29.12.06 Cover, January
|
Benjamin Franklin famously defined insanity as “doing the same thing over and over and expecting different results.” As the Washington Legislature goes into session this month, Franklin’s maxim comes to mind, and it’s difficult to dispute its wisdom. Using the definition as a clinical guidepost, this state’s approach to improving its tax system – if not quite mad – could certainly benefit from some time on the fiscal couch.
Across the political spectrum, right to left, most agree that Washington’s highly regressive tax system – based as it is on one of the country’s highest sales tax rates – places an unfair burden on those least able to pay. “Why would you create a tax structure that taxes poor people the most?” asks Rod Regan, who led the 1976 campaign here that removed the sales tax from food.
|
|
|
It’s a good question. But then, Washington also consistently ranks among the bottom 10 states when it comes to funding its public schools. And, although some conservatives argue that per-pupil spending is sufficient, many who’ve studied the issue say increased state support would not only improve student performance, but also produce more smart people with college degrees, who in turn would put their brains to work in local industries, bolster the region’s economic output, and – guess what? – generate more tax revenue with less tax burden per citizen.
And finally, when cornered (and shown accurate data presented without emotional arm-twisting), policy wonks as well as politicians of all stripes concede that lowering the sales tax, changing or even eliminating the Business & Occupation tax, and adding a modest income tax would not only make Washington’s tax system fairer for everyone, but also create a more stable stream of revenue, year after year. |
|
|
So there’s broad consensus – and yet nothing ever changes. What gives, Dr. Freud? Why is it so difficult here to create an equitable tax system that also generates enough revenue? (Never mind what “enough” actually means; there will never be agreement on that.) And how can it be that every state, county and municipality in the richest country on Earth seems mired in perpetual tax crisis, forced to place a new initiative on the ballot every time there is a need to fill potholes or add buses?
“There’s something quite odd in our state’s politics when a senior and very distinguished businessperson – with great name recognition across the state – cannot pave a political consensus to make sensible changes,” says Seattle University economist Paul Sommers. He refers, of course, |
|
|
to William H. Gates and the Washington State Tax Structure Study Committee he chaired in 2002 at the request of the Legislature. This collection of private economists, legislators and academic experts (backed by an advisory committee that included dozens of business and advocacy groups as well as a couple hundred private citizens) systematically analyzed Washington’s tax structure and issued a lengthy report proposing improvements.
“They’ve done the research,” Sommers says of the Gates committee. “Nobody has objected to the conclusions. But there is no political consensus yet to make the changes.”
|
|
Mr. Gates, a formidable yet soft-spoken man, seems not quite sanguine when he says, “People are happy with the devil they know – and don’t trust the devil they don’t know,” a metaphorical way of saying that citizens will cling to the known evil of a sales tax rather than embrace the imagined hellfire of an income tax.
In a conference room at the Bill & Melinda Gates Foundation, on East Lake Union, Gates tilts back in a plush chair as he lays out his recommendation: “A structure that includes some taxes that would provide stability to the system, and some taxes that would ‘go with the flow,’ so to speak,” because “a system that just depends on taxes that fluctuate is not a great way to create a stable tax system.” Many would agree, some grudgingly, that the most equitable and effective tax systems are constructed of three pillars: a sales tax, a property tax and an income tax. Washington has the first two; Oregon has the second two. In tough economic times, both states’ revenue streams can dry up and become dangerously weak trickles. Having all three taxing sources, as Idaho does, combined with excise taxes, inheritance taxes and other, more specific revenues, is the savvy way to finance the operations of a state, Gates insists.
In broad strokes, the Gates committee recommended reducing the state’s share of the sales tax from 6 percent to 3.5 percent; eliminating the B & O tax; adding an income tax; eliminating the state’s portion of the property tax; rewriting state law so that all special tax exemptions (business-specific loopholes) expire every 10 years unless proactively renewed by the Legislature; and creating not only a Rainy Day Fund for lean revenue times, but also protecting its existence with a constitutional amendment, so legislators could not tap the money except in dire circumstances.
Mostly, people agree the committee’s recommendations make good sense. So what keeps the state from moving toward such sane reforms?
