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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How Does Washington State Stack Up?

Think Washingtonians have it bad when it comes to taxation?  Have you ever wondered how Washington's taxes compare to other states and the U.S. as a whole?  As it turns out, we aren't the worst off in the U.S.  In fact, according to 2009 data (the most recent complete data available) Washington is below average in per capita state and local taxes.  As shown in the chart below, Washingtonians pay $4,049 in property, sales, and other taxes on average annually.  That is slightly below the national average of $4,141 per capita - a 2.2% difference.   

Washington's tax structure is different than many other states.  We are one of seven states that doesn't impose a state income tax.  However, Washingtonians are unduly burdened by the state's relatively high sales tax - one of the most regressive taxes out there.  On average, Washingtonians spend $1,850 on sales tax.  The U.S. average is only $948.  That is an astonishing 95% difference.

Compared to other states, Washington ranks 21st in the nation for the cost of state and local taxes per capita.  Only twenty other states have taxes higher than Washington.  As noted in "A Citizen's Guide to the Washington State Budget," an especially informative publication by the Senate Ways & Means Committee, this ranking has been used to gauge Washington's tax burden on residents.  However, in recent decades this measure has not been as reliable as it once was due to the explosion of wealth (aka stock options) in the late 1990s and 2000s.

If you are interested in more information or seeing compelling visual comparison's, check out the "My Money Blog" post on state comparisons.  This post sources the information from The Tax Foundation, a self-described nonpartisan research group dedicated to "educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government." 

Tobacco excise tax now applies to roll-your-own cigarettes

If you don’t smoke, you might not be aware of the taxes placed on cigarettes sold in this state. And if you don’t smoke, you’ve probably been out of the loop on recent discussions pertaining to taxing loose/pipe tobacco. Pipe tobacco is sold by tobacco shops for tobacco pipe users, but it is also sold in shops that offer roll-you-own packs and cartons of cigarettes. The roll-your-own cigarettes are taxed at an extremely discounted rate, thus gaining appeal with the consumer that wants to spend less on their tobacco.

A pack of 20 cigarettes is taxed $3.025 in Washington State. The tax rate previously was $2.025 but went up a dollar in 2010. We rank 5^th in the country for the amount we tax cigarettes. In addition to the state tax, cigarettes are taxed an additional $1/pack by the federal government. New York taxes the most at $4.35/pack while the least taxed cigarettes can be found in Missouri at only 17¢/pack.

This tax is paid as soon as the cigarettes are brought into Washington State. The cigarette tax is not paid directly by the consumer; rather the seller of the cigarettes has to pay the tax on each pack of cigarettes before they are sold to the consumer. That being said, the increase in cigarette taxes certainly increases the price the consumer pays for cigarettes. 

The monies collected from the state’s cigarette tax go into the state’s general fund, except for 14% that is deposited into the Education Legacy Trust Account. This account is created in the State Treasury and goes towards expanding access to higher education.

Cigarettes aren’t just subject to the state cigarette tax; they also charged sales tax (for more information check out the Department of Revenue). Depending on where you are located, the sales tax differs. If you make a purchase in Olympia, you’re going to be paying .087¢ for every dollar. See how your county compares with others.

In 2009, Congress raised taxes on roll-you-own tobacco, but some companies were able to skirt this tax by changing the way they labeled their tobacco calling it pipe tobacco instead of roll-you-own tobacco. This loophole made it so that the roll-you-own stores could continue to sell the cheaper cigarettes without having to pay the new tax. Even in 1933, state legislators contemplated a large increase in tobacco tax as a way to raise revenue. Just like present day, store owners in 1933 didn’t think this was the best way to go about raising revenue.

During the 2012 Legislative Session, Representative Kirby from Lakewood sponsored House Bill 2565, Concerning persons who operate roll-your-own cigarette machines at retail establishments. The bill would make roll-you-own cigarettes taxable at the cigarette tax rate. Those testifying to legislative committees in opposition to the bill stated it would cost the state jobs and small businesses operating roll-you-own machines would have to shut down. Proponents on the other hand felt that competition should be fair and both manufactured cigarettes and roll-your-own cigarettes should be taxed the same.

House Bill 2565 passed the legislature, and Governor Gregoire is scheduled to sign the bill into law on May 2, 2012. We’ll just have to stay tuned to see if any part of it gets vetoed!   

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.