The Great East vs. West Debate

If you are familiar with politics in Washington State, there’s no doubt you’ve heard of the rift between Western and Eastern Washington.  According to UW professor, John Findlay, this rift has been around since the 1880’s.  In a nutshell, Eastern Washington residents have been unhappy with the way politics in the state are seemingly dominated by the more liberal, Puget Sound legislators.  In particular, the tax and economic policy are thought to be “socialist” and bringing Washington deeper into a “welfare state.”  “Eastern Washington lawmakers are tired of getting stuck with legislation catering to the interests of the coast” Senator Frank Hansen from Moses Lake stated in the Ellensburg Daily Record.  In 1985, 1991, and again in 2001, Eastern Washington Republicans have introduced legislation proposing the secession of Eastern Washington.

These Eastern Washington legislators should be careful what they wish for, warns David Nice, a political science professor at Washington State University.  “It wouldn’t be a terribly strong state financially,” he said.  This seems a bit ironic, considering the state’s heavily republican east side is supportive of scaling back state government, reducing benefits to the most needy, and cutting taxes. 

Seattle’s alternative newspaper, The Stranger, published a compelling article on the exact nature of Washington’s “welfare state.”  It turns out, Eastern Washington residents are those that are subsidized the most by tax dollars.  With the latest 2001 proposal to split the state, Senator Bob Morton (R-Orient) stated, “We’re saying ‘Whoa, we don’t want to create a revolution, but we certainly do want our rights.  We want our culture, customs and lifestyle preserved.”  There seem to be some conflicting messages being sent by lawmakers in Eastern Washington.  Much like with many voters, there is a disconnect between perceptions and fact – about who pays for the majority of services and who is benefitting from them.

King County contains roughly 29% of the state population, produces 42% of state tax revenues, and receives back less than 26% of state benefits – a return of only 62 cents on the dollar.  Compare that to the $3.16 return on the dollar in Ferry County and you’d think that Eastern Washington should look at the facts before complaining that Western Washington receives a disproportionate share of state resources.  The chart on the total money each county receives from the state for each dollar is pays in taxes is a particularly good visual on the divide. 

This type of disparity spans all types of government – school districts and social services being the most prominent.  The following charts show you how certain counties (Yakima, Okanagon, Adams, and Stevens) are subsidized by the rest of the state.

Now, don’t get me wrong.  I do not think this disparity is bad or even ironic.  Those who need the most help should receive it from those who have surplus.  Anybody who lives in Eastern Washington will tell you that, of course, it costs more per capita to maintain core functions like roads and schools because the population is smaller.  The irony comes about when those who live in these less populated counties vote against measures that will directly impact the services they depend on.  It is this exact type of disconnect that needs to be discussed on a much larger scale.  Voters largely don’t think past how much it costs them as individuals to pay taxes.  They don’t make the connection between the services and subsidies they receive and their tax dollars.  It is this disconnect that must be discussed on a broader scale so that we can create a tax structure in our state that suits everyone’s needs – in good times and in bad. 

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Property Tax 101: Exemptions, Credits, & Deductions

Part 2

In Part 1 of our discussion on property tax exemptions, credits, and deductions we touched on a higher-lever overview.  Today, we dive into a few of the more popular programs in the state.

A majority of the exemptions mentioned in Part 1 are targeted at organizations or entities that serve the public and add to the public good.  There are also a few exemption and deferral programs aimed at relieving the tax burden on certain groups of people.

Senior citizens/disabled persons can apply for an exemption if they are 61 years old or retired due to a disability and whose household income is $35,000 or less.  This exemption program, which was passed as a constitutional amendment in 1966, is a large one in the state.  According to the Department of Revenue, in 2009 (the most recent data available) $176.1 million in property tax relief was given to homeowners, which equates to an average savings of $1,555 per household – that’s no nominal figure! 

A related program for senior citizens/disabled persons is not an exemption program but a deferral program.  Under this program, seniors 60 years or older in a household that has less than $40,000 of disposable income can defer property tax collections until the property ceases to be the permanent residence  of the homeowner or surviving spouse.  The deferral then becomes a lien on the residence and is repaid from the proceeds of the estate.  In the meantime, the state reimburses local jurisdictions for lost revenue.  This deferral program isn’t as widely utilized as the exemption program.  In 2007, only 950 households took part in the program, compared to the just under 114,000 households that took part in the exemption program.
In 2005, a similar program was established for widows/widowers of veterans who died in the line of active duty.  In 2007, the legislature created a new deferral program for low-income households.  Those households with a combined income of $57,000 or less can qualify for the deferral program which allows taxpayers to defer half of their yearly property taxes; payment on the second half is then postponed until the residence is sold.

