Capital gains tax alternative proposed

We’ve talked about how regressive Washington’s tax structure is and how people in higher income brackets contribute a smaller percentage of their money to funding public services.  One solution to this discrepancy was proposed by Representative Laurie Jenkins during the 2012 Legislative Session that would have helped to correct this imbalance. 

On February 29, 2012, Representative Jenkins, and 26 other Democrats, introduced House Bill 2563 - Establishing a state tax on capital gains – which would have applied a 5% tax on capital gains over $10,000 per year. For those of you who don’t know, capital gain is the profit from investing in capital assets (like stocks, bonds, or real estate), which exceeds the purchase price.  So if you buy a stock for $100, then sell it later for $150, you have a capital gain of $50.  It’s important to note that one of the exemptions for this tax removed any collection of capital gains from the sales of homes.  Also, the collection of this tax would mirror the federal model, which would make it easier for citizens during tax season.

It was projected that, if implemented, this bill would bring in over $1.4 billion during the 2013-15 fiscal biennium.  Also, 42 other states have a similar tax on capital gains, 31 of which are higher than the proposed 5% for Washington.  Representative Jenkins said,  “We should join 42 other states in making sure everyone pays their fair share for public schools and universities, prisons and parks. Capital gains is a big step toward tax reform and fairness.”  Lastly, according to the Washington State Budget and Policy Center, 96% of capital gains go to those with an annual income over $1 million.

This bill seems like a good way to even the tax burden in Washington. So, what happened? Two things killed the capital gains proposal. The first was time.  When this bill got it’s first hearing with the House Ways and Means Committee, it was day 52 of a 60-day legislative session and the cutoff for fiscal committee bills was two days earlier. This meant that Jenkins’ bill needed to be included in a proposed budget to survive, but this didn’t happen. The second thing that would have killed this proposal is Initiative 1053 and the supermajority requirement on the Legislature for any revenue increase.

It’s unfortunate that this bill fizzled in the legislature and with any luck it will progress further when lawmakers return to Olympia next year.  This was a good example of addressing our regressive structure without trying to implement an income tax.  It’s also a popular revenue source for a majority of states and the federal government.  If this concept is to survive the legislature or the initiative process, people will need to be more aware of the discrepancy in tax contributions for people with low and high levels of income. People who are better off enjoy capital gains without paying taxes at the state level. Others who are less fortunate shouldn’t have to give up a higher portion of their money to fund government.

Taxes and the Internet

Other posts about economic nexus and the use tax talked about how the Internet changed the way we interact and buy or sell goods and services. Electronic commerce is an emerging issue for states and local jurisdictions who deal with taxation of digital and out of state products. One of the main reasons governments haven’t had more dialogue on this issue is because of federal law.

The Internet Tax Freedom Act (IFTA) (Public Law105-277, Section 1100) was passed by Congress and signed by President Clinton in 1998. The purpose of the ITFA was to give the Internet some time to develop and to protect users from multiple and discriminatory taxation due to its decentralized architecture. The ITFA imposed a moratorium on state and local taxes for Internet access and banned multiple or discriminatory taxes on electronic commerce.  The law also created the Advisory Commission on Electronic Commerce, which analyzed Internet taxation and provided recommendations on dealing with this issue.

Two of these ideas included establishing “bright line” nexus standards for American businesses and placing the burden on states to simplify their own complicated telecommunications tax systems as well as sales and use tax systems to ease burdens on interstate commerce.  To address the issue of tax simplification, the National Governors’ Association and the National Conference of State Legislatures created the Streamlined Sales and Use Tax Agreement, which established a common set of definitions and tax laws regarding electronic commerce for government and businesses.  Currently, there are 24 states that have passed laws conforming to the agreement. Washington joined in July 2008 with the passage of Senate Bill 5089 - Conforming Washington's tax structure to the streamlined sales and use tax agreement.

Scott Peterson, Executive Director of the Streamlined Sales Tax Governing Board (Board), said that the consortium is recruiting mores states and seeking bill sponsors in Congress to create a national system for online sales tax collection and remittances. Remittance means sending the taxes collected to the jurisdiction of the buyer.  Businesses also like the agreement and 1,400 online retailers have volunteered to collect state sales tax. In return, Washington promises not to sue them for back taxes they might have owed.

While the Agreement is a step in the right direction, in order for there to be significant change the answer will need to come from the other Washington.  According to the Board, some studies estimate that states lose billions a year in uncollected sales tax and it could reach as much as $23 billion by this year.  Only Congress has the authority to let states require collection of this revenue.  The Agreement simplifies the complexity of this issue and as more states join, it applies pressure on Congress to act.

