Last week, PubliCola reported on a proposal by a few freshman Democrats to institute a 1% income tax*, offset by lower B&O and sales taxes. Most notably for our purposes, it would also generate $1.6 billion by extending the sales tax to services. Overall, the State would come out about $500m ahead.

I’m no political pundit but I suspect this is DOA. Nevertheless, it’s important to note that a broader sales tax base would have huge implications for local governments, particularly transit agencies. A couple of years ago, I estimated the fiscal impact of taxing all services as $100m a year for Metro. For comparison, the temporary CRC that basically stabilized Metro’s situation generates $26-28m a year; Metro’s long term deficit is on the order of $60m. All of Metro’s expansion plans come back into play, and then some.

Community Transit’s entire funding gap would disappear, and then some; Sound Transit could suddenly afford Federal Way, the Bellevue tunnel, an Aloha extension, and just about everything else coded “if funding allows”; and Pierce Transit would recover from its recent collapse. And that’s to say nothing about renewed city transportation budgets.

This would be a game changer.

* 1% is the rate; it is NOT a tax on “the 1%”

78 Replies to “A Broader Sales Tax Base Would Help”

  1. I wish we could get the sales tax broadened, here in Chicago too, CTA could probably fix most of its system if we stopped solely taxing the declining share of commerce, and taxed both halves of it (Goods & Services). I was unaware that the home state had the same problem.

  2. I don’t know if its really DOA, the business community supports new revenue for transportation, and they might want to lobby for this bill.

    1. We’re a year-plus removed from the voters voting down an income tax, and Olympia is infamously slavish towards how the people vote on initiatives. The income tax, at least, isn’t happening. Dunno about the sales tax extention.

      1. I will be really surprised if the 1/2% sales tax increase passes at initiative. I think supporters of any significant state program need to think differently.

        [ot]

      2. New diesels have been announced for years in the press and at auto shows. These vehicles already exist as production models all over the world. Yet a decade or more later they still aren’t on the market here in the US. Subaru diesel, GM small truck diesel, VW Polo 70mpg diesel yes please.

      3. The level of trust simply isn’t there among voters to support an income tax. No matter how balanced at first, how much relief it offers from regressive sales taxes, a majority of Washington voters believe that the Legislature would inevitably raise both income and sales taxes.

        I think they’re wrong — the state budget has already been shrinking relative to state personal income for many years. (If the budget had simply kept pace with personal income over the past ten years, the current biennium would be more than $13 billion higher than what’s been adopted so far.)

        But it’s not the opinion of the informed participant that really matters. If you want any tax increase at the state level, even just an increase to keep pace with economic growth, you need to get the average voter on board. And right now, voters aren’t ready to trust Olympia with more money.

      4. Correct, Josh. The problem is that the same people who advocate an income tax have been trying to raise every other tax at every opportunity. The trust and confidence simply isn’t there, especially during a depression.

  3. A sales tax on services is not a smart move if we want to have any hope of continuing to attract businesses to move or even conduct business here. It is something that is simply not done in other states. Doing so would put Washington State at a distinct disadvantage.

    I’ll also say a thing that most other states do do, and that Washington State has failed to do to their detriment is institute a personal and corporate income tax. The key effect being that revenues to the state would be more stable than based on a sales tax which taxes consumer behavior. That behavior causes people to stop spending when times are uncertain, or move as much of your spending out of state.

    Payrolls and income for people in this state have actually grown consistently and an income tax would tax that regardless of if they spend it or not.

    Now, believe it or not, I also have a bit of cynicism with regards to tax collections and stewardship. I lived in a state that had a 4% income tax, an 8% (plus local add ons) sales tax, hefty property taxes, hefty gas taxes that were also sales taxed, toll roads and various other fees and yet, with 14 million inhabitants, it was always crying it was broke.

    That government officials in that state and in it’s largest city had a very cavalier attitude towards their accountability to the people and there is a name for it. Corruption. We’re seeing signs of that kind of attitude here now too. The mess in Bellevue is very reminiscent of alder-manic politics of Chicago. The rather obvious legislative preference to “feed” road builders to the detriment of all other state services speaks to that kind of corruption.