It is clear to see what the legislature’s priorities have been by looking at the history of property tax exemptions and deferral programs.  Those most vulnerable to losing their homes – seniors, low-income, and widows/widowers – are considered entitled to state assistance.  Do you agree with the legislature’s view?  Should we be subsidizing those in need?  Around the same time these popular programs were put into place, a Tim Eyman initiative (I-747) was voted into law, which restricted property tax valuations to 1% per year.  Clearly, Washington State residents were struggling with the cost of their property taxes and the legislature made an effort to help those most in need.

Property Tax 101: Exemptions, Credits, & Deductions

Part 1

Washington State’s Constitution allows for the legislature to declare certain exemptions for property taxes.  And declare they have!  Over the years, the number of exemptions, credits, and deductions has grown.   There are a number of classifications, too.  For example, there are various entities and types of property that are exempt from property taxes.  It’s probably no surprise that federal, state and local government owned properties are among those exempt.  But did you know that most non-profit organizations and many privately owned properties are exempt, as well?  For a complete list, read the Tax Reference Manual produced by the State Department of Revenue.  In the meantime, here are some examples:

Non-Profit Organizations:

·         Churches, parsonages, convents, and administrative offices of religious organizations

·         Humane societies

·         Assembly halls and meeting places

·         Thrift stores that sell only donated merchandise

Privately Owned Property:

·         Cemeteries

·         Widows/widowers of veterans

·         Property used to produce biodiesel, wood biomass, or alcohol fuel or as an anaerobic digester

·         Senior citizen and disabled homeowners (see below for a more detailed discussion)

As discussed in previous posts, some personal property is also exempt from taxation.  Certain intangible assets such as cash, stocks, and bonds are not included in property taxation.  Also, motor vehicles, farm equipment, commercial vessels, and recreational boats are exempt. 

In the 2012 legislative session multiple bills were introduced to expand exemptions or credits.  Here is a roundup:

·         SHB 1042/SB 5017 – Providing a property tax exemption for property held under lease, sublease, or lease-purchase by a nonprofit organization that provides job training, placement, or pre-employment services.  Did not pass.

·         HB 1385/SB 5628 - Concerning a limited property tax exemption from the emergency medical services levy.  Did not pass.

·         HB 1457 – Encouraging businesses to locate in vacant buidlings through a business and occupation tax credit for property taxes paid. Did not pass.

·         HB 2772/SB 6583 – Creating a property tax exemption for the value of new construction of industrial/manufacturing facilities in target urban areas.  Did not pass.

·         SB 6600 – Extending property tax exemptions to property used exclusively by certain nonprofit organizations that is leased from an entity that acquired the property from a previously exempt nonprofit organization.  Passed – effective 6/7/2012.

For more information on property tax exemptions, read part 2, coming soon.

Washington State Property Tax 101 – Overview

State property taxes account for approximately 13% of all state general fund revenue, making it the third largest revenue stream in the state.  Think of Washington’s tax structure as a three-legged stool (a reference made by former State Forecaster, Arun Raha, during a revenue forecast in 2011); the three legs (taxes) hold up the entire stool (Washington’s revenue sources).  To put things in perspective, the following chart shows you what our property tax collections look like relative to all other sources of revenue.  No surprise that the “three legs” account for nearly 80% of state general fund revenues.

In 2011, $8.9 billion in property taxes was paid by Washingtonians to state and local governments and school districts.  Of that, just under 55% (approximately $5 billion) was collected to support K-12 education.  Local governments rely heavily on property tax collections as well.  In fact, property taxes make up the largest revenue stream in tax collections for the locals, generating approximately $4 billion in 2011.  Clearly in times of economic downturn (especially The Great Recession with the huge hit to home ownership levels), K-12 education funding is directly at risk.  For further discussion on this, see this article.

