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Originally published Sunday, April 12, 2009 at 12:00 AM

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On the Economy

Time for state to discuss taxes despite difficulties

State revenue has to come from somewhere. A proposal to create an income tax and another to increase the sales tax are just two ways to pay for services such as education.

Special to The Seattle Times

It's quixotic — or deranged. Such are most of the reactions, depending on political persuasion, to state Senate Majority Leader Lisa Brown's idea of an income tax on high-wage earners to help fund education.

Washington voters have repeatedly turned down efforts to institute an income tax, and have sometimes favored the tax-limitation initiatives of activist Tim Eyman.

Brown's timing may be bad, as well, and not just because many economists would argue against raising taxes in a recession.

Even so, Brown's proposal ought to open an important conversation about taxes and the state's future competitiveness. It's one that's difficult to have without arousing partisan passions, cooked statistics and charges of socialism or a sales-tax-driven war on the poor. It's one we should have nevertheless.

Washington and nine other states without an income tax are considering the issue. Take out of the mix Texas, which benefits from oil-production taxes, and Washington is the most urbanized, wealthy and economically diverse.

For fiscal 2008, Washington's state and local tax burden ranked 35th in the nation, just ahead of Mississippi, according to the nonpartisan Tax Foundation. By the slightly different calculation of the Federation of Tax Administrators, Washington ranked 32nd. Its per-capita income was eighth nationally. (Mississippi ranks 50th.)

Per-capita state spending in fiscal 2007, the most recent year tracked by the Census, ranks Washington 19th nationally ($5,780), and only slightly higher than the U.S. average. Washington is the 13th-most-populous state. The top corporate tax rate is relatively low and there are further breaks for major players, such as Boeing.

The revenue has to come from somewhere and the state has a variety of other sources. But it is particularly dependent on sales taxes.

In tax parlance, sales taxes tend to be regressive, meaning the burden falls heaviest on lower-income people. Income taxes are progressive — higher earners pay more. The liberal Institute on Taxation and Economic Policy said in a 2003 study that low- and middle-income Washingtonians pay a far greater share of their income on sales taxes than the wealthy. The group said it was the most regressive sales tax in the nation.

With the recession, that reliance on a sales tax has hit Washington hard, helping dig a more than $8 billion deficit as consumers have pulled back. Still, states with income taxes have been devastated, too, most notably California. So aside from the fairness argument about regressive sales taxes, there may be no perfect model for a state's tax structure.

Some of the states with the highest tax rates and tax burdens (taxes paid divided by income) are also the richest and most economically powerful.

These include New York, Connecticut, New Jersey and California. Some states with very low taxes also suffer from limited economies and a relative lack of well-paid jobs. This doesn't mean that high taxes can't ultimately hurt competitiveness, only that reflexive tax cutting is no panacea, either. Rather, tax policy seems to be one element in a state's overall competitive DNA.

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In our case, the obvious question might be, "Why mess with success?" By many measures of economic well-being, Washington has done quite well. Any state, metro area or nation's competitiveness is a complex balance, which can be accidentally tilted to its disadvantage by well-meaning changes.

Yet the severity of the economic downturn has exposed deep, long-standing problems across the economy. One might be that Washington state's tax revenue isn't adequate for its public needs. Lack of an income tax is likely only one of the problems; another is the approval of various tax-limitation initiatives.

Thus, in addition to being forced to cut spending just as the recession increases demand for state help, Washington will have trouble with maintaining key competitive assets. Notably among these are excellent universities. It will struggle to address gaps in K-12 schooling that has left Washington with some mediocre grades in education. The state's urban areas already struggle to build and sustain mass-transit infrastructure, while the ferry system faces a $1 billion funding gap over the next 15 years. Critical programs to address health care and opportunity in a state with a big gap in incomes and skills are also facing cutbacks.

These cuts might not matter as much if the economy will soon bounce back to its old self and tax revenues return. Yet there's plenty of evidence a recovery won't happen soon, and the economy that emerges might look quite different from the one in which the state prospered over the past quarter-century. Continued high debt loads, sustained higher energy prices and greater global competition for talent and capital are baked in the cake.

Tax increases don't automatically harm an economy nationally; those of the early 1990s that eliminated the federal deficit didn't stand in the way of a historic boom.

Yet calling for higher taxes is near-suicide in American politics. Candidate Barack Obama, portrayed as a liberal, promised tax cuts for most Americans. It's good politics, no matter the cost. Americans don't like taxes, even though they pay less than most advanced nations.

Anti-tax activists have been effective in portraying government as always bloated and inefficient. This sidesteps answering what roles government must do well and which cost money to enhance competitiveness in a complex, global economy.

It's an argument without end, and Washington will likely elect to muddle along. But will that be good enough?

You may reach Jon Talton at jtalton@seattletimes.com

Copyright © 2009 The Seattle Times Company

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About On the Economy

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@yahoo.com

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