Exactly how do you close tax exemptions in Washington State?

There has been increased discussion in the halls of our capitol about the impact tax exemptions have on our state.  Previously, I talked in detail about just how much exemptions are costing our state and how many we have on the books.  Many have argued that it’s time to close some of those exemptions, or at least bring them under review.  Unfortunately, closing an exemption is more complicated that you might think.

The authority to levy a tax is clearly given in Article VII of Washington’s Constitution, which is aptly named Revenue and Taxation.  The complexities of this article and the authority given have been the subject of numerous debates and countless courts cases.  The debates have played out in the legislature, the Supreme Court, and the ballot.  To say that it is complicated is, well, an understatement.  However, its relevance is paramount in trying to understand just how to address the issue of exemptions.

To put it plainly, the Federal Government and the Washington State Legislature have the authority to manage our tax system, including modifying any existing exemptions.

However, a recent ballot initiative has impacted the legislature’s ability to manage Washington’s revenue system.  Initiative 1053 (led by initiative activist Tim Eyman) passed in November 2010 with over 63% voter approval.  This initiative re-instated a 2/3rds vote requirement in both houses of the Washington State Legislature to make any changes to our tax code.  This requirement was first introduced by I-601 in 1993 and was later reinstated by I-695 in 1999 and again by I-960 in 2007.  The 2/3rds requirement INCLUDES the closure of tax exemptions because it would require legislative action that would amend our tax code resulting in a net increase in revenue. 

The super-majority requirement has plagued reform advocates since it was first introduced.  There have been a number of attempts to mitigate the impact of these initiatives, including the introduction of a temporary increase in sales tax on certain retail items to a full legal challenge of I-1053 which is currently being reviewed by King County Superior Court.  The outcome of the legal challenge will have a big impact on the legislature’s ability to address or modify existing exemptions.  Until then, it’s going to take a supermajority in the legislature to close any of the 452 revenue generating tax exemptions.

BUT, there is another way.  The ballot.  Both I-960 and its predecessor I-1053 reinforce the power of the ballot by reinforcing the people’s right to petition their government.  An existing exemption could be closed by a simple majority vote of the people.  However, it’s important to realize just how difficult it can be to pass an initiative in Washington State.  To date, nearly 1,200 initiatives have been introduced and only 69 have successfully passed into law.

Bearing in mind the complications associated with the closure of tax exemptions, reform advocates should remain diligent in their efforts to bolster fairness in our tax code through the elimination of some outmoded exemptions.  However, the road to closure for tax exemptions is wrought with pitfalls and speed bumps.  When trying to address the fiscal crisis other more short term measures should be explored as well.  Those might include the introduction of mandatory reviews and sunsets of existing exemptions or greater scrutiny of any newly proposed or existing exemptions.  These are two options that are being explored which I will discuss in another post.

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.

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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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.

Understanding the effects of tax cuts in the initiative process

Last time we looked at issues around passing expensive initiatives without outlining how to pay for them (click here in case you missed it). This entry will focus on the opposite occurrence, that of the public limiting the state’s ability to raise taxes or reducing certain revenue sources. Before going further, I want to say that I’m not trying to demean our initiative process or take away from its significance. Ballot initiatives have made many positive changes in Washington State including: the Public Records Act (I-276), the Clean Indoor Air Act (I-901), Mandatory Performance Audits (I-900), and many others.  There are plenty of examples depending on your political cup of tea that you could find to your liking.  My goal is to simply show the power of this process and the importance of understanding the fiscal consequences of using it.

When talking about limiting government through the initiative process, one has to mention Tim Eyman who, love him or hate him, has become quite adept at using Washington’s direct democracy to pass laws that circumvent the Legislature and the Governor.  Some recent reductions in state funding are a result of his efforts including: I-695 - Cut the state motor vehicle excise tax and required voter approval for all tax, I-747-Cut state and local property taxes, and I-1053 - Concerns Tax and Fee Increases by State Government.