    1. Wait, so if we add the sales tax to services, people will start driving to Oregon for tax lawyers, legal help, and veteranry services?

      I agree that there are probubly plenty of flaws in the legislation, but it seems like you are making the perfect the enemy of the good. This tax proposal isn’t great, but its better than what we have right now, and I think that is a much better test for if we should pass it.

      What will actually hurt business is less higher education funding or less transit funding.

      1. People who want consulting services, banking services, trust services, insurance services, legal services etc will now seek a safe haven to conduct those transactions. It isn’t simply a trip to the vet…

      2. Huge numbers of services are available remotely.

        It’s more convenient to meet with my tax attorney in person, but sales tax on his bill would more than pay for good videoconferencing equipment. The same is true for most intangible services — I can’t see a dentist in another state, but most legal, medical, and financial services are quite compatible with remote service in exchange for a 9%+ discount.

        If we were talking about a tax on goods, then the continued expansion of the simplified sales tax regime will eventually lead to interstate collection of sales tax. But a sales tax on services will have no collection mechanism in place for out-of-state providers.

    2. WA started charging sales tax on labor a long time ago. The exemptions are for “Personal & prof. services” (Doctors, lawyers, hookers, etc.) and “Janitorial services”. How come a mechanic has to charge sales tax but a manicurist doesn’t? If you look at the list of exemptions some are pretty silly; like singling out “Football stadium parking”.

      1. If you follow the links, you’ll find that the football stadium parking exemption is due to another tax levied on that which is dedicated to the football stadium and exhibition center bonds. I’m pretty sure there’s only one football stadium that qualifies for that exemption.

      2. What, so Husky Stadium, Cheney Stadium, the Tacoma Dome, and the stadiums for Western, Central, and Eastern Washington Universities’ football teams don’t qualify?

      3. Well not for the exemption granted by RCW 82.03.02875. That, I presume, is what Bernie was referring to. That exemption does not apply to any stadium already in operation as of July 17, 1997.

      4. Why?

        Professional services that could easily relocate to other states are exempt to avoid pushing them out of state.

        The rest are mostly “public good” exemptions (do we really want to make medical services even less affordable?) and favors for well-connected special interests.

    3. Actually, I think you’ve got it backwards.

      Ryan Avent made an interesting observation about tradable versus non-tradable goods and services. The idea is some goods and services can be consumed far away from where they are produced, while others can’t. For example, tax preparation is a tradable service (an accountant in Boston could do taxes for a client in Houston), while a haircut is not. Conversely, land is completely non-tradable by definition, and buildings are effectively non-tradable (who moves a house across state lines?).

      As a rule, the more tradable a good or service, the less its price will vary from the international norm. Who would buy a widget for $100 locally if you can buy it from $50 from a foreign seller? This is why iPhones and cars and coffee tables cost roughly the same everywhere in the country. Even in foreign countries with dramatically lower standards of living and GDP, these types of products aren’t much cheaper.

      In contrast, the price of non-tradable goods and services varies wildly across places. Again, land and housing are the obvious examples, but things like restaurants/cafes, salons, health care, taxis, cleaners, plumbers, electricians… the prices of those are very dependent on where you live.

      In many ways, non-tradable services are the best kinds of services to tax. If you need your house cleaned, or your plumbing fixed, or daycare for your kids, you need to look locally. Avoiding them by buying elsewhere just isn’t an option. So the risk of economic devastation as a result of such a tax is virtually nil.

      Honestly, I think the current tax on goods is much more problematic than any service tax could be. Provided we had enough revenue from other sources — a high-enough tax on non-tradables and an income tax — I would absolutely support eliminating the current tax on tradable goods entirely.

      1. You have to be careful in taxing non-tradeables, since substitution and avoidance are an alternative for many of them.

