to increased taxes. That's how the Gates Commission report on Washington's tax system was greeted in December.

So are we doomed to live with a broken system? Greene says not necessarily.

"The reason I know it's not purely academic is because occasionally it gets done," he said. "And many of the most significant changes come in bad times."

Peter Callaghan: 253-597-8657 peter.callaghan@mail.tribnet.com


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