In brief I-695 was commonly known as the law that capped car tabs at $30 and I-747 limited increases in total property-tax collections by a taxing district to 1% a year. If there’s anything consistent in our state’s history, it’s our disdain for property taxes (click here for Justin’s piece on I-64). Both of these laws have a similar story.  The initiatives that passed were declared unconstitutional by the State Supreme Court but were resurrected by the Legislature shortly afterwards due to their popularity with the voters.  Lastly, I-1053 (and it’s predecessor I-960) requires the Legislature to have a two-thirds majority in both chambers before raising any taxes.

So what happens when reductions like this occur? In 2009, the Kitsap Sun wrote an article that looked at the effects of I-695 ten years after it passed.  “[Washington State Ferries] drive-on customers are clearly worse off for I-695. Frequent-user books for drivers jumped from $104 to $189.60 for 10 round trips. That equates to a $2,225.60 increase for this year alone.” The story goes on to talk about other modes of transit since this tax reduction targeted transportation services and projects.

Lastly, the voting requirement on taxes outlined in I-1053 has severely limited the Legislature’s options for dealing with the current recession. Over $12 billion has been cut in the last 4 years and taxes haven’t been able to help address this shortfall. The only time the state came close was with the candy and soda tax, which was overturned by I-1107 (click here for Catherine’s post on this issue).

After saying all of this I have to ask, do citizens fully understand how tax cuts affect them? Would the public have vetoed the soda tax if it were commonly known that it could have saved a service or health care program? Or would I-695 have passed if everyone had a full understanding of its impact on local transportation?  While I can’t answer these questions with accuracy, I can say that it’s important for both the public and government to be more engaged with each other in this discussion. If citizens can look beyond the appeal of tax cuts or large ideas and know where the money goes, and if government can work harder to explain clearly where specific tax dollars are going then that’s a start. I know it’s a tall order, but anything less leaves Washington at risk to ballot initiatives that aren’t fully understood by the electorate.

Initiative 1098

Washington State has a long and complicated history with state income tax. I won’t go into all of it in this post (you’re welcome), but it’s important to know some basics. When Washington became a territory in 1889, a system of taxation had to be implemented. During this time, most of the power in the state came from the landowners aka the farmers (you may remember our previous post on Charles Hodde and the WA State Grange Association). Property tax, which included farmland, accounted for most of the revenue in the state in the early 1900s. As the population and demand for services grew, the farmers’ concern (understandably) increased, and thus began the quest by the Grange Association, labor organizers, and others to get the state to adopt an income tax. In 1932, I-69 was passed by the voters but ended up being struck down by the State Supreme Court. (You can find much more information on I-69 by checking out Justin’s post.)

In 1935, the legislature passed a tax package that created Washington’s tax structure that we still use today (Justin also wrote a summary post on the revenue act which you can check out for more info). With the passage of the revenue act, the pressure was off the property tax for supporting most of the services provided by the state, although it still is one of the three major taxing sources.  If you want a very detailed and interesting account of the battle for an income tax in Washington State, check out Phil Roberts’ book A Penny for the Governor, a Dollar for Uncle Sam.

I know this is a lot of background, but that’s because income taxation in Washington is a really scandalous topic. All of the times the State Supreme Court overruled or the governor vetoed an attempt at a state income tax was because of a little clause in Washington’s State Constitution. In Article VII, Sec. (1), the constitution reads, All taxes shall be uniform upon the same class of property within the territorial limits and, the work ‘property’ as used herein shall mean and include everything, whether tangible or intangible, subject to ownership. This section creates definite limitations to taxation and has been the reason why Washington’s Supreme Court has ruled against a graduated income tax. All of this information really means that it’s a complicated and trying process to get massive tax reform passed for the whole state. 


Stay tuned for part II when we look at the latest effort to adopt an income tax—Initiative 1098!