[UPDATE 2:28pm: If you’d like to put together your own package of sales tax exemptions, this Dept. of Revenue pdf lists them all. The list of special-interest giveaways is mind-boggling (livestock semen? gun safes?). Of particular interest, gasoline (p.291) would yield about $28m for Metro. Taxing all personal and professional services (p.285) would net over $100m a year.]
One could be forgiven that the coming legislative struggles over plugging the State’s general fund deficit are orthogonal to the transit funding crisis. And indeed, the profound decisions to be made are likely to drown out calls to rescue struggling local transit agencies with more tax revenue.
However, of all the new revenue options being covered, one stands out as being useful for transit, and that is the option of reducing exemptions in the Sales Tax. Unlike other options, such an expansion would also increase the revenue of all other state entities that use the sales tax — including all county transit agencies and Sound Transit.
I’ve spoken to a number of veteran Olympia watchers and no one has definitively verified or challenged my layman’s interpretation. Perhaps that’ll happen in the comments.
Here are some back-of-the-envelope calculations, using the 2011 revenue estimates reported in the Schmudget blog and the estimate that Metro sales tax collections in FY 2011 will be 5.5% the size of the State take*:
- Extending the tax to candy and gum would raise $1.5m;
- bakery products, $0.9m;
- a variety of consumer services, $6.5m;
- financial services, $10.5m (mentioned in the Seattle Times) ; and
- removing the non-resident exemption, $2m.
More after the jump.
I estimated Metro’s annual budget hole in 2012-13 at about 385,000 service hours, or roughly $48m. The extensions above would plug almost half of that, and possibly more given that financial services are heavily concentrated in King County. There would also be relief for all other transit agencies and local government.
Community Transit collects about 17% as much sales tax revenue as Metro, but their budget hole is “only” $11m. All the measures listed above combined could buy back about half of the abolished Sunday and Holiday service.
Of course, it’s always possible for the legislature to specifically screw local government by writing the statute so as to not extend their authority simultaneously. Transit advocates should pressure their legislators to plug the revenue hole by reducing exemptions and making sure that those reductions apply broadly to all sales taxes.
* Showing my work: the Economic and Revenue Forecast Council estimates (pdf, pg 67) that the state will collect $7.3175 billion in sales taxes in FY 2011; the last executive’s proposed transportation budget projects 2011 Metro sales tax revenue as $406m. Thus Metro collections are 5.5% of the total State sales tax take. Community transit projects $66.8m in sales tax revenue in 2011.
The non-resident exemption on big ticket items (furniture, applainces, cars) is pretty important to retailers in cities like Bellingham, Spokane, Vacouver, WA.
Did you include internet purchases, as in Washington residents buying online from out of state while avoiding paying Washington sales tax?
To my knowledge a state doesn’t have the power the tax goods bought out of state (internet, catalog, etc) as that would be considered a tariff and a violation of Interstate Commerce.
The state can’t compel retailers out of state to collect sales tax, unless they have a business nexus in this state.
The state can and does collect use tax from consumers on out-of-state purchases.
The state can also form compacts with other states, so that retailers in those states will collect sales tax, send it to their state’s revenue department, and that state will forward the taxes to Washington DOR. The Streamlined Sales Tax was part of this process.
http://en.wikipedia.org/wiki/Streamlined_Sales_Tax_Project
Actually at UW we are required to pay a “Use Tax” for items purchased from out of state. I believe the state wants to require this of everyone but only has only been able to make state institutions do it so far.
All Washington residents are required to pay a use tax on items purchased out of state for use in Washington that have not already been taxed by our state or another, the problem is nobody is aware of its existence. States can’t force out of state companies from collecting sales tax unless they meet a certain level of contact with WA (e.g. a physical presence in-state). But the state is perfectly capable of taxing its own residents purchase of items for use in state, which it currently does.
Other states use their annual income tax return to provide residents an opportunity to declare items covered by the use tax, but we don’t collect income tax. Further, our Department of Revenue isn’t equipped (and the payoff is probably too low to justify) to begin auditing thousands of resident’s annual purchases to see where they purchase items and what taxes were paid/due. The only time this really comes into play for most individuals is when you bring a vehicle to WA from out of state. Then you pay a “use tax” rather than a sales tax, although the rates are the same and most people think they are paying a sales tax.
See these sites for more information:
http://dor.wa.gov/content/FindTaxesAndRates/UseTax/
http://www.dol.wa.gov/vehicleregistration/usetax.html
I’m all for closing loopholes and judicious removals of exemptions on the Sales tax. However, Tobacco taxes are already at the point where people are figuring out ways to avoid it by buying out of state or at reservations. The Sales tax is getting there too. At some point, as you increase taxes, people will balk. The sales tax on a laptop computer right now would easily pay for a day trip to Portland. Heaping even more general sales taxes on will just increase that incentive.
