Dear Group,
We elect people to represent us in Olympia. The biggest issue they wrestle with in Olympia is the state budget, and more than half of the state budget is funding for public schools.The rest of us pay little attention until either schools are disrupted or taxes rise. It is time to change that.
A budget has two sides, revenue and spending. On Monday I made the point that about 60% of the Washington State budget’s spending side (in 2017-19) went to Education. That’s roughly 26 billion dollars, 22 billion of which is devoted to K-12, 4 billion to higher education. The next biggest spending item in the budget is Human Services at 14 billion. Nothing else comes close. Take-away: When you hear about the Washington State budget think first about educating our kids…then medical care and social services. All else, all those little ways we interact with government, licensing, for example, all roll up into pocket change by comparison. So when we read about the legislature struggling over passing a budget, recognize the biggest part of that struggle is about funding K-12 education.
First a note: I’m writing here about the “General Fund,” a term you read about in the paper without explanation. The General Fund is simply the part of government money expended in the State of Washington over which the State Government has direct control. The money is raised largely from State taxes and fees. Other money comes to the State from the federal government (think federal income tax). That money mostly comes earmarked for a particular purpose and is mostly beyond state government control. That is a different topic. (for more, see P.P.S. below)
Most of the money for the State of Washington’s “General Fund” budget, a majority of which educates our children (to participate in our society and work in our economy), is covered by revenue from state taxes. Stop for a moment and guess at the major sources of State tax revenue. Is it motor vehicle tabs? Sin taxes (alcohol, tobacco, and marijuana)? Property taxes?
Sources of Washington State tax revenue:
Retail Sales Tax 17.6 billion
Business and Occupation (B&O) Taxes 7.2 billion
Property Tax 5 billion
Real Estate Excise Tax 1.9 billion
All Other 4.6 billion
The above figures are drawn from the 2017-19 Biennium General Fund Table at http://fiscal.wa.gov/RevenuebyFund.aspx looking at the Actual Revenue through March 2019 on a total of Actual Taxes collected of 36.3 billion dollars.
Let’s examine the three biggest taxes:
Sales Tax: What ever the sales tax in a given locale in Washington State the State gets 6.5 percentage points of the tax charged. (The rest goes county and municipal government. In Spokane we pay 8.9% total.) This is a regressive tax, that is, it is paid on every dollar spent on most goods and services (exceptions include food and prescription drugs), regardless of income or lack thereof. As of 2017 we pay the fifth highest combined state and (average) local sales tax rate in the nation.
Property Tax: This is an interesting one. Tax on property is really a form of wealth tax that selectively affects the lower and middle class. Renters pay property tax as an unseen pass through in the cost of the rental. For american families with sufficient income home equity is a major form of savings. Many scrape and save to pay on mortgages in the hope of accumulating equity in a home they believe (less so since 2008) will be a good investment. Many buy homes they can barely afford and neglect investing elsewhere in the belief that property is the better asset. Certainly the wealthy drive up home prices by purchasing homes larger than they need, but the wealthy also have money in stocks and bonds and other investments. The value of those investment instruments is not taxed like real property. The result: Property taxes are yet another regressive tax. The State takes (in 2019) $2.52 of the total Spokane property tax levy of $11.93 per $1000 of assessed value. The rest ($9.41) funds County and Municipal government and the local part of District 81 funding (more on that on Friday).
Business and Occupation Tax (B&O): Unless you own or manage a business in Washington State, you might be only dimly aware of the B&O tax. It is a tax paid on gross receipts of a business, a tax on the money received before any of the costs of doing business are subtracted. Certainly different businesses have wildly different cost and overhead. How can that be equitable? Ah, that’s why the State has a complex list of tens of different business types. The Business and Occupation tax is not unique to Washington State, but nearly so. Only West Virginia and Ohio have any kind of statewide B&O tax. (Check out the short Wikipedia article on B&O for perspective.) Tax rates seem small, in the neighborhood of 0.5% (1.5% on the service industry), but, remember, this is on gross receipts, not profits. It strikes me this tax is rife with potential for behind-the-scenes manipulation and odd incentives. From a governmental standpoint the B&O tax has the advantage that most voters are only dimly aware of it.
Taxes Washington State does not have:
State Income Tax: Only five other states have no tax on any type of income, NV, WY, SD, TX, and Florida. New Hampshire and TN only tax income from dividends and interest. State income taxes are progressive (higher rates on higher marginal income) in all the states that have an income tax (except for CO and NC, which levy a flat rate income tax).
High Value Asset Sale Tax: It’s being considered right now in the legislature. It would represent a small improvement to Washington State’s rating as the State with the most regressive tax system in the United States. “… the lowest 20 percent of income earners (families making less than $24,000) contribute almost 18 percent of their annual earnings to state and local tax coffers, while the top 1 percent (those making over $545,900) pay just 3 percent of their income.”
It behooves us to pay attention. We all benefit from an educated citizenry. A majority of our tax dollars are spent on education, and in the State of Washington (more so than any other state) those tax dollars come disproportionately from the least affluent. Let’s not get so lost in the bickering over who is to blame for teacher layoffs that we lose sight of the underlying problem.
Keep to the high ground,
Jerry
P.S. The details of the State budget are devilishly complex. I’m deriving data from the Washington State fiscal.wa.gov website. It provides a wealth of information with a dearth of simple explanation.
P.P.S. The numbers I’ve offered are number from the Washington State “General Fund.” Some other money comes to the State from the federal government ear-marked for certain purposes. These monies contribute significantly to the expenditures made in the State in the areas of Human Services and Higher Education, but contribute little to K-12 education. (1.5 billion out of 22 billion cited above.)
P.P.P.S. Thomas Piketty in his 2013 book Capital in the Twenty-First Century advocated a progressive wealth tax as a means to alleviate some of the wealth and opportunity inequality straining the world today. Property taxes are wealth taxes, but, standing alone without a wealth tax on monetary instruments, property taxes are decidedly regressive, not progressive.
P.P.P.P.S. For a very interesting bar graph of how states fund themselves check this out. It is the types of taxes within each bar that is interesting, not so much the total tax revenue comparison. (After all, what use is there in comparing the total tax revenues of California with those of Alaska without a nod to population?)