By Kim Justice, Senior Budget Analyst, and Andy Nicholas, Senior Fiscal Analyst
With just over a week left in the regular 2015 legislative session, lawmakers are scrambling to address the elephant in the room when it comes to funding for basic education: the fact that there is an over-reliance on local property tax levies. Any plan to address this issue should eliminate the arbitrary 1 percent growth cap on property taxes that limits school funding. And it should also make the property tax more equitable by implementing a “circuit breaker” system that would reduce taxes for people with low and moderate incomes.
Let’s unpack this a bit, because it’s a complicated issue.
Local levies – property taxes approved by voters for a specified school district – have become increasingly used to fill gaps left by inadequate state resources. Although local levies are intended to fund “enrichment programs” like extracurricular clubs and after-school programs, the funding from them currently supports a multitude of school’s basic needs. Things like teacher salaries and textbooks.
When the State Supreme Court ruled in its 2012 McCleary case that the state had failed to meet its constitutional obligation to fully fund basic education, it asserted that this model doesn’t work. The court noted that the state’s reliance on local property taxes to support basic education – instead of broader, statewide taxes – fails to provide the ample funding required by the Constitution.
Heavy reliance on local resources has resulted in an uneven education system, in which wealthier localities are able to raise more money than poorer areas of the state (see graph). To fix this structural problem and safeguard access to basic education for all kids, adequate state funding is needed.
Lawmakers from both chambers have put forth proposals to reform school levies. There are currently three proposals under consideration in the state Legislature to reform the state and local property tax levy system.
Leaders in the State House of Representatives introduced HB 2239, a bill that would create a task force to develop recommendations to reform the state and local levy system. The task force would be required to submit its recommendations to the Legislature by December 1. The Legislature would be required to implement those recommendations by 2019.
In the meantime, there are two competing levy reform proposals in the state Senate. Senate Bill 6109 is being proposed by the Republicans and Senate Bill 6103 is being proposed by the Democrats. Here’s what both bills would do, and how they differ:
- Reduce local school property tax levies: The key difference between the bills is that SB 6109 would set a slightly higher limit on the maximum local property tax levy for schools.
- Take the important step of increasing state resources for teacher salaries: Bill 6109 would do that by increasing the state property tax rate to the maximum rate allowed under current law (to $3.60 per $1,000 of assessed value) by 2020. Bill 6103 would not increase the state property tax levies to make up for the loss of revenue from local levies. Rather, it would raise additional resources for teacher compensation through a new 7 percent tax on capital gains.
- Leave the damaging 1 percent growth cap in place: The current law limits growth in property tax resources for schools to either 1 percent per year or the rate of inflation, whichever is lower. However, the costs of educating our children rise considerably faster than 1 percent per year. As a result, this law, which was first approved by voters in 2000, has greatly reduced funding for public schools.
- Fail to enact a circuit breaker credit for homeowners and renters with lower and moderate incomes: The circuit breaker credit would shut off property tax payments once they exceed 5 percent of a household’s annual income. This is an important protection for low-income households.
SB 6103 would likely make our overall state and local tax system less costly for lower-and middle-income households than SB 6109. That’s because it would replace local property tax revenues – which take a disproportionately large bite out of the family budget of households with lower incomes – with a capital gains tax that would be paid primarily by millionaires.
However, without lifting the arbitrary 1 percent cap, neither proposal raises enough revenue to adequately fulfill the requirements for McCleary. Further, steps still need to be taken to safeguard access to basic education for all kids. As lawmakers consider how to move forward in tackling this particular funding problem, the issue of equity must be considered. The opportunity gap will only continue to widen in our state if the kids in school districts with less money don’t get as much government investment in their education as kids in wealthy districts.
Stay tuned for more in-depth analysis on these proposals.
Amid all the buzz today about federal taxes, we’d like to draw your attention to something closer to home: Washington state’s (broken) tax system. As you know, we’ve written about it extensively for years.