As I briefly mentioned in the property tax history  post, the definition of taxable property has changed over the years and will undoubtedly continue to change as our technology evolves.  At its most basic level, it is defined in Article 7, Section 1 of our state constitution as tangible and intangible goods that can be owned.  Real property – land, structures, etc - and tangible property – generally everything else - are the two major classifications the state uses to define property.  The legislature has granted some exemptions; for instance, motor vehicles and household goods are not included in property tax assessments.

The same uniformity clause in the state constitution that prevents Washington from implementing a state income tax applies to property tax too.  According to the Legislative Guide to Washington State Property Taxes, “many other states have differential tax rates or different value standards that depend upon the separate classification of property.”  This type of system would be deemed unconstitutional in Washington and has been multiple times throughout state history.

Stay tuned for more posts about property taxes including a discussion on exemptions and how your property is assessed.

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Washington State Property Tax 101:

The relationship between property taxes and public school funding

In Washington State, property taxes are the primary revenue source for public schools.  Of the state general fund, almost half goes to K-12 education – as shown in A Guide to K-12 Funding, $13.2 billion was dedicated to public schools in the 2009-11 biennium. The state property tax levy is commonly called the state school levy because the funds are dedicated to public schools.  The paid property tax, as well as all other tax revenue, is deposited into the general fund.  In 2000, voters approved Initiative 728, which transfers a portion of the state property tax from the general fund to the Student Achievement Fund (SAF).  This transfer of funds goes directly to school districts across the state to be used for class size reduction, extended learning opportunities for students, professional training for educators, and early childhood programs. 

In addition to the school levy, there are special levies.  Whereas the school levy is paid by all Washington property owners through the property tax, special levies are approved by voters for a specific school district.  Special levies are often called excess levies because the levy is in excess of the 1% limit on property taxes.  To read more about the 1% limit visit this post. 

Over the years, reliance on special levies to fund school operations has decreased, largely in part to the Seattle v. State of Washington State Supreme Court decision in which Judge Doran directed the legislature to define and fully fund basic education for all students in Washington State.  After that, in 1977, the legislature enacted the Basic Education Act, increasing state funding support to public schools and limiting the special levy limits.  Still, special levies remain an important part of funding for public schools.  In 2010, 281 of the state’s 295 school districts passed a special levy aimed at maintenance and operations for school districts.

Property Tax 101: The Limit Factor

In recent years, residents of Washington State would think little of Governor Gregoire calling a special session of the legislature simply because it has become a very common occurrence as of late.  However, in November of 2007, when the Governor called her first special session, it was unexpected. The special session was called for the purpose of reinstating a 1% limit, or cap, on property taxes. 

The first limit on property taxes was passed by the legislature in 1971 and only affected regular property taxes at the local level.  This limit required that any property tax levy not exceed 106% of the highest amount of revenue received from any levy in the preceding three years.  Eight years later, the legislature extended this same provision to state property taxes, as well.

 A couple decades later, Washington State voters passed Referendum 47, which required additional limits on top of the 106% limit.  Beginning in 1997, taxing districts with a population over 10,000 could only increase regular levies by the inflation rate or 6%, whichever was smaller.

Not long after, in 2000, Initiative 722 (I-722) was passed.  I-722 limited future property tax increases to 2% and rolled back certain property tax increases levied in the year 2000.  The State Supreme Court ruled I-722 unconstitutional because it was not limited to a single subject.

With the help of Tim Eyman, voters were back at it in 2001 with I-747, which restricted property tax increases to the lesser of inflation or 1%, sending legislators a clear message that property taxes were growing too quickly and they wanted that growth curbed.  Six years later, the State Supreme Court overturned I-747 stating that it didn't include proper disclosure to voters.  In other words, the court believed voters didn't fully know what they were voting on.

The legislature and Governor Gregoire disagreed and quickly called a special session in late 2007.  House Bill 2416 reinstated the 1% levy limit established by I-747 and remains intact today.

What exactly is a tax shift?

The term tax shift isn’t one that’s very complex or hard to understand.  However, it is used in various forms, all with different meanings.  Some refer to a tax shift as the transfer of some or all of a tax burden from one entity to another.  For example, shifting a tax burden from state government to local government.

At its most basic level, a tax shift occurs when an exemption is put into place.  For example, as discussed in the 2012 Legislative Guide to Washington State Property Taxes, the senior citizen’s property tax exemption has the effect of, “slightly increasing the tax rate that owners of all other taxable property must pay by reducing the overall base of taxable property” (pg. 5).  In other words, one segment of taxpayers’ taxes are increased as a direct result of the exemptions afforded to others.

