Increasing and Modernizing the Sales Tax
Now more than ever, Washingtonians need basic public structures like health care and education. At the same time as the need for these investments has grown, the recession has greatly reduced the resources available to meet the need. In sum, the national recession has caused a critical imbalance in Washington State.
So far, the response to this imbalance has included $3.5 billion in deep cuts that will harm our ability to have an educated workforce, a strong health care infrastructure, and economic security. Now state policymakers face another $2.6 billion shortfall and the Governor’s first budget proposal outlines a solution that depends heavily on making even deeper cuts. These proposed cuts would, among other things, eliminate health insurance for tens of thousands of workers and children, eliminate child care assistance for thousands, and curtail toxic clean-up efforts. A more balanced approach is needed. In order to maintain our shared investments in health care, education, the environment, and communities, one option is to modernize and temporarily increase our state’s major revenue instrument: the sales tax. Elements of the proposal include:
- A temporary (3-year) increase in the state sales tax rate to 7.5 from 6.5 percent combined with fully funding the Working Families Tax Rebate (WFTR), which would offset much or all of the cost of the sales tax increase for over 350,000 Washington working households.
- Permanently modernizing the sales tax by extending it to include consumer services. This would bring the sales tax more in line with the modern economy, making it a more adequate and equitable instrument for financing public services.
- Extend the sales tax to candy, gum, and bakery products and eliminate a tax break for shoppers from out-of-state.
Together, these three elements would generate an additional $1.2 billion in resources that could be used to prevent further economically damaging cuts. The remaining deficit could be closed through a combination of additional revenue strategies, an extension of federal recovery funds, and one-time transfers and changes (including accessing the Rainy Day Fund).
The economy’s impact on the budget
- On the spending side, the downturn means that struggling families face a heightened need for state services, such as health care. Upon losing employer sponsored health coverage, laid off workers and their families often must rely on state health insurance programs. For example, since the current budget was passed, the number of children expected to access children’s medical assistance programs has risen by 11 percent.2
- While the need for public structures has grown, the continued economic malaise has also meant that the state is taking in too little revenue to meet the growing needs of vulnerable families and maintain our long-term investments and economic competitiveness. The amount of revenue expected to be raised from fiscal year 2009 through fiscal year 2011 has fallen by $1.68 billion, since the current budget was passed.3
An imbalanced approach
- Over 65,000 people will lose access to affordable health insurance;
- 16,000 children will lose health insurance coverage;
- Over 20,000 people who are unable to work due to disability will lose financial and medical assistance;
- 12,300 students from lower income families will lose an important source of financial aid;
- 2,400 working families per month will lose child care assistance;
- 1,500 three-year-olds will lose access to early learning opportunities.
A balanced approach
Increasing the sales tax and funding the Working Families Tax Rebate
- Generate about $1 billion per year in new resources;
- Result in minimal administrative and compliances costs for the government and businesses;
- Be relatively equitable, as the Working Families Tax Rebate (WFTR) would reduce much of the added costs for low-income working families.
Minimal Compliance Costs
Mitigating the impact for working families
Modernizing the sales tax
- Raise a significant amount of revenue in the current biennium;
- Bring the sales tax more in-line with the modern economy;
- Ensure the sales tax is applied more equitably across different types of products and services.
Other sales tax actions
The remaining gap
Long-term reforms needed
Raising taxes to preserve services is sound economic policy
1. Elizabeth McNichol and Nicholas Johnson, “Recession Continues to Batter State Budgets; State Responses Could Slow Recovery,” Center on Budget and Policy Priorities, Updated December 23, 2009, http://www.cbpp.org/cms/index.cfm?fa=view&id=711.
2. Budget and Policy Center analysis of data from Washington State Caseload Forecast Council, http://www.cfc.wa.gov/.
3. Budget and Policy Center analysis of data from Washington State Economic and Revenue Forecast Council, http://www.erfc.wa.gov/.
4. Jeff Chapman, “Governor’s Budget Shows Need for Balanced Approach,” Budget & Policy Center, December 30, 2009, http://budgetandpolicy.org/reports/governors-budget-shows-need-for-balanced-approach.
6. Washington State Department of Revenue, revenue alternatives estimates, October 2009.
7. BPC analysis of Brookings/IRS data.
8. Office of Financial Management and Department of Revenue. Fiscal Note, HB 2377. https://fortress.wa.gov/ofm/fnspublic/legsearch.asp?BillNumber=2377&SessionNumber=61.
9. Estimates from Institute on Taxation and Economic Policy, January 2010.
10. Washington State Department of Revenue, revenue alternatives estimates, December 2009.
11. Revenue estimates for these services could not be obtained for this analysis. However, Department of Revenue’s “Tax Exemptions -- 2008” report estimates that the exclusion of all consumer services from the sales tax results in taxpayer savings of about $200 million per year.
12. BPC analysis of data from the U.S. Bureau of Economic Analysis (NIPA 1.1.5).
13. Michael Mazerov, “Expanding the Sales Taxation of Services: Options and Issues,” Center on Budget and Policy Priorities, July 2009, http://www.cbpp.org/cms/index.cfm?fa=view&id=2888.
14. Washington State Department of Revenue, revenue alternatives estimates, October 2009.
15. Washington State Department of Revenue, “Tax Exemptions -- 2008: A Study of Tax Exemptions, Exclusions, Deduction, Deferrals, Differential Rates, and Credits for Major Washington State and Local Taxes,” January 2008.
16. Peter Orszag, Joseph Stiglitz, “Budget Cuts or Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?” Center on Budget and Policy Priorities, November 6, 2001, http://www.cbpp.org/cms/index.cfm?fa=view&id=1346.
17. Budget & Policy Center, “Economists Urge Lawmakers to Consider All Options in Addressing the State Deficit,” February 19, 2009, http://www.budgetandpolicy.org/schmudget/2009schmudgetdocuments/econletter021909.pdf.
18. Nicholas Johnson, Andrew C. Nicholas, and Steven Pennington, “Tax Measures Help Balance State Budgets: A Common and Reasonable Response to Shortfalls,” Center on Budget and Policy Priorities, Updated July 9, 2009, http://www.cbpp.org/cms/index.cfm?fa=view&id=2815.