Revenue Reform Vital for Increasing Opportunity and Job Growth

Part III in a series from our recent brief, In Pursuit of Prosperity: Eight Strategies to Rebuild Washington's Economy. Washington state’s out-of-date and upside-down revenue system is hurting our ability to make investments that would build opportunity, create jobs, and strengthen our economy.

• A 1930’s tax system in a 21st century economy: Over the last 20 years, revenues as a share of Washington state’s economy have declined by 30 percent.  In large part that is because, when our tax system was put into law during the 1930’s, the economy was mostly driven by agriculture and the production and sale of manufactured goods. At the time, a sales tax on goods reflected most consumer activity. Over time, however, Washington state’s economy – like the rest of the nation – shifted away from manufacturing toward being a primarily service-based economy. Consumers have been spending more on untaxed services than manufactured goods since the 1970s, but there has been no significant corresponding shift to the tax code (figure). Without reforms that reflect this and other changes in the economy, our revenue system will fall ever farther behind, starving the state of resources needed to support public investments in opportunities and jobs.

• Upside-down system making income inequality worse: To make matters worse, our revenue system is “upside-down,” which means low- to middle-income families pay a far greater share of their incomes to support our state investments (17 percent and 11 percent, respectively) compared to wealthy families (5 percent) (figure). Generating revenue through a tax system that places the responsibility on those who are least able to contribute is not only unjust, it doesn’t make economic sense. Substantial economic activity among wealthy families is not included. In addition, this flawed system increases income inequality by giving a big break to the highest income earners, while low- to middle-income families reap little reward from the economic activity they help generate (same figure).

To find out what policymakers can do to build a just and prosperous future for all Washingtonians, read the full brief.