Saying yes to Mission: Impossible

One quick way to kill a conversation is to bring up tax reform. You’re more likely to get a monologue, a diatribe or some cursing if you mention an income tax. Dialogue, not so much.

But having an adult conversation about taxes is something Washington voters and politicians need. Big bills are coming due for K-12 public schools — much bigger than lawmakers have strained to pay for thus far — and options on the table look pretty terrible.

That’s where we think state Treasurer Jim McIntire, a Democrat and former state legislator, is on the right track. Like a secret agent on an impossible mission, he’s been talking quietly over the past year with business, labor and other interests about our state’s outdated tax system.

In April he laid down a framework for a new tax system he hopes can appeal to everyone as the reality of school financing dawns on policy makers.

Yes, McIntire is talking about the dreaded income tax, which Washington voters have rejected repeatedly. And so far he’s not received a great upwelling of support for his work — even getting a cold shoulder from the governor.

But more important than his call to consider an income tax is the larger story he’s painting about a broken tax system inadequate to pay for a first-rate schools system:

▪ The Supreme Court’s impatient demands for ample funding of K-12 schools is likely to bring a stop to over-reliance on local property-tax levies.

▪ McIntire estimates the need for as much as $4 billion in 2017-19 to both replace a large share of local levies and to improve teacher pay. Simply transferring $3 billion of property tax burden from local levies to the state share of the tax would create new tax inequalities between school districts.

▪ Using current tax options to replace most of the levies could, in McIntire's analysis, push the state portion of the sales tax from 6.5 percent to 7.5 percent; add 15 percent to the business-occupations tax paid by businesses (regardless of profit); and nearly triple the state share of property tax from $1 per $1,000 of assessed value to $2.90.

Washington already has the most “regressive” tax system of any state, hitting the poor harder than the rich, and business taxes are higher. Using the existing tax system to raise more funds makes this worse.

McIntire doesn’t have a silver bullet but his suggestions start a discussion. The high points:

▪ A 5 percent income tax with deductions of $15,000 per person or $30,000 per couple. After deducting the value of other taxes he proposes to cut, this could generate a net $4 billion of new revenue. He’d put three-fourths of it into public schools and one-fourth into higher education, locking it in place with a constitutional amendment approved by voters.

▪ The state share of the sales tax would drop from 6.5 percent to 5.5 percent.

▪ The state share of the property tax would be eliminated. McIntire estimates most property owners would save about 20 percent or more.

▪ Business-occupation taxes would drop from 1.5 percent to 1 percent of gross receipts for service businesses; B&O rates for manufacturing, retail and wholesale firms would fall to the level paid by Boeing and other aerospace companies (0.29 percent).

Small business owners could credit B&O payments against income tax obligations.

▪ Local school levies would be capped at 15 percent of the state’s allocation for basic education.

Why do all this? Washington’s tax system was designed for an era when manufacturing and selling goods were the central economic activities. Now we have a service economy in which less and less activity is taxed. Left alone, the tax base will shrink, increasing pressure for higher rates to keep pace.

Of course, there’s legitimate fear that legislators won’t ever restrain themselves if they can tax income.

That’s why McIntire is looking for a grand political bargain that unites conservatives and liberals. He’d consider meeting anti-tax crusader Tim Eyman part way on a constitutional amendment that makes major tax-rate changes harder to enact. McIntire suggests locking tax rates in the state Constitution, with a 60 percent supermajority requirement for changes in the rates for income, sales or business taxes.

No one likes to talk about taxes, let alone pay them. Uncle Cranky is liable to throw a fork across the table if you suggest taxing his pay — or capital gains, if he has any.

But someone has to start the conversation about what kind of tax system does make sense. McIntire’s proposal should get people thinking.

This story was originally published September 12, 2015 at 5:01 PM with the headline "Saying yes to Mission: Impossible."