Of course there are many reasons to offer exemptions for people and businesses that benefit society as a whole.  Small business, seniors, and disabled populations are just a few groups that the legislature has deemed deserving of exemptions and most Washingtonians would agree that helping these vital groups benefit us all. 

However, as detailed in a previous post on the cost of exemptions in Washington State, there are 640 tax exemptions.  Of those, 452 would likely generate revenue if eliminated.  I’m not going to suggest that all of those exemptions should be repealed.  I see exemptions as playing a vital role in how our economic systems work.  Some tax exemptions stimulate growth in the economy and help small businesses survive.  Nevertheless, by leaving as many exemptions as we have in place, the tax burden is shifted to those most vulnerable in the state – mainly through the sales tax.  Certain exemptions have been on the books for decades and their relevance has certainly expired long ago.  To have a working tax system we need to be constantly looking at why our system is in place – not just do as we’ve always done.  In order to reform our tax system there needs to be thoughtful examination of our current exemptions combined with major alternatives to our reliance on the volatile sales and property taxes.  In doing so, the tax shifts currently burdening our most vulnerable populations could be minimized which will ultimately help the overall economy of the state.

What are the costs of tax exemptions in Washington State?

According to a recent Department of Revenue report, there are 640 tax exemptions on the books in Washington State.  Of those, 452 would likely generate revenue if eliminated.  However, the bigger question is how much revenue is being lost through these exemptions?

Revenue advocates make the case that closing some exemptions would help to address the budget shortfalls that have plagued Washington since the start of the Great Recession.  Before getting into the weeds of that debate, we need to know just how much the 452 revenue-generating exemptions cost our state.

Exemptions are spread across our entire tax code and can be found in every type of tax applied by the state.  176 apply to the B&O tax, 151 are in sales tax collections, 63 are found in other business taxes, 35 apply to taxes in lieu of an excise tax, 21 in miscellaneous taxes, and 6 in property taxes.  In total, these 452 revenue-generating exemptions resulted in $29.3 billion in lost revenue in the 2011 – 2013 biennium.

To fully understand the $29.3 billion in lost revenue, we need to relate this amount to the big picture—the state’s full operating cost. According to the Washington Citizen’s Guide to the Budget, total expenditures for the 2009- 2011 biennium added up to $74.8 billion.  Of that amount, $26.7 billion was spent on human services, $17 billion on public schools, $10.5 billion on higher education, and $8 billion on transportation.  If viewed as an expenditure, exemptions outweighed any other categorical expenditure in the state.  Currently, exemptions represent approximately 39% of our state’s operating cost.       

Since the beginning of the Great Recession, the legislature has had to rip $10.5 billion from the state’s operating cost as a result of continued budget shortfalls.  These reductions have had a tremendous impact on how the state conducts its business and funds its core values.  Across the board reductions have resulted in increased tuition at our 2-year and 4-year colleges, decreased funding for k12 education (resulting in a legal challenge that was recently upheld by our state’s supreme court), the elimination of vital social service programs, and the delay of critical infrastructure improvements.

Viewed as a whole, exemptions add up to a huge bite out of our state’s operating budget.  Still, a knee-jerk decision to close loopholes could have larger unforeseen ripple effects in our economy.  Currently, these exemptions are not subject to regular and rigorous review, with some exemptions remaining on the books for over 50 years.  When entering into the debate over the closure of exemptions, it is important to not only know the impact that these exemptions have on our budget but to also conduct a full and careful review of proposed exemption eliminations. 

It is hard to argue that the closure of exemptions should not be considered in trying to address the current fiscal crisis in our state.  Even if only 10% of the exemptions were closed, it would result in $2.9 billion of additional funds that could be used to mitigate some of the recent devastating cuts experienced by critical public programs.    

There is something happening here

We are in the midst of a crisis.  Changes are taking place in our state and our nation that look to undermine the dream of prosperity that our culture is built upon.  The gap between the haves and have-nots is growing at an alarming rate.  Poverty is turning into a national epidemic.  Washington State is no exception with 13.4%, or approximately 880,000 of our friends and neighbors caught in the grips of poverty.