A survey of economists, business advocates, think-tank scholars, liberals and conservatives generated a list of prime reasons. This is not meant to be a complete inventory; nonetheless, the following factors play noteworthy roles in the gridlock stalling tax reform:
· Not surprisingly, the primary reason is the public’s lack of trust in government – specifically, a lack of faith that officeholders at all levels can, or even want to, prevent waste in government programs and inefficiencies among its employees. Cynical citizens assume that instead of rolling up sleeves and reducing questionable expenses, elected officials will just raise taxes whenever it’s convenient. Would you trust your elected representatives to enact an income tax – and then not raise its rates whenever doing so would make their jobs easier? Most would not.
· Special interests – public as well as private – have become more effective at getting their exclusive needs funded by government. Result? Not only are more programs eating up budget share, but special legislative loopholes are written into laws that give advantage to specific companies or targeted industries. “Business likes all these loopholes and subsidies,” says Ted Van Dyk, who worked with Hubert Humphrey in Lyndon Johnson’s Great Society heyday. “They don’t recognize that you need a level playing field for the state’s economy to really work well. Why should Boeing get a $3 billion tax break – and nobody else get one? With the tax base reduced by $3 billion, somebody else has to make up the difference.”
· The ability of Republicans, libertarians and other activists on the right to “starve the beast” and eviscerate “big guv’mint” gained traction nationwide during the Reagan presidency. Think tanks such as the Heritage Foundation, nationally, and the Washington Policy Center, locally, push for government to focus on “core” functions – courts, prisons, schools, transportation – while arguing to privatize “non-essential” services. Their operative assumption is that governments are mostly inefficient or corrupt, and they aggressively promote this view. Some conservatives regard the state’s tax revenue not only as outright theft, but also as a symptom of American-style socialism. To them, taxes are the embodiment of a menacing ideology that must be suppressed. As Seattle visionary/gadfly/political soothsayer David Brewster says, “The Republicans and Tim Eyman have made taxes a litmus test, and sort of made it a wedge issue. So if you’re a legislator and you vote for a tax increase, you’re in trouble. The only way that you can vote for a tax is if it’s for a clear public good, like education.” Beginning in 1978 with California’s Proposition 13, the tax revolt army has gone head to head with 20th century liberalism, polarizing politics as well as society, and making progress through old-fashioned horsetrading more difficult.
· Because citizens so mistrust their elected representatives’ abilities to behave prudently with money, any money, governments as well as special interest groups have turned increasingly away from general tax hikes and toward targeted taxes (for example, Initiative 732, which guaranteed Washington’s public school teachers cost-of-living salary increases paid for by the state). In philanthropy, Brewster points out, such targeted funds have become popular among donors. (Giving non-targeted money to a charity, he says, is called “throwing money over the wall.”) It’s becoming much the same with revenue-hungry taxing authorities that realize the public may well agree to fund, say, bridge repairs or a new jail in Pierce County, but also sense those same voters might never approve an equal amount of tax money for general use. According to the Washington Policy Center, Seattle now collects earmarked funds for 16 specific projects or services: A Families and Education Levy, bonds financing a youth detention center, a library levy, improvements to fire stations and more. “So everything becomes a levy and everything becomes an initiative,” Brewster says, adding that initiatives have become increasingly popular in the populist-leaning West. Result? Revenues to the general fund remain about the same, yet citizens are squeezed even tighter by a growing array of additional taxes.
· As conservatives at the federal level “starve the beast” in the other Washington, shrinking domestic budgets mean less money to feed our various local beasts. Perennial reductions in federal allocations to states, counties and municipalities force local taxing authorities to fund more services or eliminate programs once paid for by federal grants and aid. Because it’s politically difficult to eliminate programs that constituents rely on or support, local governments feel pressure to raise taxes or levy new “user fees” to cover costs and placate constituents.
