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Progress in Focus: The Case for New Revenue Sources

Posted by Lori Pfingst at Apr 13, 2015 02:15 PM |
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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.

PI Revenue graphic hi-res 

In addition to its regressivity, our tax system has some serious structural defects. In order for it to become healthier and more able to meet the needs of this state, these flaws must be fixed (see figure for a summary; and see the full 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.

***

PI cover thumbnailTo 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.

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