Unfortunately, in the current political climate in D.C. where lawmakers are willing to default on our nation’s debt for political purposes, change won’t come easy or quickly.  However, this change needs to happen. Even though the sales tax is regressive, it’s Washington’s primary source of revenue.  By fixing this issue it will help to modernize the state’s tax collection authority for a 21^st century economy.

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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Why doesn’t Washington tax tribal casinos?

An idea I’ve heard thrown around a few times when folks talk about government reform is that the state should tax tribes that operate casinos. So why doesn’t Washington do this? Well, there are two main reasons: tribal sovereignty/federal law and Washington’s past opposition to the expansion of gambling.

As Catherine mentioned in her post on tribal fuel tax agreements, there are 29 federally recognized tribes that are independent nations within Washington State. The federal government has a trust relationship with the tribes, usually established by treaties, that falls outside of the federal framework that connects the 50 states. This has been an emotional issue since our nation’s founding, and to say that this creates a complex system would be an understatement.  However, it does mean that the states cannot tax tribes since it’s not allowed under federal law.

However, in certain instances, tribal gaming money can be given to states. This is called revenue sharing. Here’s a quick description from Marty Brown, the Director of the Office of Financial Management:

The federal government closely scrutinizes any compact that provides for revenue sharing to ensure a tribe receives something of equal benefit in return. In most states, no other entities are allowed to offer gaming in exchange for revenue sharing. In our state, non-tribal card rooms do offer gaming.

The compact that Marty references is a gaming agreement that the Washington State Gambling Commission negotiates with individual tribes that is then sent to the Secretary of the Interior for approval.  These compacts outline types of gambling, number of slot machines, gaming facilities, etc. that a tribe can operate.

Since the state has some non-tribal gaming, tribes couldn’t be given a monopoly on gambling establishments in Washington.  The only other way to make revenue sharing a reality in Washington would be to allow tribes to greatly expand their gambling operations, an idea that voters and elected officials aren’t thrilled about.  Looking at past initiatives related to gambling, five out of seven have failed. The most recent example is Initiative 892, which would have authorized additional "electronic scratch ticket machines" in non-tribal gaming establishments. Gambling revenues collected from this expansion would have been used to help offset property taxes.  Voters didn’t like this idea and the measure was defeated by a margin of 2 to 1.

Based on all of this, it’s highly unlikely that revenue sharing will occur in Washington anytime soon. While the money from gambling would be a boost to state and local coffers, it’s better if Washington doesn’t go down that road. As previously mentioned, Washington’s tax structure is very regressive and paying for services has been challenging during economic downturns.  Gambling is a recreational activity that people do less of when times are tough. Depending on this revenue source would only contribute to the shortfalls that Washington experiences when the economy takes a turn for the worst. 

Initiative 1098 take II

Click here for part I of Initiative 1098.

A hot issue in 1932, state income tax remains a volatile topic today. Initiative 1098 was the most recent major push towards implementing a graduated income tax in Washington State. The initiative was put to a vote of the people in November of 2010 and failed, but once again it sparked contentious debate about whether or not Washington State needs an income tax.

The intent behind the initiative was, “to create a new trust fund dedicated to improving education and health services and providing middle class tax relief.” Initiative 1098 proposed to:

• ·      Reduce state property tax by 20%
• ·      Do away with the B&O tax for small businesses
• ·      Tax joint income over $400,000
• ·      Tax individual income over $200,000

By increasing taxes on the wealthiest 1.2% of the state’s population, this initiative also aimed to make Washington’s taxing mechanisms less regressive (read more about WA’s regressive taxes).

William H. Gates, Sr. was the Chair of the Washington State Tax Structure Study Committee that released a report to the Legislature in November of 2002 on taxing alternatives. He was also a staunch advocate of Initiative 1098.  The Gates Commission Report, found that a graduated income tax would lessen Washington’s regressive taxes by taking some of the burden off of other regressive taxes, and the overall fairness of the tax system would improve; however, the proposals put forward in the Gates Commission Report from 2002, look vastly different than what was being presented to the voters in Initiative 1098.

