Dysfunctional Tax System Fails to Meet Modern Needs

Part four in a series on Washington’s long-term fiscal challenges.

Washington’s outdated tax system is starving our state of vital resources desperately needed to invest in what it takes to create jobs and build a strong economy.

The amount taken in from state taxes, measured as a share of our state economy, has been steadily falling for the past couple of decades.  In fact, since 1995 there has been a 30 percent drop. Without changes in the tax system, this downward trend won’t subside.

The major reason behind this decline is that Washington’s tax structure has not kept up with the changes in the state’s economy. It was built for a different time. For example, increasingly, the wealthiest Washingtonians make their money from capital gains, which the state doesn’t tax. In addition, the state sales tax – Washington’s largest revenue source – doesn’t reflect the massive shift in consumer spending patterns. When the sales tax took effect in 1935, people spent more on things than services. Today it’s the other way around, but the sales tax isn’t applied to most services – many of which didn’t exist when the sales tax began.

Elimination of the motor vehicle excise tax (MVET) through approval of Initiative 695 in 1999 made the decline even worse. Replacing the MVET with a flat, $30 vehicle licensing fee costs the state more than $800 million in annual resources.

In an era of so much social and economic upheaval maybe it’s natural to gravitate toward things that are traditional and familiar. But Washington’s 1930s-era tax system is making things worse. Difficult as it may be, we must acknowledge that Washington faces 21st century economic challenges that our quaint tax system simply can’t handle.

We can create a sustainable tax system that meets the demands of the 21st century global economy.  Key reforms that would put Washington on the right path include modernizing the sales tax to include more consumer services and adopting a tax on rapidly-growing capital gains. These two options would help reverse the downward spiral of economic resources.  In the coming year, adopting these changes would increase available state tax revenues by at least $800 million -- all of which could be invested health care, education, and other necessities proven to create jobs and promote prosperity.

Check out parts one, two, and three of this series for more information on Washington’s long-term fiscal challenges.