Measuring poverty is complicated.  A 2007 Office of Financial Management (OFM) report details the problems associated with gauging poverty.  Two common indicators of poverty are income and social service caseloads.  Measuring poverty by income is difficult because the cost of living (healthcare, transportation, food, housing, child care etc.) changes depending on location and family size.  Depending on the method of measurement, there are conflicting reports of the rates of poverty in relation to income, ranging from 13% to 22% (with some counties reaching as high as 33%).  One common thread among income measurements is that poverty in Washington is following national trends and is rising considerably as a result of the lingering recession.  

In relation to social service caseloads, the OFM Data Book, a comprehensive collection of vital statistics about Washington State, indicates that caseloads for social service programs have steadily climbed since 2004.  Over the past seven years, there has been a 122% increase in demand for public assistance programs that help those struggling with economic hardship.  This increase has outpaced population growth which has grown only 14%in the past decade. 

Perhaps most alarming is the impact that poverty is having on children—one of the most vulnerable portions of our population.  The proportion of children living in poverty is not aligned with the state wide average.  18% of Washington’s children are living in poverty, almost a full 5% above the statewide average.  This population has grown steadily since 2007 and has reached a decade-long high, with trends most likely continuing to increase.

However, policy decisions can be made to ensure that individuals are given opportunities to break free from the cycle of poverty.  Social service programs and education help families and individuals move out of poverty.  Unfortunately, these public programs have been hit hard by the Great Recession.  Budget decisions, compounded by Washington’s volatile tax system, have taken a huge bite out of the very programs and services that act as a ladder for those continuing to struggle with economic hardship.  Downward economic trends cannot be completely avoided, but by rebuilding our tax system we can ensure greater stability and consistency in funding for public programs.

State Supreme Court overturns 70% of Washington Voters

In a pivotal 1933 case, Culliton v. Chase, the Washington State Supreme Court handed down a decision that overturned an income tax initiative that was supported by 70% of Washington voters.  This decision forever changed the fate of a graduated income tax in Washington State.

After the overwhelming passage of Initiative  69 in 1932, income tax proponents were celebrating their victory and state officials were taking steps to start collecting the recently passed graduated income tax.  As tax forms were being printed and prepared for delivery to the public, two Seattle businessmen brought forth a case that challenged the income tax on grounds of its lack of uniformity.  As written, Initiative 69 introduced an income tax that had higher rates for higher income earners.

 

William M. Culliton, an insurance broker, and Earl McHale, owner of a chain of gas stations, with the support of other Seattle business owners and prominent attorneys, filed their suit in Thurston County Superior Court. This challenge was based on the uniformity provisions of Article VII, Section 1 of the state’s constitution.  These provisions prohibit the state from levying different rates of taxation on the same property.

Washington had a long-standing precedent that sought to ensure that all forms of property were taxed uniformly.  This can be found in the territorial tax code and was later incorporated into the state’s constitution.  The drafters of Washington’s Constitution were vague in their definition of property.  This was intentional and came to be understood as any taxable property, both real and personal.

The vague nature of the constitutional definition of property was the grounds on which the graduated income tax portion of Initiative 69 was struck down.  The court found that income is property.  As such, a tax that introduced different tax rates on different incomes violated the uniformity requirements of the constitution. 

This decision set a precedent that has haunted income tax efforts ever since. In the years following Cullion v. Chase, the state supreme court has struck down 3 additional attempts at introducing an income tax in Washington.  Income tax proponents have yet to build proposals able to pass constitutional muster because of the court’s original decision.

The social and political atmosphere of the 1930s was ripe for change and reform.  A climate of that magnitude has yet to come over Washington since.  While there have been many attempts to introduce an income tax in Washington, this supreme court decision almost 80 years ago unfortunately may have laid to rest any opportunities for a graduated income tax in Washington State.

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Elasticity, more than just keeping your socks up

Elasticity - probably not something that you think of every day, but, it is a concept often used in economics and tax policy.  Unfortunately, the nuances of elasticity can be somewhat confusing.  To the best of my ability, I will try to make it a little more comprehendible.

Elasticity is a measure of how a tax system keeps up with changes in the economy.  It shows how tax revenues compare with the economy in good times, bad times, and over the long run.  An ideal tax system will keep pace with the economy and remain as steady as possible in both good times and bad.  If a tax system keeps pace with changes in the economy, then it is said to have good elasticity. Elasticity, or Short Run Elasticity (SRE) (as the 2002 Washington State Tax Structure Study calls it), measures the relationship between two economic factors.  More precisely, elasticity measures the percent change in one economic variable in relation to the changes in another economic variable.  Still with me? 