        Put a significant tax on daycare, and more people will seek lower-quality non-licensed child care, leave their kids alone more, or leave marginally-profitable jobs to take care of their own kids.

        Put a significant tax on house cleaning, and more people will find the time to clean their own homes.

        It’s the key to Ikea’s business model — they’re most successful in markets with high taxes on supposedly-non-tradable labor and goods, because that’s where the consumer saves the most by doing final assembly themselves.

      2. Josh,

        Everything you’re saying is true, but it applies equally well — if not more — to tradables. Substitution of non-tradables generally involves an inferior service or the black market, whereas substitution of tradables is generally as easy as buying something from a different jurisdiction.

        I agree that a tax on income is better for many reasons, but if you have to tax consumption, it’s better to tax the goods/services which are the hardest to substitute — and that means nontradables.

  4. Martin – your little asterisk at the bottom deserves a little closer discussion. Would a 1% tax on the “1%” (for the sake of this argument, let’s call it wage earners making $200K or better) make any difference at all? Given that 1% is proportional, that means for each qualifying wage earner, that’s two grand minimum. Hardly a dent in their coffers, but there many not be enough of those wage earners to make it worthwhile (to say nothing of politically feasible).

  5. How about this?

    — When the state projects a deficit beyond a trigger threshold, –all– exemptions in the categories enumerated at the bottom of this comment are trimmed for the period and amount required to eliminate that portion of the deficit beyond the triggering threshold.

    For the current projected deficit, roughly half of the missing revenue responsible for that gap could be recovered by a 10% across-the-board reduction in exemptions. Making this renewed collection of revenue non-discriminatory would arguably be more “fair” and less controversial than trying to single out particular beneficiaries and going after larger cuts in their exemptions.

    To those who will argue that this represents a tax increase, it of course does not; reducing exemptions simply means collecting tax we all agreed should be on the books. Against the argument that a 10% reduction in exemptions will drive certain businesses under, is it really the role of government to permanently subsidize private, for-profit activities that cannot pay for themselves? Finally, if one is prepared to argue that a decrease in benefits enjoyed by tax exemption beneficiaries will reduce employment, it would be well to have data supporting that position; this is a serious matter and hand-waving isn’t really appropriate in discussion of whether or not revenue restoration is a good idea.

    Meanwhile, booking collection for less than half of most revenue categories included in exemptions while watching our civil society decay and then getting all emotional about it is pretty silly.

    State Tax Source Total percentage exempted Total percentage collected
    Property 62.8% 37.2%
    B&O Tax 48.5 51.5
    Public Utility Tax 81.4 18.6
    Sales/Use Tax 55.4 44.6
    Real Estate Excise 26.4 73.6

    1. Holy Herbert Hoover, Batman! This guy wants to automatically raise taxes during a depression! Who is he, anyway? The ghost of Andrew W. Mellon?

    2. Raising taxes on businesses that are losing money makes no sense. It isn’t about subsidizing unprofitable businesses in the long term, B&O is a tax on gross receipts, not on profitability. Assuming rough proportionality of revenue to employment, it’s a tax on providing jobs, not on earning profits.

  6. Regarding the sales tax on services – we already put sales taxes on most “non-portable” services. Yard care – taxed. Construction and Contracting work – taxed.

    We don’t tax what I’d classify as more portable services – intellectual work like architecture, accounting, and legal work.

    Beyond the fact that most of the legislature and lobbyists are lawyers and will take care of their own, this intellectual work is portable, not just around the U.S. but even to oversees destinations, and in fact the more rote legal, accounting, and architecture work is often outsourced to lower wage areas. Adding a 9.5% sales tax to this kind of work would in fact send big ticket work to other jurisdictions. Maybe you would still pay the tax for your will, but Boeing’s and Microsoft’s legal work will get done in OR, ID, CA or elsewhere to save 9%.

    1. 100% agreed that we should tax non-portable (I call them non-tradable) services, and not portable ones.

      But as everyone’s pointed out, haircuts and manicures are not currently taxed. Nor are “janitorial services” or laundromats. Nor is rent (which is 100% non-tradable).

