Along with $1 billion tax increase, Legislature authorizes study of state tax structure.

Adding $1 billion in new taxes on top of record-setting revenue growth – an unpopular move – was not the end of legislative interest in tax policy. As the Washington Research Council points out, lawmakers also extended the life of last year’s tax structure work group. Emily Makes of the WRC writes,

The 2019–21 operating budget passed by the Legislature April 28 reauthorizes the tax structure work group that was created in 2017 and issued a report in December.

Under section 137(2)(c) of the budget bill, the Department of Revenue (DOR) is required to facilitate the work group.

The group has a specific mandate that implies a continued interest in major tax reform, 

The proviso requires DOR and a technical advisory group to update the data used in the 2002 Washington State Tax Structure Study Committee report and make several estimates related to what revenues would look like now if Washington had implemented the committee’s recommendations.

The 2002 report considered several alternatives and adjustments to Washington’s tax structure at the time. Replacement alternatives were to:

  • Replace the B&O with a value added tax (a subtraction method business VAT, a goods and services tax, or a progressive VAT) and
  • Impose an income tax (a flat rate personal income tax, a graduated rate personal income tax, flat rate personal and corporate income tax) in order to reduce sales and property taxes.

As Makings says, the 2002 WSTSSC also looked a number of incremental changes to the current system, including  extending the sales tax to consumer services, eliminating dedicated taxes, streamlining the sales tax, and more. 

Now, she writes,

In addition to updating the data in the 2002 report, the 2019–21 budget proviso requires DOR and the technical advisory group to:

  • Estimate how much revenue would have been generated in 2017–19 if all the revenue replacement alternatives from the 2002 report had been implemented;
  • Estimate what tax rates would have to be to implement the 2002 replacement alternatives and generate the same amount of revenues as were actually collected in 2017–19;
  • Estimate the impact to taxpayers of implementing the 2002 replacement alternatives, including “tax paid as a share of household income for various income levels, and tax paid as a share of total business revenue for various business activities;”

Similar research is to be accomplished for the incremental alternatives.

Jason Mercier with the Washington Policy Center notes in his review of the session’s tax increases that the work group’s mission sends a message. 

Indicating that the legislature may not be done raising taxes in the near future, the budget also includes $2 million for the Department of Revenue to facilitate a tax structure study that is tasked with looking at the possibility of a corporate income tax among other things (Section 137 (2)(c)).

Makings writes that the bill provides for public input.

The report from DOR and the technical advisory group including their findings must be prepared by Dec. 1, 2020. By May 1, 2021, the work group must hold at least one meeting with stakeholder groups (to include small, start-up, or low-margin businesses and taxpayers with income at or below 100 percent of area median income); review the report; and present the report to legislative committees. After the 2021 legislative session, the work group must hold at least five public meetings around the state and submit a final summary report to the Legislature.

Interest in changing the tax structure remains a legislative perennial. It’s worth noting, however, that research finds that Washington’s tax structure is unusual,but it yields revenues that are similar to other states by multiple metrics. And, there’s strong evidence that Washington state’s tax system has contributed to the state’s run of economic growth.

Research and analysis are important, surely. We’d simply  advise caution when contemplating changes to a system that has demonstrated that it works well, for most people and businesses, most of the time.