The goal of a well-designed tax structure is to have a 1 to 1 ratio in SRE. When one factor goes up, the other follows relatively closely, the same is true when one of the factors goes down.  Tax structures that are able to weather economic and business cycles without any drastic disproportionate changes in revenue are said to have good elasticity.   A tax system with a SRE ratio greater than one is volatile, subject to compounded fiscal crises.  In periods of economic expansion, tax revenues grow faster than the economy; in times of recession tax revenues shrink faster than the economy.

To try and put this in perspective, think of a roller coaster (I know, not the most comforting tax policy analogy, but it works).  A roller coaster has a number of cars to hold passengers.  Ideally, you want your economic activity (measured by personal or corporate income) and your revenue collections in the same car, so that when one goes up the other is right beside it.  If these two riders are generally instep, it is said that the system has good stability or elasticity.

Unfortunately, in Washington those two thrill seeking roller coaster riders are not in the same car, they are not even on the same ride.  In both the short and long term view, state revenue is not keeping pace with personal or corporate income.  This creates BIG problems when trying to plan and develop solid public programs like education, environmental protection, and infrastructure maintenance and development. 

http://www.eoionline.org/

One way to add elasticity to our tax code in Washington is to connect revenue collections to the major economic driver of the state—this has been done before in Washington.  The first time was before Washington’s statehood through the 1930s when Washington was a property tax state, and the economy was driven by agriculture.  The second time this was done was the shift to a consumption-driven sales tax that reflected Washington’s transition to a manufacturing economy.

As we transition further away from a consumption driven economy to an innovation driven economy we should make appropriate changes in our tax code to increase the elasticity and stability of funding streams used to fund core public programs and resources.  An introduction of an income tax would be one step towards greater stability and elasticity in Washington’s tax code.

Liquor in grocery stores part II

To read our first post on Initiative 1183, click here.

Even after June 1, 2012, the state will still collect revenue from the sale of each bottle of liquor through a liquor tax. This liquor tax is considered one of the state’s excise taxes. (Read past posts about other excise taxes for fuel and tobacco here.) The state law pertaining to the collection of liquor tax can be found in RCW 82.08.150. In 2011, The Washington State Liquor Control Board (WSLCB) reported that liquor taxes accounted for more than $425 million in revenue that went to the state and local governments for services. The WSLCB produces a report that shows how each county distributes your liquor dollars, click hereto check out how your county benefits. Thurston County received $2,193,132 from liquor tax last year alone.

So starting June 1^st, you’ll be able to walk into Costco and pickup your favorite bottle of spirits right? Maybe not. Like most initiatives in this state, implementation of them becomes extremely complicated. The Washington State Supreme Court heard arguments last week that, if ruled in favor of, would make Initiative 1183 unconstitutional. You can view the hearing here.

The group bringing up the lawsuit is the Washington Association for Substance Abuse and Violence Prevention, a Washington non-profit corporation. The claim of illegality is that Initiative 1183 dealt with more than one subject. Washington’s Constitution states in Article II, Sec. 19 that, “no bill shall embrace more than one subject, and that shall be expressed in the title.” The Association for Substance Abuse and Violence Prevention claims that, “I-1183 exploited the initiative process to serve the special interests of large retailers such as Costco, its biggest financial supporter. Upholding I-1183 would compromise the integrity of future initiatives and eviscerate the salutary purpose of Article II, [sect.] 19.”

The plaintiff also believes that Costco and the backers of I-1183 purposely misled the voters by disguising new taxes as fees, thus distracting citizens who would perhaps not have voted for the initiative if it were a “tax.” The state insists that there are taxes involved with I-1183, but no new taxes.

The hope is that the court will rule on the lawsuit by June 1, 2012—the same day Costco (and others) will begin selling liquor. Stay tuned to TVW and the State Supreme Court for the final ruling.

Costco brand Whiskey?

You’re all probably aware that big changes with liquor have taken place in this state in the last year. Chances are you were approached to sign an initiative petition at Costco or at a chain grocery store. With the passage of Initiative 1183 (I-1183), in November of 2011, Washington State was “kicked out of the liquor business.” Not unusual for corporate-backed initiatives, I-1183 racked in millions from corporate businesses that wanted the ability to sell liquor in this state. While the state will no longer have a monopoly on the sale of liquor, they will still generate monies since the liquor tax will remain.