Other reforms, like making sales tax on cars go to where the car buyer lives, rather than the city it is sold in, would help – especially in small cities without commercial businesses. Voter approved property tax increases are also an option but need to be carefully considered. Just because the majority who vote for a tax increase can afford it doesn’t mean every resident can.
I think we’re in agreement then; eliminating exemptions is better than increasing the rate. And it helps local governments and transit.
Taxing cars where people live, not purchase is actually a good idea. It’s already done when someone leases, or buys from out of state. Car dealers and DMV could handle that easy enough.
In Oregon how do local governments raise money? Here it is mostly from sales tax and property tax right?
They do things exactly opposite and have an income tax. Which is convenient for those working in south WA.
Okay so the income tax is direct to where someone LIVES not where they WORK?
This is the funny thing about tax structure. If what I said just above is the case cities in Washington want business but could generally care less about people. In Oregon cities want people and could care less about business. I wonder from a GMA perspective which is better?
Adam, in Oregon, the income tax targets people who either LIVE or WORK in Oregon. All those Vancouverites who commute over the river to work in OR also pay OR income tax every year, even though they have no vote in OR nor receive any government services (beyond the most basic associated with their physical presence for 40 hours/week). Yes, the Washingtonians who are in that box hate it, but there’s nothing they can do about it.
Orgegon also has property taxes.
@ Transit Guy
Actually I wasn’t really thinking about those people at all. What I’m curious about is for an average person that LIVES and WORKS in Oregon, where do there income tax dollars go. To the city/county that they LIVE or WORK in?
Just did a search for “oregon washington county revenue sources” and got this:
http://www.co.washington.or.us/Support_Services/Finance/loader.cfm?csModule=security/getfile&pageid=70380
“Much of the County’s dedicated revenue come from the state or federal government, from fees charged to cover the cost of particular activities, and from internal charges for services provided by on County department to another. ”
So it sounds like they probably get some of the state income tax money for specific purposes.
Disagree. I’d like to see a return to the vehicle license tax based on car value, rather than simply the sales tax. Have it apply only for the sale and transfer of title rather than when renewing tabs. Many states apply a property tax-type solution to vehicles, and Eyman’s nonsense that puts the tab fee for an Escalade at the same amount as my crappy ’90 Honda Accord is insanity.
I’ve lived in the Chicagoland area for over a decade and when I first arrived here, I was always tempted to compare how things were done back in good ole’ Washington State. I had always felt that the tax burden in Washington was low by comparison and the variability of tax revenue based on the cyclical nature of the economy forced the State to be rather frugal and if we happened to have elected a “wise” and prudent Governor with a cooperative Legislature during the era prior to a “bust”, they would have saved for a rainy day.
Washington stands out as one of the few if not only State that does not have an income tax and instead derives it’s revenue from Sales, property and Business and Occupation taxes as well as a variety of excise taxes. Compared to my current State that has the Income tax and property taxes as it’s primary revenue vehicle. While this era with the “meltdown” is extraordinary, I am finding that budget crises are now seemingly a regular occurrence and there are monumental fights between the Regional Transit Agency and the State over adequate funding. And the CTA uses these crises to full effect. The train and bus automated announcements are now blaring with frequency, significant cuts on some routes and reduced frequencies on others. This seems to happen almost every budget cycle this game of chicken between the RTA/CTA and the State either over overall funding or for the distribution formula.
Now I could say Washington should get an income tax as logically that would be a way to level out the wild fluctuations in revenue that Washington experiences. But, after having been in Chicago for this long, the cynical side says, it would change the fundamental nature of Washington in ways that you might not like. Illinois has no experience like Washington’s of having to meet drastic sudden budget shortfalls (at least not until this past year) and their solution is to generally raise taxes when they want. Indeed, the incumbent Governor (who took over for the disgraced Rod Blagoavich) has vowed to raise our income tax. There is an element of crass corruption here and feeling of entitlement that the Libertarian tinged masses in Washington would find disgusting. Yet, one interesting thing that happens at least at the city level is big things get done.
There is no “Seattle Process” here in Chicago. It’s what the Mayor wants the Mayor gets. You want a billion dollar world class grand park (remember the Commons???), well, presto, Chicago gets it’s Millennium Park complete with “donations” from the major businesses in the city. So it has a world class Gehry designed Amphitheater, and other grand artifacts. You want to lure a major manufacturer of commercial and military aircraft to headquarter in your city instead of Texas (or where they came from), presto, a tax concession package worth hundreds of millions suddenly appears, and a vacant skyscraper in the heart of the city suddenly is available.
So, for all the challenges and frustration that Washington State and the Puget Sound region is going through especially with transit funding shortfalls, take solace in the fact that there is a level of engagement there that is not present in most other places in the country. Changing the funding methods in that state could lead to what we have here in Chicago which is a spigot of tax money that is still never enough and the people being powerless to shut it off. (oh, btw, there is NO initiative process in Illinois so no Tim Eymans to worry about)
Nevada, Colorado, Tennessee, New Hampshire, Texas, Florida, Alaska and S. Dakota also don’t have an income tax.