Now, as a special Tax Day treat, here's a roundup of some of the most compelling data that supports why Washington needs to reform its tax system. We would call it the greatest hits, but well, unfortunately it’s a list of biggest misses.
We’ve also compiled a collection of recent editorials and op-eds that support the message of tax reform and increasing revenue. This support is picking up steam! For good reason.
For more explanation on why our tax system is broken -- and for the ever-important suggested solutions for how to fix it -- visit our Progress Index or this recent blog post. And for analysis of how the current legislative budgets are (and aren't) taking steps toward reform, read this post.
Otherwise, read on...
Top 10 Reasons to Reform Washington State's Tax System
- Washington has the most upside-down state tax system in the nation. The lowest-income fifth of Washingtonians pay 16.8 percent of their incomes in taxes – seven times more than the richest 1 percent, whose tax rates average 2.4 percent. (Source: ITEP)
- Our poorest families also face a higher effective state and local tax rate than those living in any other state. (source: ITEP)
- There are more than 655 special interest tax breaks on the books in Washington state – 223 more than in 2000. (Source: Progress Index)
- Between 2000 and 2014, tax revenues as a share of the state economy declined by 20 percent. The decline is largely because our system relies too heavily on sales tax, which is applied to a shrinking share of economic activity each year. (Source: Progress Index)
- The combined state tax rate for small businesses (1.7 percent) is nearly twice that of big businesses (0.95 percent). (Source: OFM)
- The combined state tax rate for hairdressers, accountants, janitors, and other service-based businesses (2.03 percent) is seven times larger than that of manufacturers (0.28 percent). (Source: OFM)
- Our tax revenues remain more than $500 million below pre-recession levels, after adjustment for inflation. (Source: schmudget blog)
- As of 2013, Washington ranked 37th in the nation in terms of its tax revenue recovery following the Great Recession. (Source: Revenue Trends 2013 policy brief)
- Washington is one of only nine states that that doesn’t tax capital gains, or profits from the sale of high-end corporate stocks and other financial assets. (Source: "A Capital Reform" policy brief)
- Only four other states – Florida, Nevada, South Dakota, and Wyoming -- tax the richest 1 percent less than Washington state. (Source: ITEP)
Recent Editorials & Op-Eds Supporting Tax Reform (Woo Hoo!)
- Washington's broken tax system is funded by the poor to benefit the rich, Real Change (Yep, we wrote this one.)
- Our zombie tax code needs a new life, The Olympian
- Guest Opinion: Tax reform is the only way to ensure seniors get the care they deserve, Crosscut
- Tax increases meet two goals, The Everett Herald
- Our Voice: Not all needs being met in Senate and House budget proposals, Bellingham Herald
- State taxes: We’ve paid our fair share, let the rich pay theirs, Real Change News
- How to get closer to solving state’s budget mess, Seattle Times
- State should collect online sales tax, The Olympian
This is Part 1 in our "Progress in Focus" series of blog posts highlighting the individual sections of the Progress Index. This post is focused on the revenue section.
Washington state has an upside-down tax system – in which low- and middle-income families pay seven times more taxes as a proportion of their income than the wealthiest families. This gives us the unfortunate distinction of having the most regressive tax system out of all 50 states.
But this broken system is finally getting some attention in Olympia. And it’s about time.
Lawmakers are currently considering several proposals – including enacting a capital gains tax, closing wasteful tax breaks, and reinstating a Business & Occupation (B & O) surtax on large service-industry businesses – that would make the tax system fairer while generating $1.5 billion in new revenue to advance progress in Washington state.
Having enough revenue to invest in public services that we all rely on is critical to our collective well-being. It determines our ability to provide high-quality education, build a world-class health care system, protect our environment, and support a strong middle class. But as our Progress Index shows, our revenue system is causing us to fall behind on many key measures of progress.