      I think that taxing tradable services is every bit as legitimate as taxing tradable goods. (I don’t think we should tax either, but if we have a 9% sales tax on IKEA tables, then we might as well have a 9% sales tax on H&R Block.) But taxing non-tradable services is even better. If there are some non-tradable services we don’t currently tax, we should fix that ASAP.
      =

      1. You want to tax rents but not tax mortgage payments? And what about people who own their houses free and clear? You know, instead of that, how about a “poor tax,” like in Monopoly?

      2. Here’s a tax I might support: Tax on college tuition paid by out-of-state students.

      3. There already is one for state universities. An unintended consequence is that admission rates for out-of-state students is higher than for in-state students.

      4. I wasn’t aware that in-state universities charge sales tax. One of my nieces is at Evergreen. I’ll have to ask her about it.

      5. Not a sales tax, out-of-state tuition rates vs. resident rates. Maybe not properly a tax, but it allows the universities to collect more money, and it creates a perverse incentive at admission time.

      6. It might not be what you think. The reason out of state tuition is much more expensive is it’s not being subsidized. For my classes about 50% is paid for by the student, the rest is from taxes.

      7. There is no sales tax on tuition (or any State fee). I think even a private college could argue that it’s a personal or professional service. If there were it could only be charged to State residents. Out of State residents can actually claim an exemption for everything they buy. Although you then have the dichotomy of telling the student they have to pay sales tax because they are a resident while living here and going to school but at the same time telling them they haven’t established State residency allowing them the lower in state tuition rate. A parent buying the tuition could claim the out of State exemption but legitimately say they are buying it for a resident of the State. Buying an education from another state could also be considered interstate commerce.

      8. There is no sales tax on tuition (or any State fee). I think even a private college could argue that it’s a personal or professional service. If there were it could only be charged to State residents. Out of State residents can actually claim an exemption for everything they buy.

        That’s incorrect. For starters, the sales tax exemption can be claimed only be residents of states with sales taxes of less than 3%. And it can be claimed only on purchases of tangible goods for use out of state. Thus, someone from Oregon or New Hampshire must pay sales tax on restaurant meals here. The same would go for college tuition, if it were to be taxed.

        That much said, I highly doubt the state would tax out of state tuition. The higher education lobby is strong, and would resist this like crazy.

      9. I knew that you couldn’t use the out of state exemption for things like restaurant meals. I didn’t know about the 3% clause. It’s a bit nebulous though since B.C. residents were recently ruled except because they don’t pay a sales tax but a value-added tax. Seems fair since we can get B.C. sales value-added tax refunded. I think the key with tuition is that it falls under the personal services exception. I don’t believe you pay tax if you’re going to hair cutting school or taking a yoga class. That may be changing though. Up until this year you didn’t have to pay sales tax on event entry fees for things like running a marathon or doing a century ride. Of course some of the organizations running these events are 401-C corporations so I guess we’ll see how that shakes out. The lawyers, who’s services don’t contribute will get richer either way.

    2. Boeing’s and Microsoft’s legal work will get done in OR, ID, CA or elsewhere to save 9%.

      No, if a company contracts or purchases anything taxable from out of state they are required to pay use tax on it.

      1. There are sure to be loopholes for that. Set up a company in Nevada which contracts the legal or accounting work.

        Before Boeing got an exemption that lets them deliver airplanes without sales tax being due on the plane, they used to fly the plane out of state and do the delivery somewhere else. And I believe that Microsoft has or had a licensing office in Nevada so that software royalties weren’t subject to sales tax. When there’s that much money involved, if it’s not taxed everywhere, the way will be found to avoid the tax.