Here’s how the whole thing came about...

Initiative 1183 was filed in May of 2011 and easily received enough signatures to be include on the November ballot. The initiative found, “that the state government monopoly on liquor distribution and liquor stores in Washington and the state government regulations that arbitrarily restrict the wholesale distribution and pricing of wine are outdated, inefficient, and costly to local taxpayers, consumers, distributors, and retailers.” The way the initiative sought to solve this was by opening up the market to businesses. By doing this, the initiative claimed that the state would generate more money and incur less costs relating to running state-managed liquor stores.

Costco was at the forefront on Initiative 1183. Its headquarters is located in Issaquah, WA, but has warehouses around the world. Its employees helped collect signatures inside their warehouses and the company donated over $22 million in favor of its passage. Costco’s donation was record setting. Obviously, Costco would generate a substantial amount of money in sales if they were granted the ablility to sell liquor in their warehouses. The PDC reports that pro-Initiative 1183 monies totaled over $20 million, while the opposition raised over $12 million.

There has been a growing trend in Washington over the last few years regarding liquor distribution reform. Washington was 1 of 18 states that still had state controlled liquor systems. In 2010, two other liquor initiatives made it to the ballot. Initiative 1100 and Initiative 1105 both abolished the state-run liquor stores, and Initiative 1105 also attempted to change the taxing structure of liquor. Costco played a large part in raising money for I-1100 as well; however, both I-1100 and I-1105 were voted down.

The Office of Financial Management (OFM) released an initiative cost breakdown (as they always do for initiatives).  OFM claimed that it would be hard to calculate the fiscal impact of the initiative because private retailers would set their own prices and be able to charge whatever they wanted. There is expected to be a one-time jump in revenue from the auctioning off of several state-owned liquor stores and distribution centers. Both local and state revenues are expected to increase every year, projecting the trend out until 2017.

Some of this extra revenue is generated through a new fee that would be imposed on liquor distributor licenses. The fee is 10%, “of total liquor revenues from March 1, 2012, to March 1, 2014; the fee decreases to 5 percent thereafter. The initiative imposes a new liquor retailer license fee of 17 percent of total liquor revenues beginning June 1, 2012.”

On November 8, 2011, the voters in Washington State passed Initiative 1183. Beginning June 01, 2012, grocery stores can begin selling liquor. By May 31, 2012, all state liquor stores must close. The state liquor board has an Initiative-1183 transition plan in place, click here to check it out.

Two States’ Competing Tax Systems

Washington and Oregon share a very unique situation: two states and one metropolitan region with an economic structure unlike any other in the country.  Oregon has one of the top income tax rates in the country, and Washington has one of the top sales tax rates, making it almost impossible for their tax systems to be any more different . 

To add an additional ripple to the fold, Washington has a controversial sales tax exemption for all Oregon residents.  Washington lawmakers believed that without an exemption, Oregonians wouldn’t shop in Washington since they could shop in their home state and pay no sales tax at all.  All it takes is an Oregon driver’s license and there’s no sales tax charged.  Not surprisingly, businesses on border cities and towns greatly dislike the exemption.  Washington State Representative Jim Moeller told Pew Center on the States, “Sixty-thousand of my constituents pay Oregon income tax and help support their parks and their roads and their health care.  When Oregonians find themselves over here and they need to pick up a shirt or a pair of shoes or whatever, they should help pay for our parks and our roads and our health care just as much as we pay for theirs.”  Oregon isn’t the only state which benefits from the exemption.  Alaska, Colorado, Montana, and New Hampshire among others benefit as well.

To complicate matters, Washington residents are required by law to pay use tax on goods or certain services when a sales tax has not been paid.  However, this practice is widely ignored in the state. See Phil’s use tax post here.

That leads us to the question--does any of this really matter?  Are residents in both Oregon and Washington traveling en masse and moving across one border to the next in order to dodge the tax burden?  Overall, experts have mixed thoughts on the issue. 

Portland-based economist, Joe Cortright believes the disparate tax structures do not play a large role in each state’s economy – even though he believes Clark County is losing $100 million annually in sales tax revenue.  Some factors which support his position are that many Washingtonians live in Vancouver yet work in Portland.  So, they are paying Oregon’s income tax and Washington’s sales tax.  One positive for this group of Washington residents is that homes are cheaper in the border area of Washington.  

