Research Council finds WA tax structure performed well during pandemic; Tax Foundation ranks WA #16 in business tax climate.

There’s never a shortage of critics of Washington’s tax structure. Again this year, the Legislature continues the work of the Tax Structure Work Group.  Last week, three former governors agreed that system requires reform. And yet, after decades of criticism, ballot initiativesblue-ribbon commissions, the system has been retained. 

Perhaps that’s because it generally works pretty well. 

The Washington Research Council has a good blog post reviewing some of the criticism and setting the record straight. The WRC leads with the criticism levied last week by the former governors.

The Puget Sound Business Journal (PSBJ) reported last week on an event with former Washington governors Gregoire, Locke, and Evans. According to the PSBJ,  

All three governors said the state should create a more fair, progressive tax system that provides stability in recessions. Washington’s current tax system, relying heavily on sales taxes, has proven to be volatile during the pandemic and other economic slowdowns. Locke said a state income tax could be a better solution.

On the contrary, Washington’s tax system is less volatile than most other states. Pew reported last week that for the fiscal years 2000–2019, Washington’s tax revenue ranked the 16th least volatile in the country.

This revenue stability is a favorable point in Washington’s credit rating. In an Oct. 7, 2020 credit rating report, S&P noted that Washington’s high rating in part reflected its “Sales tax-based revenue structure that has demonstrated less sensitivity to economic cycles compared with income tax-reliant states.”

There’s much more at the blog post, which we commend to you. We will quote one other section.

Similarly, Lucy Dadayan of the Urban Institute reported last week that preliminary data on state tax collections through August indicate that total state tax collections for the period of March–August 2020 are down 6.4 percent compared to the same period last year. Washington is one of just eight states that reported that tax collections actually increased for this period from 2019 to 2020.

The Tax Foundation also gives the state relatively good marks on business tax policy, ranking Washington 16th in the 2021 State Business Tax Climate Index, released today (first is best).

Here’s the Washington page. As the TF snapshot below shows, Washington is one notch below Oregon and four ahead of Idaho. The state’s best ranking, No. 6, is on individual taxes, a nod to the lack of a personal income tax.

The TF index, while not definitive, does point to some relative strengths and weakness in the tax structure. The authors write

The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement.

The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Nevada, South Dakota, and Wyoming have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.

This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes. Indiana, North Carolina, and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases.

Again, much more in the study. We expect the tax reform discussions to continue. The challenge for the reformers is to demonstrate how their proposed changes will improve upon on performance of the current structure.