WA revenue system is unfair and inadequate

We have the most unfair and most regressive tax system in the country, and it results in stagnating revenue even as personal income for the top 10% of households soars in our state.  

To put this in perspective, low income taxpayers spend over two months working to pay their share of state and local taxes, while wealthy people with incomes in excess of a half a million dollars spend less than a week and a half to pay their share of state and local taxes.

Number of weeks dedicated to state and local taxes

A comprehensive compilation of data on Washington’s regressive tax structure comes from the Institute for Taxation and Economic Policy. 

In addition, this regressive and unfair tax structure does not keep pace with costs over time.  State revenue to support schools and other vital government services has declined as a share of the state’s economy – not keeping pace with growth and inflationary costs.

WA revenue collection share over 30 years

A Tax Fact Toolkit for 2017

Knowing the problem – that we have the most unfair tax system in the country and one that does not keep pace with the need to provide ample resources for the education of Washington’s students and rising costs for other essential government services – is the first step. Once we understand the problem, how can we enter into revenue discussions with policymakers and community members? Many educators have indicated an interest in WEA compiling a tax toolkit that will provide greater detail on financial issues facing Washington. A dynamic resource that they can turn to for context and background as they advocate for sensible changes to our upside-down and stagnant tax system.

The Economic Opportunity Institute has assembled several websites, both explanatory and interactive, to enable educators to better understand our current tax system as background in proposing systemic public revenue reform.

  1. Background on the State’s Revenue System

Let’s start with this summary of Washington’s regressive and stagnating tax system.  

  1. Details on Tax Exemptions and Loopholes

The Department of Revenue issues a comprehensive report every two years on tax exemptions and loopholes. But we offer caution in understanding the categories. For example “taxpayer savings” references the benefit/savings to the industries or individuals benefiting from the loophole. That description of enabling selected industries and companies (think Boeing) to avoid millions and billions of dollars of taxes disguises that these loopholes are actually robbing from the revenues for public services for the people of our state. 

Boeing exemption

  1. Background on the State Budget

Note: this a discussion of expenditures, not revenue.

The Economic Opportunity Institute has compiled some historical background and context on the state budget and education funding crisis from EOI:

EOI has also created an interactive website to explore the increases and decreases in Washington’s operative budget from 2004 to 2017. With this site, you can dig down into each area and sub-area of Washington’s budget. 

For example, here is the historical funding record for K-12 Education.     

For some detail on higher education tuition and funding, we developed this Interactive spread sheet on tuition in Washington’s public universities, colleges, and community colleges, from 1965 to 2017, with proportional state support from 1989 to 2017.

The State’s Office of Financial Management has also created an interactive tool to dig down into the budget and expenditures by category for the Governor’s proposed 2017-2019 Biennial Budget. 

  1. Recent Governor’s Proposed Revenue Solutions

  1. Capital Gains and Income Tax Modeling

For those who are interested in modeling different tax scenarios, EOI has created this interactive tool to estimate new revenues from capital gains or income tax scenarios. Instructions are embedded in the Excel model.

  1. State Bank Proposals

There have been periodic proposals to create a State Bank, which are aimed at creating efficiencies in state financial transactions and leveraging these resources to benefit the people of Washington State. 

During the 2017 legislative session companion bills regarding the state bank were sponsored by Senator Bob Hasegawa and Representative Noel Frame. Senate Bill 5464 had a public hearing on February 9 and House Bill 2059 was heard on February 15, but neither bill moved out of committee by the cut-off deadline. A fiscal note was completed. There will be some administrative costs to run a state investment trust, but there will also be profits on those investments that can support public programs. 

With such a large overhaul of a financial infrastructure – most of the significant elements of the fiscal note (operations costs and profits) are listed as indeterminate costs and revenues to the state.

Also during the 2017 legislative session, the Legislature adopted a 2017-2019 Operating Budget on June 30, 2017.  The budget contained a proviso within the State Treasurer’s appropriation requiring that the Treasurer “establish a task force on public infrastructure and a publicly-owned depository.”  The task force was charged with examining the scope of financial needs for local governments for constructing public infrastructure; the feasibility of creating a publicly-owned depository to facilitate investment in, and financing of, public infrastructure systems that will increase public health and safety, and leverage the financial capital and resources of Washington state by working in partnership with financial institutions that benefit local communities, or with community-based organizations, economic development organizations, local governments, guaranty agencies, and other stakeholder groups to create jobs and economic opportunities within our state for public benefit.  ) The task force was to report any recommendations identified by the task force that involve statutory changes, funding recommendations, or administrative action to the legislature as draft legislation by December 1, 2017

The task force consisted of one member from each of the two largest caucuses of the senate appointed by the president of the senate; one member from each of the two largest caucuses of the house of representatives appointed by the speaker of the house of representatives; members representing a small sized state-chartered bank, a medium sized state-chartered bank, a federally chartered bank, local governments, and four citizens with a background in financial issues or public infrastructure selected by the president of the senate and the speaker of the house of representatives; and the attorney general, the state auditor, the treasurer, and the governor, or their designees.