· At the same time, the feds have increased military expenditures by tens of billions of dollars – and these sums don’t include money allocated for the war in Iraq, which, by October, was costing taxpayers an estimated $100,000 per minute. For Americans who also pay state and local taxes, the Pentagon’s habit of buying $700 hammers and pricey missile defense shields to protect against mighty North Korea makes it more difficult for Olympia to sell local tax plans to citizens who increasingly question what kind of security their tax money is buying. Never mind the old guns vs. butter allegory; as they worry about ways to fund a $4 billion Alaskan Way Viaduct or fret because their children’s classrooms swell with too many students, Washingtonians increasingly recognize a connection between no-bid multi-million-dollar contracts let to Halliburton and chronic shortfalls in funding at their daughter’s middle school. The resulting sense of impotence and cynicism contributes to taxpayer frustration and political gridlock at all levels of government.
So much for generalities. Here’s the looming, sotto voce crisis that could either sink the Washington ship of state or force tax reform: the clash between education and health care.
Constitutionally speaking, the state has an ironclad obligation to fully fund K-12 education. Because the precise definition of “fully fund” has been open to debate, there’s been a stalemate: The state says it’s doing its duty; school districts howl and protest; little happens. Now, however, public school supporters say they have a new tool with which to hold the Legislature’s feet to the funding fire: the WASL test. According to Steve Ludwig, a Seattle parent, “People say they’re going to use the awful scores on the WASL test to prove that schools are failing, which de facto proves schools are being underfunded by the state. They’ll use the state’s own test to force Olympia to finally fund public education properly.”
Yet even if education’s advocates are successful, the problem remains: where to get the additional money. Do legislators raise existing taxes, and risk defeat at the polls? Do they pilfer revenue from other programs, and risk defeat at the polls? Or do they institute tax reform – including an income tax – and risk defeat at the polls?
Former state senator Dwight Pelz, now chairman of the Washington State Democrats, expects little tax leadership from legislators wary of angering constituents. “There’s no way you’ll get an income tax without a public vote,” he says. “The Legislature is more of a mirror on the question. They reflect the mood of the voters.” Legislative timidity and buckpassing aside, Olympia has likely made full school funding impossible – without tax reform, that is. And here comes the revenue train wreck.
“Education has already lost budget share as a percentage of all state spending,” says Marc Fraser, vice president of the Washington Roundtable. In 1986, K-12 public schools received 45.7 percent of all state spending and higher education received 15.8 percent – fully 61.5 percent of the state budget to education. By 2006, however, K-12 schools’ share had dropped to 39.5 percent and higher education plummeted to 10.6 percent of the budget, for a total of just 50.1 percent of state spending.
Why such a drastic drop in money for schools?
“Over the past 10 years,” Fraser says, “education spending has lost out to health care spending.” He explains that legislators, in vote after vote, have made health care the state’s priority by continually expanding coverage of its Basic Health Plan to an ever-growing number of low income citizens, and because legislators feel a responsibility to maintain the health benefit packages of some 110,000 state employees. To make it a budgetary triple whammy, federal cutbacks have forced the state to pay more of local Medicaid costs.
Fraser’s boss, Washington Roundtable President Steve Mullen, says that between the 1993-95 biennium and the 2005-07 biennium, “health-related programs have grown 246 percent. This is not a problem that an incremental increase in taxes is going to solve.” In 2000, he notes, state spending on health care took 21.7 percent of the budget; in 2007 it hogged 28.5 percent. Health care costs are rising at doubledigit rates as income rises in low single digits. “It’s the only substantive issue that exists in the Legislature,” says Mullin. “It’s the 800-pound gorilla in Olympia, and it’s the 800-pound gorilla in every other state capital in the country.” The trend is unambiguous and, unless the U.S. switches to a single-payer health care system and outlaws the private insurance industry, health care costs will swallow larger and larger percentages of state revenues.
“The rate of health care spending is not sustainable,” Fraser says.
In the wealthiest nation ever, it’s not easy to ignore tens of thousands of neighbors who lack even minimal medical coverage. Likewise, in a state with a long history of support for organized labor, it’s difficult to cut benefits for state employees. Although tax revolt champions such as the Washington Policy Center insist privatizing many of the tasks state workers perform would trim employee wages in general and health care costs in particular, the Democrats’ tightening grip on state government makes such measures even less likely than before.