Consider these examples of stalled and declining progress, which are just a small sample from the Index:
- The gap between the rich and the poor in Washington state is growing, and average people are struggling as the median household income dropped by more than $4,000 in the past five years;
- Our state is failing to invest properly in K-12 schools and has not given teachers a raise in six years. This hurts our ability to improve student achievement and graduation rates, as well as our ability to make sure students from low-income families and students of color have equal opportunities to succeed;
- Cuts to state universities and communities colleges have resulted in the second highest tuition increase in the country. They have also increased the amount of debt students are taking on to attend college; and
- Less than half of our rivers and streams have a water quality that is ranked as “good,” and the number of beaches with safe water has declined.
Without additional state investment, progress on these critical issues, and many others, is impossible. Reforming our state's revenue system is one of the best things we can do to create an economy where everyone can prosper.Progress Index to review all the data we use to measure progress). Currently, our tax system:
- Lacks equity. Low-income people pay 16.8 percent of their income in taxes, compared to the meager 2.4 percent paid by the richest Washingtonians. This upside-down structure especially hurts people of color, who are more likely to have low incomes, and therefore more likely to pay a greater share of their income in taxes;
- Doesn't produce the resources we need. Between 2000 and 2014, tax revenues as a share of the state economy declined by 20 percent. The decline is largely because our 1930s-era tax system relies too heavily on sales tax, which is applied to a shrinking share of economic activity each year;
- Lacks transparency. As of 2014, there were 655 tax breaks on the books – 223 more than in 2000. This amounts to billions of dollars in hidden spending every year, and little is known about whether tax breaks result in the job creation or innovation that many businesses claim;
- Gives preference to large businesses over small ones. Washington state taxes small businesses much more heavily than it taxes medium and large businesses. B&O taxes small businesses – those with $5 million or less in gross receipts each year – an average 1.7 percent of gross income. Large businesses on the other hand, which have more than $25 million in gross receipts each year, pay less than 1 percent of gross income in taxes.
The proposals currently under consideration by the legislative and executive branches are a step in the right direction to fix our broken revenue system. These proposals would seek to ensure that there are adequate resources to invest in shared prosperity for all Washingtonians.
But more needs to be done. We live in a state known for innovation, so it’s high time that our tax system gets out of the past and starts aligning with the needs of a modern economy. If this happens, we can move in a direction in which every Washingtonian has an opportunity for a bright, equitable future.
To read our additional recommendations for how to improve our state’s revenue system, visit the revenue section of our Progress Index. Stay tuned for "Progress in Focus" blog posts on the other sections of our Progress Index.
By neglecting to raise new revenue, the Senate budget merely puts a Band-Aid on the biggest challenges facing our state. Ultimately, it doesn’t address a pressing issue: that we are failing to raise enough resources over time to keep up with the needs of a growing state.
- It raids funding from other dedicated accounts to pay for ongoing state needs. The Senate budget depends on $375 million in funding transferred from other accounts, including $200 million from the Public Works Trust Account that pays for local infrastructure projects like water and sewer improvements. Taking money that is intended for other purposes is not a long-term solution to addressing the failure of our revenue system to raise adequate resources over time.
- It banks on marijuana revenues to fund education, completely rewriting voter-approved Initiative 502. Initiative 502, which legalized the recreational market for marijuana, dedicates tax revenues to a variety of health, treatment, and prevention programs. The Senate proposes to rewrite the initiative to dedicate the majority of revenues to public schools. Not only does this undermine the integrity of the initiative, but it also hinges school funding on $300 million in revenue from the marijuana market – which is still in its infancy and highly uncertain.
- It relies on unrealistic savings from Lean management. Lean management is an organizational management strategy that state government has adopted to improve efficiency and quality. In the 2013-15 budget, $30 million in Lean savings were accounted for and those savings are anticipated to continue into the next two-year budget cycle. The Office of Financial Management has advised that, while improvements continue to be made to make services more efficient, it is unrealistic to expect any additional, significant savings from Lean. The Senate does not heed this advice. Instead, it books $50 million in Lean savings.
- It wastes $114 million in tax breaks. Rather than raising new, sustainable revenue, the Senate budget wastes resources on tax breaks. This includes extending a costly tax break for agricultural processors and re-enacting a tax break for high-tech research and development activities. A Joint Legislative Audit and Review Committee audit found this to be a complete failure.
