Five advantages of raising the sales tax
As policymakers gather for a special session to address a $2 billion revenue shortfall it is crucial that they examine raising new revenues to protect essential public priorities. Policymakers should work to close wasteful tax breaks. But given the magnitude of the current shortfall, closing loopholes cannot solve all of our revenue problems. Accordingly, lawmakers should consider raising additional resources via Washington's primary revenue instrument: the state sales tax.
Key advantages of raising the sales tax include:
- Generating new resources quickly: A modest sales tax increase could go into effect almost immediately. A one percentage point (one penny) increase in the sales tax would generate nearly $1 billion in the current budget cycle to help maintain core health and education structures.
- Costs for lower-and moderate-income families can be offset: Pairing a sales tax increase with funding for the Working Families Tax Rebate (WFTR) would significantly reduce costs for lower-income working families with children. The WFTR is a Washington state version of the federal Earned Income Tax Credit (EITC) that was enacted in 2008, but never funded. Set at 10 percent of the EITC, the Washington state rebate would more than fully offset a one-penny sales tax increase among the poorest families in Washington. It's also important to note that up to one third of a sales tax increase would be offset among higher-income households due to larger federal income tax deductions for Washington state taxes.
- Simple for taxpayers and negligible costs for the state: Policymakers have a 30-day legislative session to close a $2 billion shortfall. Any revenue solution must be simple to implement and administer. Raising the sales tax rate meets that criterion. It would be straightforward for the Department of Revenue to administer. Similarly, a sales tax increase would not entail burdensome compliance costs for businesses, which would only have to make small adjustments to current procedures to account for the new rate.
- Minimal economic impact: According to mainstream economic theory, the worst thing policymakers could do for our state economy would be to enact further cuts to our core health, education, and public safety systems. A sales tax increase would provide the resources needed to prevent economically damaging cuts.
- Could be temporary: An increase in the sales tax could be applied temporarily, phasing out after the economy has fully recovered. One option would be to include an expiration date in the authorizing legislation. Last week, Governor Gregoire proposed a temporary, 0.5 percentage point (half penny) sales tax increase that would automatically expire after three years. Another option would be to apply an "economic trigger" -- that is, to tie the increase to state economic conditions. For example, if the sales tax were increased by one percentage point to 7.5 percent from 6.5 percent, the increase could phase down to 7.0 percent when the state unemployment rate falls to seven percent (it currently stands at nine percent). It could be set to phase out completely when unemployment falls to six percent.
Washingtonians have a narrow window to secure our fiscal and economic future. Going forward, lawmakers should pursue a comprehensive revenue strategy. In the short run, policymakers must quickly generate additional resources to protect public priorities. The sales tax is an appropriate instrument for doing so.
In the long run, a new excise tax on some capital gains -- profits from the sale of stocks, bonds, futures contracts, and other high-end financial assets – would help address our structural revenue problems. While it could not be implemented quickly enough to help address the current budget shortfall, enacting such a tax now would foster a more robust and equitable revenue system in the coming years.