Many believe that the various tax structures are not a major determinate of residents’ shopping habits.  People are going to live where they want to live, shop where is most convenient, and work where they want.

A question raised by the article by the Pew Center on the States is not whether the current tax structures of each state is hindering economic growth for the other, it’s whether or not both states are being well served by their respective tax structures.

By now, every reader of this blog should know that Washington’s tax structure, which is so heavily reliant on the sales tax, is one of the most regressive in the country.  And, given Oregon’s boom-or-bust revenue cycles reliant on their income and corporate gains taxes, they’ve got some work to do, too.  The message the authors of this blog have been trying to get across is that Washington State’s tax structure needs to be reformed so that it isn’t so heavily reliant on one particular tax – a volatile one at that.  Oregon faces the same troubles we have – they rely too heavily on one source of tax revenue.  Just like you’d want to diversify your investment portfolio, we need to diversify Washington’s tax structure so that in times of high volatility, we have something to rely on. 

One poignant quote included in the Pew Center on the States article by Randy Miller, an active Portland business leader, “Enlightened people here all feel the same: We need a sales tax.  Enlightened people in Washington feel the same: They need an income tax.  The general public?  Forget it.”

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When people don’t understand that taxes = services...

 Catherine recently talked about the importance of knowing that taxes equal services. I wanted to continue this conversation by looking at an article the New York Times published in February called Even Critics of Safety Net Increasingly Depend on it.  In the article, Binyamin Appelbaum and Robert Gebeloff travel to Chisago County, Minnesota, and interview middle-class conservatives who oppose government spending on entitlements, but yet still get assistance from programs like Social Security, Medicare, and Medicaid.

“Spending like this is simply unsustainable, and it’s time to cut up Washington, D.C.’s credit card,” Mr. Cravaack [Chisago’s Congressman] said in a February speech to the Hibbing Area Chamber of Commerce. “It may hurt now, but it will be absolutely deadly for the next generation — that’s our children and our grandchildren.”

But the reality of life here is that Mr. Gulbranson and many of his neighbors continue to take as much help from the government as they can get. When pressed to choose between paying more and taking less, many people interviewed here hemmed and hawed and said they could not decide. Some were reduced to tears. It is much easier to promise future restraint than to deny present needs.

“How do you tell someone that you deserve to have heart surgery and you can’t?” Mr. Gulbranson said.

He paused.

“You have to help and have compassion as a people, because otherwise you have no society, but financially you can’t destroy yourself. And that is what we’re doing.”

He paused again, unable to resolve the dilemma.

“I feel bad for my children.”

This article is a powerful example of people making the connection between taxes and how services impact themselves and others. It also outlines the large, difficult decisions that lawmakers have to deal with when deciding the fate of public assistance programs every fiscal year. 

What also made this interesting was how the New York Times selected this area of Minnesota for their story. The Minnesota Post interviewed Binyamin and found out the county was selected by analyzing data from the Bureau of Economic Analysis. Their analysis showed that Chisago “won” because its share of income from government and other baseline numbers most closely met national averages. Usually, conversations about taxes focus on entitlements for the poor or tax increases for the rich; however, this piece was able to focus on the middle class.

The Chisago area elects conservative officials, who support policies that would diminish the benefits of government aid. In essence, they’re voting against their self-interest.  Why? Since the Republican surge in 2010, this view of axing programs to control the debt, without raising taxes, has dominated the majority party in the House.  Taxes are viewed as one of the biggest problems by the Tea Party movement.

In a CBS News poll, 64% of Tea Partiers believe that President Obama raised taxes (even though he didn’t) and 63% get all of their information from Fox News.  This is a problem.  Before writing me off as someone who hates conservatives, I want to say that I believe fiscal restraint and prudent budgeting are worthy goals and that the federal debt is something to be concerned about. However, blanket statements that aren’t based on fact don’t help the dialogue that our country needs to have on how we pay for services.  If the Tea Party movement is to have any relevance, it’s going to have to have policy discussions that don’t write off taxes as the worst thing ever created by man. When people understand what taxes pay for and how government programs assist them, the dialogue on public spending will be more effective and beneficial. Remember, like it or not, taxes equal services.