- It gives workers a raw deal by rejecting collective bargaining agreements. The Senate rejects the wage and benefit agreements reached by public workers and the state through collective bargaining. Instead, it proposes an arbitrary flat $1,000 wage increase for all employees in each year of the biennium and it strips health coverage from 20,000 spouses of employees. This undercuts hardworking state employees, like those who protect children from abuse and neglect, who haven’t had a raise since 2008.
- It strips $65 million from services that help families weather difficult financial times. The Senate budget fails to provide the resources for families and children who need help meeting their basic needs. The proposed budget: neglects to restore a previous cut to food assistance, impacting over 15,000 children; eliminates staffing positions that provide public assistance to struggling individuals and families; eliminates telephone assistance for people with low incomes; and cuts $41 million from TANF, which helps people find and keep a job.
- It cuts financial aid for students with low incomes who need it the most. While the Senate budget should be lauded for its efforts to reduce college tuition, it simultaneously reduces financial aid to students who need it the most. Rather than cutting tuition assistance, the funding should be reinvested so that more students can afford a higher education. There are currently about 30,000 students who qualify for assistance through the State Need Grant but are unable to receive it due to a shortage of funding.
- It cuts mental health treatment for people with low incomes. Increasing access to mental health services is imperative for the overall safety and health of our communities. The Senate budget invests in some parts of the mental health system, but it cuts $14 million from mental health treatment programs that serve people with low incomes who do not qualify for Medicaid. A cut of this kind not only jeopardizes the health of Washingtonians, but runs the risk of driving up costs elsewhere—in hospital emergency rooms, correctional facilities, and homeless shelters.
- It neglects to provide the necessary funding to maintain our parks. While the House budget provides $26 million to operate and maintain our state parks, the Senate invests a slim $5 million. This is an insufficient amount to preserve and protect our natural assets.
- It cuts $20 million from efforts to protect our environment. The Senate’s budget cuts $20 million from efforts to keep our air, water, and environment clean. Budget reductions include eliminating funding to address watershed issues and shifting funds and responsibilities to other accounts that are intended for other purposes.
The budget proposal released by the Senate yesterday invests $1 billion less than the House proposal. It shortchanges critical investments in our state's children, workers, and families.
The House proposal released last week raised new revenue to meet Washington state's obligation to fund K-12 education, as well as other essential investments in early learning, mental health, social programs, and environmental protections. The Senate does not raise new revenue. Instead, it relies on fund transfers and reductions to balance the budget, and it gives away more money in wasteful tax breaks.
The biggest areas of difference between the House and Senate proposed budgets include:
- Revenue: The House proposes to raise an additional $1.5 billion in equitable and stable revenue to support investments in education, health, and well-being for Washingtonians. Rather than raising new revenue the Senate proposes to waste $114 million in state funds on new or re-enacted tax breaks, including the re-enactment of a tax break for business research and development activities that was recommended for expiration by a citizen commission charged with reviewing tax breaks.
- Transfers from other accounts: The Senate budget relies on $671 million in transfers from other accounts, including using $296 million in marijuana revenues to fund education, and raiding $200 million from the Public Works Assistance Account which funds local infrastructure like sewer and water projects. The House budget also transfers funding from other accounts, but a much more modest amount of $97 million.
- Investments: The House makes much-needed investments in our workforce, mental health services, early learning, and support for families experiencing difficult financial times. The Senate budget neglects to address many of the pressing needs of Washingtonians and our economy, either failing to invest in these services or doing so at a much lower amount. The Senate also relies on $50 million in reductions through unspecified cuts intended to be achieved through LEAN management, a strategy that has not yielded the level of anticipated savings in the past.
The tables below detail some of the largest programmatic differences between the House and Senate budget proposals.