Extending health care coverage to as many citizens as possible is an act of immediate compassion. It feels good to both newly insured constituents and their legislative benefactors. Nonetheless, while health care helps people now, boosters of public education point out that underfunded schools likely will hamstring the state’s economy long into the future. And, of course, until the Legislature complies with its full-funding mandate, activists will continue pushing the issue in the media, the courts and the ballot box.
Washington Roundtable’s Fraser says significant investment in education would likely pay off for the economy in ways similar to decades-old investments put in place by the late Sen. Warren Magnuson. In the 1950s, 1960s and 1970s, for example, Maggie steered trainloads of freshly printed federal dollars to the University of Washington in general, and specifically to its health sciences center. This infrastructure, and the scientific brilliance it bred, inspired innovations that fueled much of the high-tech private sector, from which the prosperity of the 1990s and the present decade blossomed.
“It’s in the long-term interest of companies here to support a well-funded public education system, including higher education,” says John Burbank, executive director of Seattle’s Economic Opportunity Institute, which is famous for thinking up the infamous latte tax a few years back. “You need to have an educational system that allows students to get into high-paying jobs.”
With education advocates preparing to haul the state into court and demand many millions more for schools, and with health care costs spiraling toward even greater financial chaos, what better time to save the state’s pastrami with tax reform?
Alas. With gubernatorial elections coming in 2008 and more than a billion-dollar surplus in state coffers, odds are slim. Factor in cynical voters with timid legislators and prospects for action seem next to nonexistent. “I don’t think that people in this state feel that things are seriously broken,” says Brewster. “You can get to good schools to the extent that you can move. We survived the dot-com collapse. Boeing didn’t go away.” Of course, he adds, larger cities feel pinched because federal funds have dried up. “But there’s not, in my mind,” he says, “a tax emergency” that would force voters to demand the dreaded income tax.
Back in his Lake Union conference room, William H. Gates remains optimistic. “My sense is that newcomers to the state and younger people are more open to new ideas,” he says, swiveling thoughtfully in his chair. “This is a blue state, and many things are changing.” Two miles north of Gates, across the same lake, John Burbank seems even more upbeat. “I actually am quite optimistic, because last year the people voted to retain the gasoline tax, and now this year they’ve voted to retain the inheritance tax, and also against Initiative 933, the developers’ privilege law. So voters overwhelmingly are embracing the greater good, and looking out for each other rather than endorsing individual greed.”
Tax reform strategists might be well advised to heed another observation by Brewster: “There’s only one year that a president – or a governor – can do anything, and that’s their fifth year in office.” Indeed, right after they’ve been re-elected, they’re atop the wave of popularity, and can stop worrying about pleasing pesky voters to win the next election. Assuming Gov. Christine Gregoire squeaks out another term, her fifth year will be 2009. The Gates committee’s prescription will be just as trenchant then as now, and the tension between paying for schools and paying for health care will only exacerbate.
“I do think we can make progress on tax reform,” Burbank says. “There are definitely incremental changes and systemic changes that can be made through the Legislature and through votes of the people. What we need to do is determine the areas where we can move forward.”
When New Jersey Sen. Bill Bradley was shepherding changes to the federal tax code through Congress in 1978, he declared, “Tax reform is ultimately a decision about values.” Maybe by 2009, a cadre of business leaders, politicians unafraid to lead, perhaps a governor hungry to leave a lasting legacy, and fiscally responsible regular citizens will join with Gates to prove our values are no longer about short-term fears but longterm savvy.
Some would say the state faces three choices: Provide health care for everyone – and let our schools sink to Mississippi-style standards. Remake state classrooms into temples of 21st century learning – and force Washington’s less fortunate into emergency rooms when they have runny noses and then medical bankruptcies when they get their doctor bills. Or create a new tax system that spreads financial responsibility more equitably across citizens as well as industries – and moves from a regressive to a progressive tax structure that generates more revenue as well as better jobs.
Put another way, shall we continue doing what we’ve always done – hoping that, somehow, our catastrophic revenue problems will magically resolve themselves? Or shall we change the way we pay our taxes and prove we’re not so crazy after all?
Dean Paton is contributing editor to Washington CEO Magazine.
