OLYMPIA - Washington's ruling Democrats are set on raising taxes to avoid deep cuts in state spending. So who gets to pay?
That’s the big, stinking question hanging over the 2010 legislative session, which convenes Jan. 11. And it doesn’t look like there are any easy answers.
In their scramble for sources of tax revenue, Gov. Chris Gregoire and lawmakers will surely gab about increasing “sin” taxes on indulgences such as tobacco and liquor. They might want to add junk food, and even bottled water, for good measure.
Tax breaks meant to help particular industries are on the chopping block too, and lawmakers will probably close a multimillion-dollar loophole for out-of-state companies, opened by a recent court decision.
But if all the scrounging doesn’t generate enough dough to save Democrats’ favorite programs, legislators could find themselves back in the arms of an old, familiar friend: The state sales tax.
Raise it a penny, get about $1 billion per year – and get ready to face recession-weary voters, fight a ballot measure to undo the tax increase, or both.
“I think they’re trying to search around, and I don’t think they’re going to find anything,” said Don Brunell, president of the Association of Washington Business.
This is the second straight year that Washington’s lawmakers will be grappling with a major budget deficit.
In 2009, the Democrat-dominated Legislature ended up bridging the gap with spending cuts, federal bailouts, and one-time gimmicks. Their usual impulse to raise taxes was blocked by a Tim Eyman initiative and a campaign pledge from the newly re-elected Gregoire.
But in 2010, those impediments are gone – Initiative 960 can be amended with a simple majority vote, and Gregoire has declared that taxes are on the table. At the same time, lagging tax collections have punched another projected $2.6 billion hole in the budget, which runs through mid-2011.
Gregoire has said she’ll seek about $700 million in new revenue to save some of the most critical programs, including the Basic Health Plan for the working poor, welfare for the disabled, and subsidies for rural schools. About $1 billion would still be cut.
In reality, many see Gregoire’s $700 million as just an opening bid.
“If you hollow out the education system and undermine our health system and eliminate core environmental protections, you not only undermine our quality of life, but you jeopardize the long-term economic future of the state,” said Sandeep Kaushik, spokesman for Rebuilding Our Economic Future Coalition, a group comprised of advocates for education, health care and social service programs.
So, say the Legislature wants to raise $1 billion. The quickest way to bring in significant revenue is hitting one of the state’s “big three” tax sources: Sales, property, or business and occupation, which is a gross-receipts tax on businesses.
Gregoire has singled out a sales tax increase as the most likely among those three. But the sales tax’s regressive nature – it eats up a larger slice of poor people’s income – generates real problems with the Democrats’ natural allies.
Which explains all the efforts to lash together a tax package from several other sources.
Closing the court-case loophole on out-of-state businesses would generate about $155 million in the current budget period. Extending the sales tax to candy and gum is worth about $30 million, and adding bakery treats tacks on another $16 million.
Wiping out a sales tax exemption for some nonresidents earns about $33 million more, while jacking up the cigarette tax by a quarter gets you about $25 million.
A nickel per can of pop is worth about $94 million. A penny per ounce on bottled water would be a geyser of about $135 million.
So, after riling up all those constituencies and consumers, the tally would be less than $500 million. And going further down the list of options just starts more fights.
Ending sales tax exemptions for certain kinds of services could raise some decent money, but the lawyers, accountants and barbers might not be happy about it.
One of the more exotic ideas being mentioned is to charge $1.50 or more for each barrel of gasoline, diesel, or other petroleum product, with environmentalists getting the revenue stream to pay for stormwater cleanup once the budget crisis is over. But that would likely run into legal challenges, since the state constitution ties state gasoline taxes to road construction.
This unending map of political battles is why some observers are predicting the Legislature will, in the end, just fall back on a temporary sales tax increase. At present, the state sales tax is 6.5 percent; with local additions in the most expensive parts of the state, some consumers already pay just under 10 percent.
To cure the political left’s heartburn about hitting the poor hardest, some are lobbying to bring back an idea from the 2009 session – a temporary sales tax increase paired with a rebate for low-income workers.
Consumers might pay more up front, but saving health care, human services and financial aid programs would be better for working-class Washingtonians in the end, said Remy Trupin, director of the Washington Budget and Policy Center, a liberal think tank.
“For lower-income people, the cuts to education and health care would be far more regressive than the tax increases,” Trupin said.