Schmudget Blog

Revenue Package Not Built to Last Over the Long Term

Posted by Kelli Smith at Jul 12, 2017 03:00 PM |

By Kelli Smith, policy analyst, and Andy Nicholas, associate director of fiscal policy
 
In a legislative session where the central question was how to come up with the billions of additional dollars required to fund schools now and in the future, lawmakers settled for a short-term revenue solution that will not sustain our schools and communities in the long run. While it’s good that there’s at least some new revenue to support our schools, much more needs to be done to fund our schools and strengthen our state economy well into the future. Lawmakers should have included more equitable and sustainable property tax reforms in the revenue package, and they should have removed more unnecessary and wasteful tax breaks.

 

Property Taxes

The property tax reforms that were passed by the legislature and signed into law by Governor Inslee are far from perfect, but they will generate much-needed new revenue for schools – at least in the short term. Under the enacted plan, beginning in January 2018, the state property tax will increase by about 80 cents to $2.70 per $1,000 of assessed value. This will generate about $1.6 billion in new revenue for the current 2017-19 budget cycle and about $2.5 billion in the following cycle.

This increase in the state property tax will be accompanied by a shift in how local school district property taxes are applied. Beginning in 2019, the new maximum local levy for a school district will be the lesser of one of the two following amounts: the amount raised by a tax of $1.50 per $1,000 assessed value or $2,500 per student in the district.

In many areas of the state, this change will result in significantly lower local school district levies compared to those currently in place. Those reductions will offset the overall increase in state property tax revenue. However, the full impact of this on state and local property tax resources that will be available to fund schools isn’t clear yet, because an official estimate of this local property tax reduction has yet to be released.

Although the property tax reforms will infuse some new investments in Washington’s schools, there are significant drawbacks to this plan. Thousands of lower- and middle-income households living in areas of the state with high property values will see a significant spike in their property tax bills. Even though many families living in areas of the state with low property values will see an overall reduction in their property taxes, there’s nevertheless good reason to think the plan will, on balance, make Washington’s tax code more inequitable. That’s a concern, considering Washington state already has the most upside-down tax code in the nation, with low- and middle-income households paying up to seven times more in state and local taxes as a share of their incomes than those at the top of the income scale.

Furthermore, because lawmakers failed to eliminate a damaging law that restricts property tax revenue growth to a maximum of 1 percent per year, the plan will not provide a sustainable stream of resources for schools past 2022. Since it first went into effect 15 years ago, the law has continuously starved communities of the resources they need to adequately support schools, public safety, and other core investments that serve all Washingtonians. Under the new plan, the law will be suspended for the next four years.

Lawmakers must work to permanently eliminate this cap. If they don’t, all the funding progress achieved this year will quickly evaporate once the 1 percent cap goes back into effect in 2023. And, because the costs of heating classrooms, operating police and fire departments, and providing health care services outpace the arbitrary 1 percent growth limit on property tax revenues, lawmakers will, once again, find themselves dealing with a funding crisis of their own making.

Tax Breaks

Lawmakers did wisely agree to close a few tax breaks. But when it comes to tax breaks, it was still one step forward, two steps back. Because this package also creates or extends 13 new loopholes (although the governor subsequently, and wisely, vetoed two of them).

An unnecessary sales tax break on bottled water was mostly eliminated; only people who don’t have access to potable water will still be able to claim it going forward. And a costly loophole was closed that allowed oil refineries to claim a sales tax break that was originally intended just for sawmills. Eliminating these breaks is a good move. It means more resources will be available for investments that benefit all of our communities.

Lawmakers also took sensible steps toward creating a more level playing field for small brick-and-mortar businesses located in our state. They closed off a large sales tax and business and occupation (B&O) tax break that has allowed businesses like eBay and Overstock.com to avoid collecting sales taxes from customers located in Washington state. Going forward, large internet retailers will now face strong incentive to begin charging sales taxes on purchases made by Washingtonians. If they choose not to do so, they will be required to provide detailed customer data to the State Department of Revenue, so it can collect the delinquent taxes directly from those customers. In states that have adopted similar laws, many companies have chosen to collect sales taxes rather than risk upsetting their customers by supplying their personal information to state revenue agencies.

By creating or extending more than a dozen new tax breaks, however, the legislature took major steps backward when it comes to cleaning up our loophole-ridden tax code. Our state already has nearly 700 tax breaks on the books. It does not need any new tax giveaways.

Governor Inslee wisely vetoed two of the most egregious new tax breaks. He refused to enact a wasteful B&O tax break for manufacturers that would have converted $39 million per year in revenues that currently support schools and other community investments into tax benefits for corporate shareholders and consumers that mostly live elsewhere. 

The governor also took a step to strengthen our state’s environment by vetoing a sales tax exemption on a coal-fired electricity-generating plant owned by a Canadian company (TransAlta) that is currently scheduled to shut down in 2025. The exemption would have applied to materials and equipment used to convert the coal plant to burn a different type of dirty fossil fuel, natural gas. Given the very real dangers that global warming and air pollution pose to the health of our communities, lawmakers should not be subsidizing any form of energy based on fossil fuels and should instead focus on transitioning to cleaner, more reliable energy sources.

Missed Opportunities

In its revenue plan, the legislature missed some major opportunities to ensure the long-term economic strength of our state and to clean up the tax code. They should have eliminated the wasteful tax break on capital gains, which would have raised significant new resources for schools. But disappointingly, the tax break for those who profit from high-end financial assets remains on the books in this budget.

They also should have ensured their property tax plan took steps to improve the equity of our tax code and the long-term sustainability of our budget. In particular, they should have paired their property tax increases with safeguard rebates to offset the costs of higher taxes for middle- and lower-income homeowners and renters. And to dependably and amply fund schools for the foreseeable future, they should have eliminated the damaging 1 percent levy growth cap.

The bottom line is that the legislature’s work does not end here. There’s still a lot more to do to clean up the tax code and provide the kind of resources that make world-class schools and thriving communities possible.

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