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Washington Accepts Justice Kennedy’s Invitation: On-line sales taxes

May 23, 2015

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The most effective state tax system would be low rates, broadly applied with few carve outs and exemptions.  As Finance chair that continues to be the policy framework through which I evaluate legislation, issues and ideas. Unfortunately, as we all know, Washington has the categorical opposite on every front.

With a reliance on sales tax and a gross business tax created 83 years ago as a temporary measure, we rely upon the whims of consumer spending to fund public education and other vital services.  Add to the mix 650 tax preferences for virtually every major industry and you are left with a economically inefficient patchwork of unfairness.

While big picture tax reform is elusive, we can improve the clunky system we have today, broaden the base and make it more fair and efficient.

A prime example is on line sales taxes.

Every year we lose hundreds of millions in uncollected revenue on consumer purchases that remain untaxed due to the unwillingness of Congress to pass the Marketplace Fairness Act, a bill that would update our nation’s tax code to essentially include–get ready for it–the Internet. It says that ‘a sales is a sale’ regardless of where it’s purchased or the vendor selling it.

Chances are a large percentage of your shopping these days is done online, at home or the office, on your computer, tablet or phone.

For many of those transactions you pay a sales tax at the same rate you would at any brick-and-mortar store in Walla Walla or Bellingham or Seattle. But because of a U.S. Supreme Court ruling from 1992 — when the Internet was hardly a whisper to most people — transactions with some online retail giants go untaxed.

That hurts Washington to the tune of hundreds of millions in lost revenue, and it hurts local companies in the state that do pay their taxes.  The politics are ugly as companies jockey and lobby to protect their interests.

The responsible answer is to level the playing field and make sales taxes apply to all equally.

And, whether you like or hate our reliance on the sales tax, we can all agree that if we have to do it we should at least do it right.  This is one of the reasons I serve on the Streamlined Sales Tax Governing Board, a national group of states and industries working together to coordinate complex sales tax policy.

And that’s why this year, I’ve introduced the Washington State Marketplace Fairness Act to establish nexus with online retailers, level the playing field for traditional brick-and-mortar businesses and collect critical revenue from existing sales.

Few realize that for every item you buy online that you don’t pay sales tax on, you technically are responsible for paying an equivalent use tax to the state of Washington. But every year, only 1 percent of residents who owe use taxes put it in an envelope and send it to the Department of Revenue for obvious reasons.

We could simplify the system and make it more fair simply by collecting our regular sales tax for all online sales.  A sale is a sale.

So what’s the problem?

In 1992, the U.S. Supreme Court ruled in Quill Corp. v. North Dakota that a state may collect sales and use taxes from a retailer only if the retailer has a physical presence such as a formal office or distributor in the state. This decision set a clunky precedent that online retailers could sell to customers in a state that collects sales taxes without charging sales tax.

But this year in an even rarer precedent, Justice Anthony Kennedy — who concurred with the 1992 decision — invited the states to petition the Supreme Court to overrule Quill and allow states to collect sales and use taxes from online retailers regardless of whether they have a building, office, distributor or physical presence in that individual state. To do that, we have to take a stand as a sales tax state and push the boundaries of the Court’s pre-Internet decision, and to do that we have to expand how we define nexus in state law.

Under our proposal, nexus would allow our state to collect sales and use taxes from online sales based on a retailer’s economic connection to Washington state, not just geographical offices. It would say, in effect, that a sale is a sale.  This proposal establishes new standards for nexus for out-of-state retail businesses by using a five-tiered approach which considers the seller, in-state affiliates, a retailers’ physical presence, and payment methods. For instance, PayPal has offices in Washington, so if PayPal is used for payment the seller will need to collect and send in sales tax. We can make it easy to administer for new sellers because we already to it today.

The Washington State Marketplace Fairness Act is about more than revenue — it’s about establishing fairness for Washington businesses. If you were given a choice at checkout whether or not to pay sales tax, you’d likely choose the latter. But when a competitor can offer the same product without charging sales tax, that puts our local neighborhood businesses at a competitive disadvantage. In his unprecedented invitation to the states, Justice Kennedy even acknowledged the “extreme harm and unfairness” the Quill decision has caused on states like Washington.

How will this affect you as a consumer? Probably not that much. Many online shoppers don’t notice a difference between buying something at Amazon and buying something on Etsy — but you’ve already paid sales taxes on every item you’ve ever purchased from Amazon. The Washington State Marketplace Fairness Act would simply extend our existing system to sales to handful of other retail websites like Etsy, Overstock and eBay.

By passing the Washington State Marketplace Fairness Act, we can conservatively collect more than $240 million by the end of 2019 from sales into Washington by out-of-state businesses. That would be a large piece to the puzzle of fully funding basic education, mental health care and other critical investments. In addition, local governments would collect substantial new revenue from sales and use taxes.

I have the great honor of representing the legislative district that is home to Amazon and, as a technology entrepreneur in the wireless and software industries, I want to ensure that our state’s policies are aggressively technology neutral.  Our polices must be fair so that all on line sellers play by the same rules.

Amazon as a global company is extremely nervous that individual states will begin implementing their own sales tax collection policies, but in an era when Congress is both incompetent and irresponsible, states must lead.  Nothing can hide the fact that physical presence as a standard to collect taxes is outdated, inefficient and unfair.  As a leading sales tax state, our responsibility is to act decisively on this important national issue.

My plan is not a broad-based tax increase, it’s a smart change in our state’s tax collection approach that levels the playing field so everyone plays by the same rules regardless of politics.

In 1992 most folks didn’t yet know what the Internet was. Some universities, companies and agencies had email and tinkered with the coming wave.  It’s past time we updated our tax policies for the 21st Century.