The Gates Report advocated for a flat income tax plan that would replace a large portion of the state’s reliance on a sales tax. The flat income tax would also do-away with some of the property tax (Initiative 1098 did include a 20% reduction of state property tax). This type of tax plan would also make Washington’s taxes more progressive and less regressive. Bill Gates, Sr. responded to critics that suggested we should try to implement one of the tax structures put forward in the Gates Commission Report by saying:

The fact of the matter is, this is something designed to happen. Those were just models set up in a report from a committee as a way to look at how taxes could be changed in this state. It doesn't represent something that I'm wed to. I'm wed to doing something that works, and this works.

William Gates Sr.

The Office of Financial Management estimated that Initiative 1098 would bring in $11.6 billion over the next five years. Out of the monies collected, 70% would be dedicated to education purposes and placed in the Education Legacy Trust Account while the other 30% would be used solely for health services.

State Revenue Increase
Calendar Year	2012	2013	2014	2015	2016
Income Tax	$2,213,000,000	$2937,000,000	$3,025,000,000	$3,116,000,000	$3,209,000,000
Business & Occupation Tax Credit	($250,000,000)	($259,000,000)	($261,000,000)	($271,000,000)	($281,000,000)
Property Tax Relief	($383,000,000)	($393,000,000)	($403,000,000)	($414,000,000)	($425,000,000)
Total Net Revenue to Trust Fund	$1,580,000,000	$2,285,000,000	$2,361,000,000	$2,431,000,000	$2,503,000,000

Source: OFM

Not surprisingly, the initiative had supporters and strong opposition. Groups supporting Initiative 1098 donated $6,423,302 while those against contributed $6,370,002 to use towards opposing the initiative. Most of the opposition’s money came from large contributions from the Microsoft and Amazon Corporations.

Several television ads aired on both sides of the issue. You can view a couple of them below:

On November 2, 2010, the state voted on whether or not to establish a state income tax. The results were 64.15% (1,616,273 votes) against to 35.85% (903,319) votes for. San Juan County was the only county in the state where Initiative 1098 was passed by the majority of voters. Given the vote count was overwhelmingly opposed to a graduated income tax, and considering Washington’s view on income tax from a century ago, it seems as though we still are not ready to restructure our taxes.

Scott Stanzel was President George W. Bush’s media affairs spokesman and led the opposition to Initiative 1098. Less than a week after the election, Scott said:

Clearly, [Washington’s] middle-class residents understand an economic reality that eludes Mr. Gates and many other already-rich advocates of higher taxes: The absence of an income tax has been Washington’s greatest comparative advantage over its high-income tax neighbors in California and Oregon.

Perhaps Washington will see another initiative in the next few years. What do you think? Did you vote for Initiative 1098, and if you didn’t, what other ways can the state fix our taxing structure?


Curious to see if you would have been impacted by Initiative 1098? Use this handy calculator to see if you would have paid more.

Voter + I-64=40 Mills

The People’s Initiative 64 joined Initiative 69 on the 1932 ballot and was part of an initiative-driven-tax-reform effort that looked to diversify revenues and alleviate the burden of rising property taxes.  Initiative 64 introduced strict limits on property taxes in Washington and was the beginning of the eventual ballooning of the sales and B&O tax.

Derived from a palpable distaste for skyrocketing property tax bills, Initiative 64 placed limits on the amount of tax that could be levied by the state and local municipalities against an assessed property value.  Initiative 64 was a sister initiative to Initiative 69, serving as an important point of coalition between urban and rural income tax supporters.  By introducing a property tax limit, reform advocates were able to intercept concerns that the introduction of a new tax in Washington would not provide sure and certain relief in property tax burdens.
Initiative 64 introduced a 40-mill limit on property tax in Washington eliminating any non-market based growth in property tax collections.  As a result, the sales and use tax has increased 9 times since its introduction through The Revenue Act of 1935.  Having been on the ballot twice prior, Initiative 64 passed by a smaller margin then its counterpart, Initiative 69, getting 303,384 or 61% of the ballots cast.

By limiting the amount that could be levied in property taxes and the court’s ruling against the income tax portion of Initiative 69, Washington has come to rely heavily on its retail sales tax to fund critical services.  Of the three types of major taxation (property, excise, and income), only two are present in Washington, and one is subject to a cap, leaving the retail sales tax the only collection system that is open for growth.  As a result, we have seen a dramatic increase in sales tax in Washington since it was first introduced in 1935.  The state portion of the retail sales tax was introduced at 2% and has since increased to 6.5%. 

