With lawmakers set to begin special session on April 29th, they must set their sights on reaching a compromise on the budget without compromising the things that Washingtonians value – like high-quality education, good jobs, economic opportunities, and a clean environment. Our state has cut investments in these areas for far too long – which has resulted in significant stalling in many key measures of progress.
Investing in the values that are critical to the well-being of all Washingtonians is the key to ensuring that our state can get back on track. It can help us make progress individually and collectively.
The big question facing budget negotiators is how to make and sustain needed investments in our shared values. The answer? It will require additional revenue sources. Raising new revenue – through proposals such as taxing capital gains and closing tax breaks – will ensure that we can sustain our investments in essential public services while also making our tax system more equitable.
Responsible budgeting requires that lawmakers take a more expansive, big-picture view of state investments. They have the opportunity to lay the groundwork for our state and its residents to thrive for years to come. If our elected officials fail to take the long view, Washingtonians are likely to continue falling behind in key measures of progress.
Despite continuing to rake in big profits, the Boeing Company has eliminated more than 3,000 jobs in Washington state since November 2013 – when lawmakers granted the company the largest state tax subsidy in U.S. history. The tax breaks were supposed to encourage Boeing to “maintain and grow” its workforce in Washington state. Instead, thousands of workers have received pink slips or been told that they can either relocate out of the state or country or lose their jobs.
So how did this happen? It’s because Washington’s tax breaks aren’t structured in a way that encourage Boeing to create more jobs here. Other than a stipulation that some of the manufacturing facilities for its upcoming 777X jetliner must be built in Washington state, the company is essentially free to do as it pleases. Unlike other states where Boeing operates – including South Carolina, Illinois, and Missouri – our state doesn’t require the company to create or retain a single job in order to claim state tax breaks.
House Bill 2147 would change that by refocusing Boeing’s tax breaks on job creation. Although the bill may now be moving into "missed opportunity" territory as the regular session comes to a close, it's still important to shine a light on why Washington state needs such a bill. The bill would help protect Washingtonians who work for Boeing by requiring the company to actually do its part to maintain and grow its workforce in Washington state or risk losing its tax subsidies. It ties the tax breaks directly to the number of jobs located in Washington state.
Essentially under the bill, Boeing’s tax breaks would be gradually reduced if its Washington-based workforce falls below November 2013 levels. For every 250 jobs below that baseline, its preferential business and occupation (B&O) tax rate would increase by about 2.5 percent. The preferential rate would disappear completely if Boeing employment falls 5,000 below the November 2013 baseline. The company’s tax credits would similarly be reduced as employment falls.
If the 2015 legislative sessions end without the passage of the bill, Boeing will continue to claim more than $300 million per year in preferential business tax rates, business tax credits, and sales tax breaks until 2040. That’s no matter how many (or how few) workers it employs in Washington state.
A 2014 Legislative Auditor economic analysis vividly spelled out the dangers of failing to act on this important measure. It found that in order for state aerospace tax breaks to have a net positive impact for the state economy, Boeing would need to make continuous investments in Washington state. A onetime investment in a new facility doesn’t cut it. That’s because the tax breaks for Boeing filter state money away from other investments that help build a strong state economy. They reduce the resources available for things like public schools and colleges, infrastructure, and public safety.
In other words, the tax incentive’s current structure doesn’t only mean that the company can keep reducing the size of its workforce in Washington; it also means taxpayers are subsidizing a multibillion-dollar corporation at the expense of the well-being of our communities.
We all want a thriving aerospace sector and the growth of good, living-wage jobs in our state. House Bill 2147 would help ensure that outcome by encouraging Boeing to make a firmer commitment to Washington. Although the 2015 regular legislative session is ending, policymakers could still revive this bill during the special session. It's an important piece of legislation that would be worthy of such a bold move by our elected officials.
Click here to see the testimonies from hardworking Boeing workers who support this bill.
Most Washingtonians would agree that good schools – from early learning all the way through higher education – are essential for our collective well-being as a state. This legislative session, lawmakers have the opportunity to help create an education system that will offer better opportunities for Washington state’s kids and young people. While much of the conversation in the Legislature right now is centered on the money, it should be focused on what’s at stake – equal opportunity for future generations to reach their full potential.
Our Progress Index shows that progress is stalled or going backward on 11 out of 13 indicators related to education in our state (see Figure 1 for a summary; and see the full Progress Index to review all the data we use to measure progress). For example:
- Just 39 percent of children entering kindergarten show up with the skills they need to succeed in school, and the opportunity gap for children of color is evident upon entry;
- Progress has stalled on several key achievement indicators (e.g., proficiency in 3rd grade reading and 8th grade math), as well as indicators correlated with future success in college and the labor market (e.g., on-time graduation). Many students of color continue to fall behind their peers as they move through K-12;
- As higher education becomes less affordable, student debt is increasing. Decreased access to higher education has affected our state’s ability to fill competitive-level jobs that require college-level degrees. It also has exacerbated the racial and ethnic gap when it comes to opportunities for good jobs.
