Options for Raising Revenue
As a result of the Great Recession, important public services -- like health care, education, and child care assistance -- face severe cuts. These basic public services were already slashed by about $3.6 billion last year. Taking a similarly unbalanced, cuts-only approach this year would mean cutting vital supports for working families to the bone. Such an approach would undermine our shared values like preserving our environment and helping those who are temporarily disabled. And reducing investments that foster a skilled, competitive workforce would jeopardize our economic recovery.
Instead, lawmakers should take a balanced approach that includes new revenues. The Budget & Policy Center has compiled a list of sensible revenue options that would generate enough resources to prevent further economically-damaging budget cuts this year. To view a pdf of the table along with a short description of each item, click here.
Sales Tax Options
Expanding the sales tax to include a broader array of products and services would generate more than $300 million in new resources in the current biennium. Items in this category include: extending the tax to consumer services; custom software; candy, gum, and bakery products; non-organic fertilizer; out-of-state coal; and repealing the exemption for out-of-state shoppers. Not only would these actions generate badly needed resources in the the short-term, they would also make the sales tax a more adequate and equitable instrument for financing public services in the long-run.
Policymakers should also consider temporarily increasing the state sales tax rate. Increasing the sales tax would be simplest and most straightforward method of generating enough resources to prevent damaging cuts this year. This action would be simple for the state to administer and would entail minimal compliance costs for businesses. And every 0.1 percentage-point increase the sales tax rate would generate about $100 million in additional revenue. As the table shows, increasing the sale tax to 7.5 from 6.5 percent would increase revenues by over $1 billion in FY2011.
The advantages of using the sales tax to preserve services are discussed more fully in the BPC analysis "Increasing and Modernizing the Sales Tax."
Other Tax Options
In total, the sin taxes and loophole closures included in our list would generate over $1 billion in new resources in FY2011. Increasing taxes on unhealthy or environmentally damaging substances would not only generate additional resources this year, but would also encourage consumers to make healthier purchasing decisions in the future. As such, policymakers should consider raising taxes on tobacco products along with implementing a new tax on sugar-sweetened beverages – a major contributor to the growing obesity epidemic. They should also consider increasing the Hazardous Substance Tax and creating a new tax on environmentally damaging bottled water.
Eliminating wasteful exemptions, deductions, and credits along with enacting targeted business tax increases would also generate a substantial amount of revenue this year. For example, adopting “Economic Nexus” would generate additional resources by providing a more rational method of identifying which multistate companies are liable for B&O taxes in Washington. (See the schmudget post “What is ‘Economic Nexus’ and Why Do I care?” for more information.) Other items in this category include -- increasing the B&O tax rate on business services; eliminating a deduction banks and mortgage companies claim for interest earned on first home mortgages; repealing the Dot Foods exemption; and other actions. A recent analysis from the Economic Opportunity Institute (EOI) provides an overview of wasteful tax preferences in Washington.
The Working Families Tax Rebate
While new revenues are needed to preserve essential services, lawmakers should also reduce costs for lower-and moderate-income families. Pairing any package of revenue enhancements with full funding for the Working Families Tax Rebate (WFTR) – a tax rebate program based on the federal EITC – would accomplish both objectives. At a cost of about $80 million per year, funding the WFTR at 10 percent of the federal EITC would significantly reduce costs for low-income working Washingtonians. On average, the poorest fifth of families with children in Washington would receive rebates of more than $200 each year. (See: How Much Would You Get? A Working Families Tax Rebate Calculator)
Below are links to additional Budget & Policy Center resources and information about the WFTR.