While the House and Senate budgets are largely aligned on their investment in K-12 public schools to meet McCleary obligations, the House invests more in teachers and early learning. The Senate proposes to enact a new tuition policy at our public colleges and universities that aims to reduce tuition while also reducing student financial aid.
The House makes modest investments in economic security, such as food assistance and support to help parents find and keep a job. The Senate takes the opposite approach, making cuts to vital services that support Washingtonians struggling through difficult financial times.
Overall, both the House and Senate invest more in the health of Washington state’s people and environment, but the House investments are much more robust. When it comes to protecting our air, water, and land, however, both budgets fall short.
Workers get a bad deal in the Senate budget. The agreements reached between workers and the state during collective bargaining are rejected in the Senate budget and replaced with a flat across-the-board wage increase. This approach undermines workers and the collective bargaining process. It would force workers back to the table to renegotiate with the state.
When it comes to raising the resources needed to maintain investments in schools, health care, and safety, the budgets could not be further apart. The House proposes to raise stable, equitable revenue to ensure the future prosperity of our state. The Senate takes the opposite approach, spending $114 million on wasteful tax breaks.
In raising new revenue, the House budget proposal takes a big step in the right direction by beginning to address our broken revenue system. The additional resources would allow our state to meet the obligation to adequately fund K-12 education. And it would not do so at the expense of other critical investments, like those for high-quality early learning, affordable higher education, and clean air. The Senate’s decision to ignore our broken revenue system puts Washingtonians and the economy at risk by further hindering the state’s ability to invest in our future.
*The titles of each section link you to the corresponding section of our new Progress Index. Each section of our Index provides detailed analysis about how the state budget should invest in these critical areas.
While the Senate’s budget proposal released today invests heavily in education for our children, it relies on unsustainable and unworkable funding sources to pay for it. Instead of raising new revenue, like the Governor and House propose, the Senate lowers the bar on important investments in our workforce, early learning, and safety net programs. It balances the budget on unspecified savings and transfers from other funds. Further, Senate leaders propose to waste $114 million in state funds on new or re-enacted tax breaks rather than invest those scarce resources into services and programs that benefit all Washingtonians.
As budget negotiations continue, the Budget & Policy Center urges lawmakers to work toward a budget that invests in equal opportunities for our children, families, businesses, and communities by supporting a dependable and equitable tax system.
Stay tuned to schmudget for a more-detailed analysis on the budget.
Yesterday, the Senate held a hearing on three important bills that would provide greater economic security for workers, children, and families throughout Washington state – HB 1355 would raise the minimum wage to $12, HB 1356 would provide paid sick and safe leave to all employees, and HB 1646 would support pay equity for women.
Research and Policy Director Lori Pfingst provided testimony in support of all three bills, and specifically focused on the benefits of raising the minimum wage:
- It would boost our economy by providing $1 billion more in earnings annually for over 550,000 low-wage workers across the state, which would immediately be spent in local economies;
- It would help us build an economy that works for everyone by: helping to reduce income inequality, reversing a decades-long trend in stagnant wages for low-income workers, and bringing greater equity into the labor market for women and people of color, who are more likely to be in minimum wage occupations; and
- It would advance family economic security by helping more Washingtonians meet their basic needs.
We recently released a report, The Progress Index, which tells a comprehensive story of how Washington state is doing in critical areas of well-being. The section of the Progress Index focused on good jobs shows that, in spite of strong economic growth over the last 35 years, low- and middle-income workers have experienced stagnant wages and have fewer opportunities for full-time work. It further shows that many workers – especially those working part-time – lack benefits like health insurance and paid sick leave (see table). These types of benefits are essential to the economic security of individuals and families.
Raising the minimum wage, especially in combination with implementing pay equity for women and paid sick and safe leave, would be a significant step in advancing family economic security and equity in Washington state.
Join our research and policy team for our Budget Beat call on Friday, April 3, at noon to hear the fate of these important bills, along with other legislative highlights from this session.
Read this Spokesman-Review article that quotes Lori Pfingst and a high-profile Seattle business-owner who supports raising the minimum wage, Molly Moon Neitzel.