      2. You don’t need an elaborate loop hole. Anything sold to someone that lives out of the State doesn’t get taxed. If someone from Oregon comes up to Seattle they can show ID and buy anything sales tax free; doesn’t matter if it’s a coffee cup or an airplane. I think that was done in part to level the playing field for stores down in Vancouver who otherwise wouldn’t stand a prayer of selling big ticket items to anyone from Portland. Airliners are also except because they are used for interstate commerce. If I wanted to buy a 787 and start Cheapskate Airlines I wouldn’t have to pay tax. Or if I buy a van and set up a business driving people to Oregon I don’t have to pay sales tax. But if I want to drive them to Spokane I do.

      3. You don’t need an elaborate loop hole. Anything sold to someone that lives out of the State doesn’t get taxed. If someone from Oregon comes up to Seattle they can show ID and buy anything sales tax free; doesn’t matter if it’s a coffee cup or an airplane.

        Only for tangibles. Only if the goods will be taken out of state. And only if the buyer is a resident of a state whose sales tax is less than 3%.

  7. I wonder how much antipathy to State taxes in general, and an income tax in particular, has more to do with the aggravation than the cost.

    My own worst memory regarding a state income tax comes from Maryland forty years ago. The form was at least three times as complicated as the Federal tax form.

    My own drafting business, which for 2011 revenue wouldn’t even classify as a hobby, has never earned enough to pay B&O tax. However I still hate filling out the form. It’s a use of my time that I don’t need- and which contributes nothing to the productive economy of this state.

    If some way could be developed, hardly outlandish given what-all else is done online, to put a Washington State income tax, and whatever else Washingtonians owe the State, on our Federal form, I think there’d be a lot less resistance.

    It would certainly be a fairer tax, and would respect something that isn’t in the Bill of Rights but should be: the right not to have your time wasted by the processes of your government.

    Mark Dublin

    1. TurboTax et.al. are more or less the standard these days for individuals, and in states with an income tax there’s generally a state component you buy that all but does your state taxes automatically. Even without a computer program, state tax forms aren’t generally difficult. So the individual burden won’t likely be high.

      That said, paying taxes for my nanny was a nightmare (a nanny is effectively an employee, and you have to register as a business and fill out all kinds of painful forms – I have a feeling most people just skip all of this and pay under the table). WA needs to take a hard look at the paperwork they make businesses fill out and find an easier way. They have a few online solutions, but the overall system could use some work.

      1. Amen to that

        Compare some of the state’s forms to Amazon or any private business:

        Good-to-Go website

        DOL vehicle license renewal

        Even the ORCA web site

        It’s like you took a 1950’s Cobol programmer and gave him/her a 2-week course on the Internet.

      2. Try filling out the B&O paperwork, not just once any more, but for each destination jurisdiction now that we’ve moved to destination-based taxes! For Amazon, or even a company large enough to have more than one accountant, it’s just a matter of paying a few extra days’ wages for someone in accounting. For small business, where the books are done by someone whose hours are otherwise billable, it’s a much larger cost.

    2. There just needs to be a dynamic way to take the money from your check for any sort of personal taxes and pay monthly for business taxes just like any other bill. I don’t think people really care that much about paying taxes because we do it every day (gas tax, sales tax, hotel tax etc) as long as it’s seamless. This business where we have to fill out a bunch of forms and come up with a chunk of money at the end of the year puts fear in everyone thus taxes = evil.

  8. I can tell you that my employer will start listening to these proposals now that you mention fixing the B&O tax, it irks them to the extreme.

    Got to get business on-board with the plan, and that’s a good way to get them interested!

  9. I see a bunch of arguments here for an income tax, but look, that one didn’t even pass King County so unless you’re trying to channel Howard Stassen I’d suggest giving up on that. Gates Sr. fought the good fight. Not very well, I might add, but he did fight it, and he lost.

    As for broadening the sales tax, just make sure it’s not levied on services easily transferred out of state. Because if it is, then they will transferred. And don’t expect that the proceeds will go to subsidize bus and rail. There are much more pressing needs than that.

    The advocates of transit need to get creative. Quit looking in the rear view mirror at light rail. It’s a century-old solution for cities as they existed in the 1960s. You should be thinking about computer-guided electric cars. It would be cheaper, more flexible, and use existing infrastructure. Rail is yesterday’s news, and it was never all that popular to begin with.

