The Sales Tax: is chump change making you a chump?

By guest contributor Julie Watts

[Send a letter to Governor Locke and your legislators here]

My pockets are stuffed with wadded up sales receipts. Like this one: I took a closer look at the second to last line -- “sales tax = $2.71.” This was for a new hair dryer and extension cord (a minor grooming accident shorted out my previous models of both.) Add a bottle of hand lotion to combat winter dryness, and voila - state, city and county coffers are richer $2.71 for education, health care and social services.

But what about that $2.71? It doesn’t look like much, but add up the tax line on all the receipts in my purse and it’s not chump change. Am I paying more or less than my fair share when I hit the cash register?

The answer was provided over a year ago by the Washington Tax Structure Study Commission in a report to the state legislature. According to the state’s own study, this chump pays a greater percentage of her income in state and local taxes than her across town neighbors with three figure salaries.

Those earning under $20,000 a year pay close to 16 percent of what they earn in state and local taxes. Yet those earning more than $130,000 a year are paying as little as 4 percent (see http://dor.wa.gov/content/WAtaxstudy/wataxstudy.htm). Economists call a tax system like this -- where the poor pay a higher percentage -- regressive.

In fact, our state’s tax system is the most regressive in the nation. A similar study by a national group, the Institute on Taxation and Economic Policy (ITEP), found that Washington places a greater tax burden on its poor than any other state in the nation (see http://www.itepnet.org/whopays.htm).

But what makes our tax burden so unfair? It's that $2.71. In fact, 54 percent of our state revenues come from sales taxes. When people with lower incomes buy hair dryers they pay the same amount of taxes as the rich. But unlike the wealthy, who sock vast portions of their incomes away in tax-sheltered investments, people with low incomes have to spend almost everything they earn.

Is it only the sales tax that makes our taxes unfair? Certainly not. The second largest source of revenue for the state is the Business and Occupational Tax (B&O). Washington bases this tax on gross receipts -- not profits. As a result, a business pays whether or not it makes a profit, which hurts small businesses. Though many big businesses benefit from this screwy B&O, wealthy corporations seek tax exemptions as regularly as they breathe, and are seldom rejected by lawmakers. (see The Seattle Weekly -- http://www.seattleweekly.com/features/0407/040218_news_taxcracks.php)

But the real grief of the B&O tax lands at your door. Businesses pass the cost of the tax on to you, the consumer. It’s a built-in double-whammy along with the sales tax. It’s not on your receipt, but rest assured, it's there.

But what about the property tax? Also regressive. Landlords -- like business owners -- pass the cost of paying the property tax on to their renters.

Together this “axis of taxes” makes for the most regressive system in the country, placing the greatest burden of paying for state services on those who can least afford it. Aside from being unfair, this system is also volatile through changes in the economy. When the economy is booming, so are tax revenues. However, when the situation sours, as it did after September 11-- we sink into deep deficits.

Over the long term, our tax system doesn’t keep pace with growth in Washington’s economy. Contrary to popular political rhetoric, Washington’s General Fund is NOT ballooning out of control. In reality the relative size of the General Fund has remained the same in recent years.

It’s our needs as a state that are growing: an aging population, ever-rising costs of health care, and the growing demand for slots at the state's colleges and universities. For all these reasons it takes more of our tax dollars to pay for the same services.

So what’s the alternative? How can we turn that $2.71 into a tax that is fair, stable and sufficient for the needs of our state? One option comes directly from the Washington Tax Structure Study Commission’s report. The answer: a state income tax.

This study group offered several ways to institute a state income tax. The most effective method to address unfairness would be a graduated income tax. Suppose we reduced the state sales tax from 6.5 percent to 3.5 percent, eliminated the state portion of the property tax and put a graduated income tax in place. In this scenario to raise the same amount of state revenue, those earning under $49,900 a year would pay 2.2 percent of their gross income, those between $49,900 to $120,650 a year would pay 3.5 percent and the fortunate few earning more than $120,650 a year would pay 6 percent.

Who benefits the most? Average Washingtonians. Those earning under $20,000 a year would get a tax break of $311 a year and their neighbors earning $50,000 a year would have an extra $223 to spend. The tax burden on the poorest would decrease from 16 percent to just over 12 percent, while raising the highest income earners to a more sane 8 percent.

Its still not fair, but it’s a step in the right direction. And we chumps, would get more than just a little change back. And wouldn’t that be a change?

More information on Ms. Watt's work at the Statewide Poverty Action Network is available here.

Comments

[Tim Godfrey]

I agree, our state tax system needs major reform. As a small business owner I am especially frustrated with all of the fees and taxes I pay while I hear about the Boeings of our region getting massive tax breaks and other bennies. We need to institute a state income tax but I keep hearing it doesn't have a chance at getting passed. Is this true? What do we need to do to push it forward, get it passed, get serious tax reform happening in WA?

[Jeff]

Tim, thanks for your comments - you can sign our petition here to tell the governor and your legislators to act.

http://www.actionstudio.org/public/page_view_all.cfm?option=begin&pageid=4375

[Chad Lupkes]

I've been reading more and more about the subject, and there is some pretty good material out there that describes why we have the system we do. Here is one of the books I am reading:

A Penny for the Governor, A Dollar for Uncle Sam - by Phillip Roberts

I'm really wanting to figure out how a progressive tax would work, and I do have some ideas. If anyone is interested, please email me.

Chad Lupkes
chadlupkes@earthlink.net

[Jon Stahl]

The folks at Northwest Environmental Watch (http://www.northwestwatch.org) have done some amazing research into the detailed means by which we can "shift" our tax burden from regressive taxes that support pollution, pesticides and sprawl towards taxes that work to improve our environmental and social conditions. Their book "Tax Shift" should be required reading for anyone interested in tax reform. http://www.amazon.com/exec/obidos/tg/detail/-/1886093075/qid=1079742417