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Increasing the Sales Tax and Funding the Working Families Tax Rebate

Posted by Andy Nicholas at Jan 14, 2010 10:00 PM |
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In our new Policy Brief, the Budget & Policy Center recommends temporarily increasing the sales tax and fully funding the Working Families Tax Rebate.  If enacted, this proposal would help maintain our shared investments in education, health care, the environment, and safer communities, while reducing costs for low-income working families.

Increasing the sales tax

In Washington, the retail sales tax is our primary instrument for financing basic public services like education and health care.  In order to maintain these services, the Budget & Policy Center recommends a temporary (3-year) increase in the state sales tax rate to 7.5 from 6.5 percent.

This approach would generate a sizable amount of new resources (about $1 billion in FY2011) and would be simple for the state to administer and for businesses to comply with.

Mitigating the impact for working families

Raising the sales tax would generate a sizable amount of revenue, but without the WFTR it would also increase costs for vulnerable families in Washington.  The graph below shows that, alone, a one-percentage-point increase would have a large impact on low-income families, raising taxes as a share of their incomes by 0.8 percent.




Full funding for the Working Families Tax Rebate -- a tax rebate for low-income working families based on the federal Earned Income Tax Credit -- would significantly reduce costs for these families.  In fact, the bottom fifth of Washington families (those earning under $29,000) would actually see a net decrease in sales tax. The rebate would also significantly lower the cost of the sales tax increase for the next bracket of earners (those earning between $29,000 and $54,000).

Click here to view the entire report.

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Taxes are a balancing act

Posted by crankyoldlady at Jan 16, 2010 04:14 PM
The regressivity of the sales tax seems to be an article of faith amongst policy wonks. And it's unarguably true that poor folk pay a higher percentage of their income in sales taxes than rich folk. But it may also be true that, setting aside the transportation and possibly the construction budgets, poor folk also receive more direct state services than rich folk.

For the sake of argument, let's say that state services serve all citizens simply by being available to those who need them. So all benefit in some fashion from their provision. But at any given time, poor folk are apt to be receiving more state services than rich folk.

Granted, this is an evidence-free theory but logic suggests it might have some validity. Let's say that close to 90 percent of the operating budget is used for education, higher ed, social services, health care, and corrections. Education and higher ed take up almost 55 percent of the state budget. Forty percent of kids in public schools are poor enough to quality for free or reduced-price lunches. An even higher percentage of college students quality for some form of financial aid. And, chances are, most college students and many parents of school-aged kids are in the early years of career building so their earnings are likely to be amongst the lowest of their working lives.

The next 30 percent or so of the budget is used to support the basic health plan, assistance for the unemployable, medicaid, TANF/welfare, childcare subsidies, nursing home assistance, corrections, and other safety net programs. The majority of these programs serve a much higher percentage of lower rather than higher-income Washingtonians.

So, at any given time, more low-income Washingtonians are using state services than is true of their higher- income neighbors. And, these clients are receiving a higher percentage of their living expenses in state funded aid than is true of higher-income clients.

The sales tax is regressive. But how much of that regressivity is ameliorated by the progressivity or imbalance of state services provided directly to lower income Washingtonians?

Just wondering.

Taxes are a balancing act

Posted by Andy Nicholas at Jan 19, 2010 09:33 PM
You are correct that a significant share of the state budget is dedicated to providing opportunity, health care, and economic security to Washingtonians in need. But it is also true that all Washingtonians – not to mention out-of-state investors and workers – benefit from these investments these as well. But it would be difficult to determine and apportion the present value of future economic growth resulting from reduced crime, a highly educated workforce, and better health among different income groups.

I think it is also important to note that our shared investments in education, health care, and safer communities reflect our values as a state. In many ways, however, our tax system works against those values by setting high tax rates for lower income households. In other words, another way of thinking about your question is whether the progressivity of state services is offset by the regressivity of state taxes. The Working Families Tax Rebate provides one way around that problem.

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We testified in support of a number of important bills during the 2016 legislative session. Take a look:

  • Policy Analyst Elena Hernandez's testimony (at the 23:23 minute mark) on the House Bill that would take a two-generation approach to preventing poverty 
  • Associate Director of Fiscal Policy Andy Nicholas's testimony (at the 1:54:09 mark) on the House bill focused on aerospace-related tax breaks
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