An over dependence on sales tax has resulted in Washington having one of the most regressive tax systems in the nation.  It places the largest tax burden, as a percentage of income, on those least able to pay.  Sales tax is driven by consumers, an over dependence on sales tax compounds economic downturns when consumer confidence is at its lowest.  Further, our economy has become more complex, it is growing increasingly difficult to effectively track and collect sales tax for online or digital purchases.  Washington is struggling with sales tax erosion that is the result of many factors.  If we are to thrive, we must address these factors to ensure that the quality of life remains high in Washington State. 

Regressive Taxes

A regressive tax is a tax that takes more from the lower and middle income brackets than it does from the highest income earners. Washington State’s tax structure is considered regressive for a plethora of reasons. One of the main reasons is that Washington does not have a personal income tax (which would take into consideration the amount that each individual makes), instead, Washington relies on other forms of taxation that do not take income disparities into account.

Forty-one states have an income tax structure which accounts for a majority of state funding. Washington, Nevada, Alaska, Wyoming, South Dakota, Texas, and Florida do not have a personal income tax. Not surprisingly, five of the seven states are ranked as having the most regressive taxing structures in the United States.

Personal income taxes are less regressive since the taxes are based on how much each individual makes, rather than a flat, across-the-board tax. These states derive between half and two-thirds of their tax revenue from these taxes, compared to the national average of 35%. Unfortunately, Washington comes in #1 (or last place, however you want to look at it) for having the most regressive of taxes. Washington citizens that fall within the lower and middle economic bracket pay 17.3% of their income in taxes, while the highest income earners pay merely 2.6%.

Another extremely regressive tax is the excise tax (or sales tax) because the same rate is imposed on everyone, regardless of discrepancies in income.  Washington State also relies heavily on excise tax revenue for state funding. For more information, check out these past posts on excise taxes in Washington.

Most states tend to receive the bulk of their funding support from the lower and middle income groups, leaving the highest-income earners to pay for a considerably smaller proportion.

The higher the income your household has, the less of their overall income goes towards taxes, whereas the lower income households have to pay a significantly higher proportion of their annual income in taxes. The Gates Commission report shows that a family that makes $150,000 a year pays 4.4% of that in taxes. A family that makes under $20,000 pays 15.7% of it in taxes. Not only is the lower income family clearly paying a higher percentage than the middle and upper-income bracket, but paying the taxes is so much more of a struggle for the lower income family without them being disproportionally taxed.

Continuing to tax our citizens in this manner is not sustainable. What kind of solution(s) do we need to fix this problem? What can we do as citizens to engage and initiate this kind of conversation so that we can begin to work towards a solution?

How much of your gas prices are going to Washington State in taxes?

As gas prices continue to climb, Washington’s commuters may be surprised to find out how much of each gallon they drive goes back into maintaining the roads and highways they use every day. Fuel tax information is not broken down on any type of payment receipt when you fill up your tank. Let’s take a look at how the taxes are distributed for each gallon of gas in Washington State.

The gas tax that is collected is split amongst counties, cities, and state accounts. About half of the fuel tax goes to support the Washington State Department of Transportation’s ferry system and highway programs. Any highway repairs or construction projects come from this money.



Source: WSDOT



The other half of the state fuel tax is given to cities and counties within the state. This money is put towards maintenance and construction of roadways that are not highways in the state. Either way, the fuel tax money collected from the state gets distributed directly back into Washington’s roadways.

During the second half of 2011, Washington state ranked 7^th in the nation (and the District of Columbia) for amount of state and federal fuel tax charged per gallon of gas. Washington’s current tax rate is 37.6¢/gallon. While this is higher than the national average of 27.6¢, some states like New York and Illinois charge upwards of 50¢/gallon in fuel tax. Alaska charges the least in state fuel tax at just 8¢/gallon.





Source: Citizen's Guide to the Senate Transportation Budget

 

 

All states are charged a federal fuel tax in addition to their individual state’s fuel tax. The federal rate is set at 18.4¢, which has not increased since 1993. When you add the federal fuel tax to the state’s fuel tax, Washingtonians pay 56¢ on every gallon of fuel.

The fuel tax is a regressive tax since all income levels pay the exact same in taxes. Poorer families that still have to commute to work, often traveling long distances, have to pay the same amount in taxes as the most well-off commuters who have more flexibility to move closer to their workplace. As a percentage, the less economically stable you are, the more of your income is paid in taxes when you fill up the tank. For the middle and higher classes, a smaller percentage of their overall income is paid in fuel taxes.

While prices at the pump fluctuate based on crude oil prices per barrel, the state and federal taxes you pay do not account for the bump.