Why bakery items? Is that some kind of Atkins sin tax? I’d be ok taxing twinkies and ho-ho’s, but bread? I’m picturing someone with low enough income to not have an oven now having to pay tax on bread. That seems to go against the whole point of tax-free food.
Bakery items excludes prepackaged bread. That’s not taxed.
But artisan bread is a luxury and should be taxed?
What about Haagen Dazs and Ben & Jerry’s ice cream? Anyone who pays for that can pay tax too ;-)
Actually, I thought the bakery items referred to donuts and such. Do you remember the controversy when the State had the bakeries charge tax on any amount of donuts less than a dozen? The thinking was that you would eat one donut there (similar to a restaurant) but a dozen donuts you were carrying out (food item in a grocery store).
11 donuts, of course, you would eat in the store. ;)
Artisans don’t have lobbyists.
Illinois careens toward bankruptcy
http://globaleconomicanalysis.blogspot.com/2010/01/illinois-careens-towards-bankruptcy.html
Very tough to deal with such a drastic reduction in projected incomes, regardless of revenue sources. I’m convinced that a state income tax would just allow the further expansion of government spending, which is to say it would defer difficult choices.
I’d rather refocus on the gas tax for potential transit uses – use the crisis to try and push that rock again. Are bloggers and posters here still of the mind that local sales tax on gas would be constitutional?
Chris,
Everything I’ve seen indicates a sales tax on gas would be constitutional. Under the assumptions I make above, extending it like that would yield about $28m for Metro.
I’d also like to see the sales tax extened to gas sales. However I’d like to see the portion not going to transit agencies restricted to non-road transportation use not covered by the gasoline excise tax. Prehaps some amount could go to roads too if that is needed to make it through the sausage machine in Olympia.
The other thought is to bring back the MVET with a local option provision for transit funding.
I’ve got a distant cousin who markets livestock semen. He and his wife often travel from the Yakima Valley to Seattle for opera and symphonies. They’re supporting Sound Transit by spending sales tax money here, which I don’t think they mind. Small world….
Have a great day —
– Mike Lindblom, Seattle Times
OK, I am wondering now, is Livestock Semen taxed? Is it a good or a service?? :P
Hey nothing against those who market livestock semen for a living, it’s an essential part of raising animals for food and clothing. However I fail to understand why it needs a tax exemption.
I don’t know if you could say that it’s essential. There’s always the old-fashioned way. Ship your cow out to visit the bull.
..and I actually own a gun safe. There’s nothing wrong with the livestock semen business, but it’s not clear to me why it deserves more of a tax break than any other business that sells goods.
Do you? I never knew that.
Did you really have to mention the livestock semen? :)
The gun safe exemption was driven by gun-safety interests — a minor subsidy to encourage more gun owners to lock up their guns when not in use.
Of course, those who sell gun safes like it, too.
And it’s amazing how many “gun safes” are perfectly good fire safes for papers, valuables, etc.
Sonnova! It would have been nice to know about the non-residence sales tax exemption WHEN I WAS LIVING THERE!!! Too late now, and not like I kept all my receipts. Damn, that’s probably a good couple grand wasted. I basically got screwed at both ends, paying Alabama income tax, and WA sales tax. :/
Going to college in walla walla the cashiers at the stores in town would ask pretty much everyone if they were an OR or WA resident due to the non residence exemption. I didn’t know about it until than. The farther away you are from the border with Oregon, the less anyone asks and the more likely it is the cashier will be the one who doesn’t know about it rather than the customer.
When I was working retail I was told that we didn’t have to honor the exemption, and not to give it. This really upset a couple of Oregonians who came in to shop.
Much of the personal and professional services are lawyers and accountants. Beyond the fact that they have the lobbyists and political clout to prevent it from happening, it’s probably not good for our economy to encourage companies and people to move the work out of state to save 9.5%. Even California doesn’t tax legal and accounting work.
It would be good to collect this additional revenue, but it will make hardly a dent in the deficit… $100m out of $2.6b covers less than 4% of the deficit. We’ll need other revenue sources as well.
http://www.hollywire.com//srv/htdocs/wp-content/uploads/2009/06/bobmarley1.jpg
;)
Lol another option. But the House bills just died, and the Senate ones probably won’t go anywhere either…
$100m is the Metro recovery. Their deficit is around $48m, so it’s about double what they need.
Wait so eliminating those property tax exemptions would generate an extra $100m for Metro? I thought it was in general.
Sales tax on all personal and professional services would raise about $2 billion for the state, translating to around $100m for Metro.
Great piece Martin. We are tracking these converstation in Olympia.
@transitguy-Most of Trimet’s taxing revenue comes from an employer payroll tax (i.e. head tax) that has taken quite a hit the last couple of years like everything else.