Editorial: To encourage business, change tax structure
Whenever the Washington Legislature finishes its work for the year – tonight would be good – the members will return to their districts with shared hopes that the economy will treat them more mercifully next January. How could it not?
Hoping isn’t enough, however. All states have struggled through serious revenue shortfalls during and after the recent recession, and when economic investment gives hints of revival, all of them will be jockeying to take advantage of it.
Washington has more work to do than most, according to a recent report from the Council on State Taxation. The report, prepared by Ernst & Young LLP, examines all 50 states’ tax structures through the eyes of hypothetical businesses that are considering new investment in plants and equipment.
The study calculated the effective tax rate faced by businesses according to capital investment and job creation. Washington ranks in the bottom fifth of both.
That’s not good, but it’s not a surprise. Study after study has demonstrated that this state’s tax structure is among the least favorable in the nation. That’s not the only factor that businesses consider, but it’s too significant to treat lightly.
For that reason, legislative leaders would be wise to spend some of their interim energy on a close examination of the state’s tax structure and its impact on competitiveness for economic development. A reasonable model will generate ample profits, good jobs and all the things that are possible when a state enjoys stable, adequate tax revenues. Such elements will help see us through economic downturns in the future.
As the Ernst & Young analysis concludes, it’s not just a matter of comparing tax rates; it has more to do with the overall structure. Legislatures wanting to better position themselves for economic development should avoid focusing on one tax and take a look at the entire system instead.
Taxes of all kinds got plenty of attention in Olympia this year from lawmakers, stakeholders and advocates. But the climate was not conducive to the kind of examination Ernst & Young recommended. It was driven by a desperate need to capture revenue in the short term, while giving insufficient attention to the long-term consequences of how it might affect investment decisions.
Comprehensive taxation studies don’t have an envious record in this state. The conclusions they produce come with heavy political baggage, and the reports wind up littering dusty shelves, partly because they concentrate on how much they can raise and not enough on what they can achieve in terms of promoting self-sustaining economic activity.
Now, as the recession’s harshest blows can be expected to soften, and as other states get ready for the competition, Washington legislators need to think about the strategies they can bring to the table in January to be serious competitors for development opportunities that do arise.
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