More on the state tax structure work group and possible tax changes resulting from I-976

Yesterday, we wrote about the first meeting of the Tax Structure Work Group. Washington Research Council economist Kriss Sjoblom provides additional context on the work group’s charge and likely approach. 

ESHB 1109 requires the Department of Revenue to prepare a report that updates the data and research that informed the analyses and recommendations of the final report of the 2002 Washington State Tax Structure Study Committee (WSTSSC). For each alternative tax system recommended by WSTSSC, this report is to estimate the amount of revenue that system would have generated during the 2017–19 biennium and to estimate the distribution of tax burdens across households by income level and across businesses by industry.

The DOR report is also to analyze several alternatives identified by the 2018 House Tax Structure Work Group. These alternatives include replacing the business and occupation tax with either a corporate income tax or a margins tax (a type of business tax used in Texas), and replacing the current one percent limit on revenue growth from the state property tax with a limit based on population growth and inflation.

He points out the legislation anticipates an extended timeline, with some uncertainty after the work is completed.

The work group is to present the preliminary report to legislative fiscal committees during the 2021 legislative sessions. Following the 2021 session the work group is hold a series of public meetings across the state, presenting DOR’s analyses of the various alternatives and receiving feedback.

ESHB 1109 is silent as to whether anything further will happen following this series of public meetings.

As we suggested yesterday, the extended review may dampen legislative enthusiasm for tax changes in the short, election-year session, particularly in a biennium with strong revenue growth and voters’ approval of I-976.

But, there are some I-976 implications to watch, as WRC analysts Emily Makings writes

Also this week, Sen. John Braun proposed dedicating the current state sales tax on motor vehicles to transportation. According to Sen. Braun, this would increase transportation funding by $30 billion over 20 years. He notes, “Car tabs were just slashed by voters, part of a twenty-year consistent message from the public on the issue. The gas tax, with increasing fuel-efficiency and the rise of hybrid/electric cars, is a declining long-term revenue source, absent increases in the tax rate.”

The proposal has been prefiled as SB 6041.

Read her post for more detail. She also writes of a proposed insurance premium tax.

Commissioner of Public Lands Hilary Franz has proposed an insurance premium surcharge to help fund wildfire response. The draft legislation would require property and casualty insurers (except medical professional liability businesses) to collect a “wildfire surcharge” of $5 per policy annually. Each property and casualty insurer would have to make a payment of at least $1,000 a year.

She writes a similar proposal passed in the Senate last session, but did not make it through the Legislature.

Writing in Crosscut, Melissa Santos takes a close look at other possible legislative responses to I-976.

State Rep. Jake Fey, a Tacoma Democrat who chairs the House Transportation Committee, said state officials will most likely continue to collect car-tab fees as the courts have allowed, but set the money aside in an escrow account of some sort. 

That would force legislators to trim hundreds of millions from the state budget in the short term, Fey said. That could further delay planned highway projects, or perhaps cut ferry service and limit ferry routes, he said…

Fey said passing new taxes to stave off transportation cuts isn’t a realistic option in the upcoming 60-day legislative session, which is set to begin Jan. 13. In the past, agreeing on a package of gas-tax increases, tolls, and other measures to pay for roads and transit has required years of negotiation, he said.

Legislators also will want to avoid raising taxes in an election year, said state Sen. Steve Hobbs, a Democrat from Lake Stevens who chairs the Senate Transportation Committee.

Fey’s thinking is more long-term, Santos writes.

Fey said he plans to come back in 2021 with a proposal for a new gas-tax package that could get some of the delayed projects back on track, as well as pay for other transportation needs, such as a new crossing on Interstate 5 over the Columbia River and about $3 billion to replace culverts that are blocking fish passageways.

By that point, the state will also have more certainty about I-976, Fey said. Until the courts rule on the constitutionality of the initiative, lawmakers don’t know whether they have to replace one year’s worth of lost revenue or several, meaning they won’t know how big of a tax package would even be needed to offset any cuts, he said.

So, we wait. A swift ruling on the constitutionality of I-976 would clearly be helpful.