Progress on education is stalled due to our broken revenue system. Our state has unbalanced tax policies that favor wealthy families and big businesses, and it disproportionately relies on revenue from low- and middle-income families and small businesses. As a result, funding for education has fallen behind by 14 percent since 2008. On top of that, the Legislature needs to increase funding for K-12 education by $4.5 billion to fulfill requirements under the Supreme Court’s McCleary ruling and to give teachers – who haven’t had a cost-of-living increase in six years – a long-overdue raise.
Proposed Budget Investments
The good news is that lawmakers are taking steps to strengthen Washington state’s education system. Both the House and Senate budget proposals take steps to invest in early learning, K-12, and higher education. The proposed investments, however, differ in magnitude (see Figure 2).
Both budgets recognize that investing in our youngest learners is one of best things we can do to improve the future success of kids and close the opportunity gaps experienced by children of color and children from low-income families. They propose:
- Quality improvements through the Early Start Act: This act gives child care providers the tools to improve the quality of care children receive and helps parents gain access to valuable information about child care settings. While both budgets invest in the Early Start Act, the House investment is more than twice that of the Senate’s ($114 million versus $50 million). Further, the Senate proposal is missing a key provision that allows families with low incomes to retain their child care for a continuous 12 months, regardless of changes in circumstances that may impact eligibility (e.g., they get a raise or higher-paying job).
- Additional slots for preschool: Both budgets provide funding to allow more children to go to preschool and receive health and family support services through the Early Childhood Education and Assistance Program. The House investment would fund preschool services for an additional 6,358 children ($72 million). The Senate budget funds an additional 4,000 slots ($45 million).
K-12 Public Schools
With the State Supreme Court’s McCleary ruling and a contempt order looming, funding for K-12 public schools is a focal point of the budget proposals from both the House and Senate. Although large investments are made, some reforms are neglected. Both bills propose:
- Heavy investments in McCleary reforms: When it comes to funding the major components of basic education reforms under McCleary, the House and Senate budgets are largely aligned. Both invest in maintenance, supplies, and operating costs; all-day kindergarten; and smaller class sizes in kindergarten through third grade (K-3). This costs a total of about $1.3 billion.
- Not to fully fund smaller class sizes called for by Initiative 1351: Although about $400 million is invested in lowering class sizes for K-3, neither budget funds smaller class sizes in the higher grades or additional school staff. Funding smaller class sizes in K-12 won the support of voters who favored Initiative 1351, and would cost an additional $1.6 billion in the next two years.
- Not to address schools’ reliance on local tax levies: Full funding of basic education is the state’s responsibility, but local levies play a significant role in funding things like teacher salaries and textbooks. The McCleary ruling makes it clear that this is unconstitutional. As a result, new proposals have recently surfaced from both chambers.
Washington state students experienced the second-biggest tuition hike in the nation since the start of the recession. The House and Senate budgets present differing strategies to make college more affordable, as follows:
- Addressing rising tuition costs: The Senate budget proposal lowers the cost of education for students by limiting tuition to a percentage of the state’s average wage. The House takes a different approach to affordability by freezing tuition for the next two years.
- Providing financial aid: Addressing tuition costs will make college more affordable for middle-income students, but any proposal should be paired with an increase in financial aid to make college more of a reality for lower-income students. Currently, a lack of investment prevents over 30,000 eligible Washington state students from receiving financial aid. The Senate’s tuition-cost reduction plan would cut funding for the State Need Grant (SNG) and the College Bound Scholarship by $75 million, further limiting opportunities for aspiring students. The House budget would invest $53 million in the SNG to serve additional students.
Funding for education helps ensure our schools keep and recruit talented teachers. It also provides up-to-date technology, good textbooks, necessary school supplies, reliable school-bus services, and safe buildings. These are all essential resources to provide our youngest and oldest students with the skills they need to be successful in school and life.
While it’s certainly commendable that both the House and Senate have made education a priority in their budget proposals, more needs to be done. The status quo is not an option. We cannot afford not to fix our broken revenue system. To make progress as a society, our state should have a world-class, equitable system for all students. That includes high-quality teachers, curriculum, and enrichment activities throughout early learning, K-12, and higher education. The way to make this happen? Lawmakers must ensure we have adequate revenue to create such a system.
To read our additional recommendations for how to improve our state’s education system, visit the education section of our Progress Index. Stay tuned for "Progress in Focus" blog posts on the other sections of the Index.
NOTE: Data on early learning and child care in the Progress Index can be found in both the Education and Good Jobs sections. While the early learning system should, first and foremost, be an investment in child development, it is also critical to the needs of working families.
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.