OLYMPIA – The father of one of the world’s richest men on Tuesday called for something Washingtonians have balked at since the 1930s: a state income tax.
Washington’s current system, which relies heavily on sales taxes, “is essentially unconscionable,” said Bill Gates Sr., who headed a high-profile tax study three years ago.
“Who’s going to stand up and argue that poor people should contribute more of their income than rich people?” he asked a House committee. “That is ultimate nonsense.”
Gates’ testimony marked the kickoff of a legislative discussion that will continue for weeks. Some legislative leaders – facing a budget shortfall of more than $1 billion for the third budget cycle in a row – say it’s time to change Washington’s tax structure.
Some lawmakers, however, worry that putting the tax system under a microscope is merely a prelude to a big tax increase. And some groups on Tuesday urged exactly that.
Rep. Ed Orcutt, R-Carrolls, said the state must first make sure it’s using taxes efficiently.
A key issue, he said, “is whether or not we’re getting our money’s worth out of the taxes we are paying.”
The debate is likely to continue into spring, as lawmakers wrestle with a two-year, $1.8 billion gap between maintenance-level spending and the amount of money the state expects to collect. At the same time, schools, colleges, state workers and health-care providers are all calling for more money, saying that the state is starving critical services that prop up Washington’s economy and quality of life.
“We’re here because most of us agree on one thing: our state’s fiscal system is broken,” said Rep. Jim McIntire, D-Seattle, who heads the House Finance Committee. The state’s spending limit, he said, has been shot full of holes by both parties. The 80-year-old tax system, he said, was designed for a manufacturing economy, not the information age.
Three years ago, Sen. Lisa Brown, D-Spokane, and other lawmakers put together the tax study panel. After months of meetings, the group concluded that Washington’s tax system is unstable, relies too heavily on sales taxes, weighs heavily on business and is unfair to low-income families. The state’s high sales tax also hurts border communities.
“Go ask somebody in Vancouver or Spokane how they feel about that,” Gates told lawmakers.
Citing a report from the Institute on Taxation and Economic Policy, Gates said Tuesday that Idahoans and Oregonians of all income levels pay about 9 percent of their income in state and local taxes.
In Washington, however, the lowest-earning families pay nearly 18 percent, he said. The wealthiest pay less than 4 percent.
To overcome that inequity, he said, the state should have a graduated income tax, with the rich paying a higher percentage than the poor.
“I just happen to have the naive belief that part of the reason some people are so wealthy is because government has been smart about some of the money it’s invested,” he said, citing research funding and higher education.
But there are a couple of big hurdles to a state income tax in Washington.
First, the courts. In 1933, the state Supreme Court ruled that a graduated state income tax – like the federal government’s – would violate the state constitution. Income is property, the court ruled, and property must be taxed equally. But Gates, an attorney, said a precedent that ruling was based on was later overturned. He thinks the court today would rule differently.
Then there’s public opinion. Two months ago, voters overwhelmingly rejected a proposal to increase the sales tax to raise money for teachers and schools. Democrat Ron Sims, who ran for governor last summer on a state-income-tax platform, lost the Democratic primary in a landslide. And in recent years, voters have repeatedly passed tax-limiting ballot measures such as I-695. The Gates tax study, in fact, has largely sat on lawmakers’ shelves since 2002.
Even some of those arguing for a state income tax conceded that it’s a tough sell to many voters. “Many of our blue-collar members are those who vote against the income tax,” said Rick Bender, president of the Washington State Labor Council. “They’re afraid that all the other taxes, over time … will be increased.”
Nonetheless, he and others urged lawmakers to not just make the tax system fairer and more stable, but to come up with more money for key needs like schools.
“We are at the breaking point,” said state Superintendent of Public Instruction Terry Bergeson.
“We need to raise revenue now,” said Greg Devereux, executive director of the Washington Federation of State Employees. Many state workers haven’t had a cost-of-living increase in several years.
While Washington is squabbling over spending on schools and colleges, several people said, countries like India and China are churning out ever-higher numbers of engineers and high-tech workers. And the state’s facing a demographic surge of tens of thousands of additional college students, starting with the high school Class of 2008.
“This is a problem of leadership, and leadership is not about telling people what they want to hear,” said Nick Hanauer, a Seattle venture capitalist and education advocate. “Irrespective of what the public thinks today, we are headed for a train wreck in 2008. … The Chinese are laughing their guts out because we can’t straighten our system out.”
Business groups and conservative lawmakers, however, said the state should focus on how taxpayer money is being spent.
“We want to make these investments (in education), but we don’t want to just throw a lot of money” at the problem, said Rep. Dan Roach, R-Bonney Lake.
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