The Washington State Supreme Court held a hearing yesterday to give state lawyers a chance to explain why the legislature should not be held in contempt for failing to make adequate progress toward meeting the terms of the court’s landmark McCleary decision. And while I’ve seen a ton of media coverage on the hearing, I haven’t seen much mention of the ginormous elephant standing quietly in the back of the courtroom: taxes.
In McCleary, the court ruled that the state was failing to meet its constitutional “paramount duty” to amply fund our K-12 schools. Exactly how much more money McCleary requires the state to spend on basic education is unclear, but we’re talking billions. Roughly an additional $4.5 billion in the 2017-2019 biennial budget. Give or take. That’s equivalent to over 13 percent of our current $34 billion biennial budget!
And the honest to God truth is that there is simply no way to meet this obligation without raising tax revenue. Everybody knows it. There isn’t $4.5 billion in waste, fraud, or abuse available to cut. So there are only two choices: raise revenue, or defy the court.
If I wielded the unfettered powers of a benevolent dictator I’d just overhaul our entire antiquated tax structure and replace much of it with an adequate, fair, and sustainable income tax. Problem solved. But our non-dictatorial democratically elected legislators aren’t entirely without options either.
The first revenue item on the table should be a substantial hike in the state property tax, which is, after all, a school levy. Given our current fiscal crisis it is just plain stupid that the state is currently using only $2.39 per $1,000 of value (and falling!) out of its $3.60 per $1,000 of value statutory cap. We can’t responsibly use it all, for various technical reasons, but we could generate at least another $1 billion per biennium in state property taxes, easy.
Next (and I know this is being bandied about in some circles in Olympia) the state could raise at least another $1 billion or so per biennium through a targeted capital gains tax that only hit, say, the top one half of one percent of Washington households. It would be a new tax, with some ramp up time and administrative overhead, so it’s not as easy as just hiking the property tax, but it’s perfectly doable.
Hike the state school levy, tax capital gains, close a few hundred million dollars in unproductive tax “preferences,” and cross your fingers that a strong economy bumps up other revenues, and before you know it the supremes could be congratulating legislators on a job well done. But let’s not pretend that we have a snowball’s chance of meeting McCleary without raising taxes. It just can’t be done.
The sad truth is, we have more than just a structural revenue deficit in Olympia. We have a structural honesty deficit. And we can’t begin to address the former until we fix the latter.
While an income tax is appropriate, it is just as dangerous to depend on one of those as it is to depend on the sales and use taxes we now depend on.
Back in 2007-2008, one of the major reasons for California’s problems was the drop in the high-end incomes. An inordinate amount of income came from a few people. We don’t want to replicate that in Washington.
However, an income tax for higher incomes with lower sales tax rates would permit those living paycheck to paycheck to spend more money.
Chances are that any sales tax decrease will turn right around to higher sales. With larger sales, a smaller sales tax could raise close to the same amount of money. It would also increase the earnings of the higher income workers who pay an income tax, so some would come back there.
But, I’m a dreamer to think that we could get a fair and balanced tax system with current Republican distemper in Olympia.
@1 I don’t know about you, but I’d sooner take a chance on the rich getting richer than try squeezing more blood from the turnip-poor.
Unfortunately, the Court could do something as stupid and inhumane as to require the State to fund nothing but education (and the few other legally-required services). That would eliminate human services and housing. If they did so, there would be no recourse.
Ignorance to truth: “No new taxes!!!”
“Chances are that any sales tax decrease will turn right around to higher sales. With larger sales, a smaller sales tax could raise close to the same amount of money. ”
Would zero sales tax yield infinite sale tax revenue?
That appears to be indistinguishable from the Laffer Curve. You know, cut income taxes, and income tax revenue will increase!
It’s the profoundly dishonest/stupid underpinning of so-called Reaganomics, and by extension, the entire right-wing platform.
@5 I’m with you. I really don’t see how the math works on that. Let’s say you cut the state sales tax by 3%, from 6.5% to 3.5%, so now you have 3% more retail buying (assuming consumers spend the entire tax cut) and a 3.5% tax on that is 0.105%, so now you have 3.65% times X revenue instead of 6.5% times X revenue. I don’t see how you can get more than 6.5% times X from this, any way you slice or dice it.
@5 “Would zero sales tax yield infinite sale tax revenue?”
Precisely. Just this week, on an investing blog I frequently read and occasionally post comments on, I found myself arguing with a guy who insisted Reagan’s tax cuts INCREASED revenue “in is first term.” They didn’t. Anyone can look this up; federal revenue DECREASED in Reagan’s first term. So then he argued there was sort of a delayed reaction and his tax cuts increased revenue in his second term. I replied, oh okay, now you’re changing the rules of the game so when you said “first term” you actually meant “second term,” but if that’s how you want to play, how about the fact Reagan RAISED TAXES eleven times? Isn’t it possible the revenue increases in his second term came from those tax increases? Oh no, he said, it’s the tax cuts stimulating economic growth that was responsible. Well, I said, if the tax cuts created revenue growth, then why did he raise taxes eleven times? … You can’t win with these people, because they use circular logic, so it’s like they’re calling the coin flap “heads I win, tails you lose!” Of course, they’re not the least bit interested in the truth of the matter; they only care about “winning” the argument.
@7
Faith.
@7
Which investing sites do you read?
If I wielded the unfettered powers of a benevolent dictator I’d just overhaul our entire antiquated tax structure and replace much of it with an adequate, fair, and sustainable income tax.
48 hours of Netanyahu, Putin or Goldy as dictator…. I guess I’ll take Goldy
@9 Mostly CNBC, Barrons, and Business Week, and a blog called Seeking Alpha because it emphasizes dividend growth investing or DGI, which I think is the way to go in present economic and market conditions. Investing isn’t difficult. Ignore the pundits and background noise, and gradually build a collection of blue-chip stocks that raise their dividends every year, and reinvest and compound the dividends. That works well and there’s no need to get more complicated.
@9 (continued) Seeking Alpha (“SA” to aficionados) is free, online, and has a large stable of contributors — some prominent, some not, some worth reading, and others to ignore. The writing often is dense, but that’s no problem, because I only skim the summaries and conclusions, which allows me to parse 20 to 30 articles a day. I’m just looking for a general drift of things, whether on the economy or a particular stock.
@11,12
Yes, I’ve been reading SA for awhile. As with anything, there is the task of weeding out the chaff and the obvious cheerleaders, but the community seems to do that fairly well.
And, yes, I agree, that focusing on stable dividend growth as the foundation of a portfolio is the way to go.