      1. The problem is space. Cars consume vast amounts of it, and encourage inherently inefficient sprawling development patterns. They do not work well in cities.

        And no, being “computer guided” does not solve that problem.

  10. There is a great solution to all our tax problems currently in the Legislature, HB2100.

    HB2100 extends the concept of an asset, or property tax, to finance, like stocks and bonds. Assets above $1M could be taxes, bringing in the needed revenue while fairly distributing the burden.

    Income and sales taxes are inherently unfair and bad…fees are not accurate.

    Asset taxes are fair.

    Encourage a vote for HB2100.

    http://apps.leg.wa.gov/billinfo/summary.aspx?year=2011&bill=2100

    1. If it survived the two-third requirement for tax increases, do you really think that would survive an initiative? I don’t.

    2. That’s certainly one way to chase financial assets out of state.

      We already lost enough assets to other states when we extended the B&O tax to investment management. (It took my employer less than four months to reincorporate in a different state at the time.)

    3. Asset taxes are a nightmare. There’s a reason why you want to tax *the first derivative* of assets, namely income. A property tax can actually kick people out of their house, or businesses out of business, because they can’t afford it; a tax on net income *can’t*.

      1. Though Florida managed to do OK with its “intangibles tax” for decades, so I guess an assets tax wouldn’t really drive people out of state.

      2. You’d think that would make it *worse*. Retirees are very likely to have financial assets, and you’d think it would have driven retirees away from Florida.

        Of course, maybe it did drive some away. Florida was so attractive to retirees, that perhaps it would have been even more attractive without the intangibles tax.

  11. extend the sales tax to gas. it would have positive price effects. in three years, if the general fund crisis has passed, the Legislature could shift its revenue to transportation; it might not be subject to the 18th amendment.

    1. Why isn’t there sales tax on gas? There’s no good reason gas shouldn’t be taxed by the sales tax – it fits all the criteria for something that should be subject to sales tax.

  12. “* 1% is the rate; it is NOT a tax on “the 1%””

    Darn. An income tax on “the 1%” would probably actually pass. ;-)

    1. We tried that last year. It didn’t work. They anti-tax zealots convinced enough people that the income tax would be expanded.

      1. That’s not a hard sell! Now the talk is another .5% on the sales tax and a backdoor gas tax increase by putting a per barrel tax on the refineries (which I’m not necessarily against). I remember when we were paying less than 7% total in sales tax. No parking passes required to use State Parks. College tuition was low and schools were well funded. Highway projects weren’t started if there wasn’t funding. Even the State ferries were doing OK. Now we’re paying 10% sales tax. We have a much larger population base with one of the best employment situations in the nation creating high property values to match the increased sales tax. There is no revenue problem. There is a spending problem. There are no “cuts” in the State budget. The spending has increased every biennium for the last decade including the lastest budget!

      2. Bernie,

        The question is not whether revenue or spending has increased, but whether they have increased *as a share of GDP*.

        As population and commerce grow, you would expect the state budget to increase. There are more people to serve, more activities to regulate, more services to provide, etc.

        As you can see from this graph, revenue as a share of GDP has in fact fallen precipitously since the 90s. From a high of nearly 7%, it’s now less than 5%.

        The Washington state tax base includes a small and rapidly-declining fraction of the economy. The way to fix this is not by piecemeal increases, and certainly not by massive spending cuts. We need a stable revenue source that will grow roughly as fast as the economy. That means expanding the tax base. There are no other options.

      3. Aleks, there are other options. One of them is to cut programs, and another is to re-examine them to see if they can’t accomplish the same things at a cheaper cost. I think mass transit is a good candidate, and particularly fixed-rail mass transit. It is hideously expensive, and delivers few benefits.

    1. Well then. I guess The Stupid is still winning elections in Washington state as of 2010.

      Either that, or poorer people really like paying more in taxes and are made happy by the knowledge that richer people pay less in taxes.

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