The following appointees served on the Infrastructure & Public Depository Task Force:

TRE:     Brad Hendrickson (Policy & Legislative Dir.) – Chair
GOV:    Scott Merriman (OFM Legislative Liaison) – Vice Chair
AUD:    Scott Nelson (Dir. Legislative/Policy Affairs)
ATG:     Darwin Roberts (Deputy AG)
SDC:     Patty Kuderer (Senator – 48th District)
SRC:    Jan Angel (Senator – 26th District)
HDC:    Steve Kirby (Representative – 29th District)
HRC:    Mike Volz (Representative – 6th District)
BKL:     Jennifer Lawson (US Bank)
BKM:    Alan Crain (Kitsap Bank)
BKS:     Denise Portmann (Bank of the Pacific)
LGV:     Kate Dean (Jefferson County Commissioner)
CIT1:     John Comerford (Pension Consultant)
CIT2:     Bill Longbrake (SIB / Robert Smith School of Bus.)
CIT3:     Yona Makowski (SIB / HDC – retired)
CIT4:     Becky Thompson (WSAC Financial Assistance Dir.)

The task force report can be found at this link  https://www.tre.wa.gov/wp-content/uploads/Infrastructure-and-Public-Depository-Task-Force-Report-December-2017.pdf

Within the resources reviewed by the task force, the North Dakota State Bank information was provided as background material.  According to the report, North Dakota’s state constitution was changed to allow it to accept deposits from public entities and then providing loans out to private citizens for mortgages, agriculture, business or student loans.

The following is an excerpt from the task force report:

Task Force members had many opinions regarding the helpfulness of establishing a depository

institution for infrastructure funding. Some members thought that numerous studies have already been conducted in other states–and the variety of issues raised in these studies has resulted in no state depository institutions being established since the Bank of North Dakota a century ago.

Some other Task Force members are supportive of doing additional study about establishing a state-owned depository institution but acknowledge that this study would need professional experts to be hired.

If the Legislature does want to further consider the issues surrounding the establishment of a state depository institution, much more work needs to be done. Topics that would need to be addressed include the legality/constitutionality, capitalization, governance, business plan, structure, and level of interest/need for such an institution from local governments.

The taskforce did not come up with a singular recommendation and was divided about the recommendations moving forward.  The republican legislators, state treasurer, and business representatives opposed the creation of a state bank, while the democrat legislators wanted to move forward on future planning to implement a state bank. 

During the 2018 Legislative session, Sen. Bob Hasegawa sponsored Senate bill 6375 to create a business plan for a state bank.  The objective of this bill was to explore the state bank model that will work in Washington State and to create a plan for implementation that would still require legislative approval.  This bill did not pass the legislature, but a provision for this work was adopted in the 2018 supplemental budget.  The exact language follows here:

$192,000 of the general fund—state appropriation for fiscal year 2018 and $288,000 of the general fund—state appropriation for fiscal year 2019 are provided solely for the office of financial management to contract with an entity or entities with expertise in public finance, commercial, and public banking to:

(a) Evaluate the benefits and risks of establishing and operating a state-chartered, public cooperative bank in the state of Washington, specifically including the business and operational issues raised by the 2017 infrastructure and public depository task force; and

(b) Develop a business plan for a public cooperative bank based on the federal home loan bank model whose members may only be the state and/or political subdivisions. The purpose of this bank is to assist the potential members of the bank to manage cash and investments more efficiently to increase yield while maintaining liquidity, and to establish a sustainable funding source of ready capital for infrastructure and economic development in the state of Washington. The business plan shall include, but is not limited to:

(i) Identification of potential members of the bank;

(ii) The capital structure that would be necessary;

(iii) Potential products the bank might offer;

(iv) Projections of earnings;

(v) Recommendations on corporate governance, accountability, and assurances; 

(vi) Legal, constitutional, and regulatory issues;

(vii) If needed, how to obtain a federal master account and join the federal reserve;

(viii) Information technology security and cybersecurity;

(ix) Opportunities for collaborating with other financial institutions;

(x) Impacts on the state's debt limit;

(xi) In the event of failure, the risk to taxpayers, including any impact on Washington's bond rating and reputation;

(xii) Potential effects on the budgets and existing state agencies programs; and

(xiii) Other items necessary to establish a state-chartered, public cooperative bank modeled after the federal home loan bank or other similar institution.

The office of financial management shall facilitate the timely transmission of information and documents from all appropriate state departments and state agencies to the entity hired to carry out its contract. A status report must be provided to the governor and appropriate committees of the legislature by December 1, 2018, and1 final report and business plan provided to the appropriate committees of the legislature by June 30, 2019. The contract is exempt from the competitive procurement requirements in chapter 39.26 RCW.

Once completed, a link to the completed report and business plan will be posted here.

Read the following documents for additional history and analysis of other state banks and a potential state bank for Washington:

Update: House Democrats Revenue Package

The House Democrats have introduced a revenue package (HB 2186) to support their budget, which includes significant education investments while maintaining other key government programs.  While raising revenue, their goal was to make Washington’s tax system more fair for low income and middle income families as well as small businesses.  The following  documents provide further information on the House Democrat’s tax  package.  

This content was prepared by the Economic Opportunity Institute.

EOI - Economic Opportunity Institute