We’ve been invited to challenge the Court’s old ruling and establish marketplace fairness for states like Washington that rely on the sales tax to survive, and we plan on accepting that gracious invitation.

Your partner in service,

Reuven.

 

Transportation 2015: Growing beyond our fears

March 8, 2015

trollyseattle

For four years the battle has raged in Olympia about how to pass a comprehensive transportation package that invests in our state’s public infrastructure, enables our global economy and meets the needs of rural towns, suburban communities and big cities.  For four years the dialogue has been framed more by anti-tax rhetoric and proprietary regional interests than aspirational ideas of long-term statewide growth.  For four years the debate has become smaller and smaller, more defensive, less courageous and strategic.  For the first time in an era of divided government, a convoluted bill to raise the gas tax stumbled from the Republican-controlled Senate to the House with a meek but bipartisan 27-22 vote.

The business community, Seattle Times and other proponents are–understandably–so relieved to see any progress on a transportation package that it becomes easy to brush past the lack of intellectual rigor of the plan itself.

Most in Olympia are committed to a bold, modern 21st Century transportation investment plan.  Yet the Senate’s transportation package is inadequate not merely because of the gaping holes in the integrity of the bill itself (the numbers don’t balance–there’s hundreds of millions of spending on projects that aren’t actually funded) but because of the smallness of the approach.

Washington’s public infrastructure and transportation network is at a crossroad between mediocrity and greatness.  We will attract hundreds of thousands of new residents in the coming years.  We will continue to grow.  Our cities will continue to struggle with density, our suburbs will continue to struggle to mix job opportunities with affordable housing, our rural communities will continue to struggle with limited economic opportunities.

On the spending side, the ragged idea that gasoline taxes are exclusively for roads, highways and concrete and not meaningful investment in transit is so impotent it’s embarrassing for us as a state.  State dollars exclusively for highways and concrete and local dollars exclusively for transit brings all sides down to the common denominator of self-serving, narrow interests.  The lack of transportation connectedness–integrated transportation network of rural, suburban, city, industrial needs–is where the lack of imagination is weak.

On the revenue side, the idea that gasoline taxes continue to be the best form of taxation is itself so outdated it’s hard to imagine a less creative approach. The plan proposes $15 billion in road, bridge, construction and maintenance investments spread strategically across the state to garner votes.  The full range of transit requests add another $15 billion or so–virtually every penny from regressive and economically inefficient tax sources.

So let’s ask:  If you had the opportunity to invest $30 billion in taxpayer dollars to build a modern, 21st Century transportation system to meet the needs of our growing state is this how you would raise it and invest it?

Not a chance.

The existing philosophical construct perpetuates the ridiculous notion that transit investments are separate–the responsibility of local taxpayers to fund on top of their gas taxes by a vote of the people.  Sound Transit 3, a vital link to the future, is granted $11 billion in incremental taxing authority in a cobbled construct of sales, property and motor vehicle taxes.  Kitsap County is asking for authority to raise their sales tax by 0.3% to construct a passenger-only ferry to cut the commute time from Bremerton to Seattle to 35 minutes (talk about economic development).  Snohomish County requests the opportunity to add 0.3% sales tax to fund their Community Transit for buses.

Yes, I’m a regionalist, urbanist, modernist, density-supporting advocate to the core, but I’m no less committed to a strategic framework that works for all statewide on the revenue and spending side of the equation.

The package ignores the painfully obvious:  Our transportation revenue sources are dying and it’s time to build a more responsible way to fund our entire transportation system.  The weakest link in the current transportation package isn’t poison pills, it is the lack of imagination in how to pay for transportation for the next generation of our state.  The lack of transparency and oversight of how transportation dollars are spent is also a legitimate concern from all sides.  That means everything from the deep-bore tunnel to the massive 167 project and other mega-projects on the table. The public has a right to be skeptical on all sides, and the Legislature’s package must rebuild trust not detract from it.

Let’s invest in the Metropolitan Revolution for our urban region and authentic economic development for our rural communities by building a stronger network of interconnectedness.  Silos of road projects dolled out by legislative district is hardly a visionary strategy.

To pay for it, we should seriously consider in this package some new financing approaches that are more economically efficient.  Let’s include the idea of a well crafted vehicle miles travelled program (not GPS-based but rather total annual mileage reporting). We should seriously consider a more comprehensive, regional network of tolls to pay for maintenance and operations of our roads.  We should seriously consider an incremental Puget Sound-regional gasoline tax that’s free of the 18th Amendment constraints to help fund trains, buses and other transit options.  We should consider the idea of strong public and private sector partnerships.  We should seriously consider a payroll tax on large employers to help fund targeted investments in transit so the companies’ own employees can get to and from work more efficiently–with the investments supported by business.  And we should seriously consider the idea of a carbon-pricing program where polluters pay–or at least receive less of a subsidy from taxpayers– to help fund our statewide transportation system into the next generation.

A transportation package that perpetuates status quo design of transportation financing and spending serves no one effectively.  Without an integrated investment approach that tackles rural, suburban and urban needs–and a creative approach to new, market-oriented and user-based ways of financing transportation–it’s just a glorified list of pork projects with the middle class getting handed the bill.  That may garner a handful of votes in the Legislature but it’s unlikely to work well for seven million people of Washington.

We are so much more as a state than what we’ve become.

Your partner in service,

Reuven.

Rethinking Public School Funding: Back To A New Future.

February 12, 2015

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The Washington State Constitution crafted in 1889 includes these mighty words in Article IV, section 1:  “It is the paramount duty of the state to make ample provision for the education of all children residing within its borders, without distinction or preference on account of race, color, caste, or sex.” This language is as unique as it is powerful.  We are the only state in the nation where our state constitution has this forceful paramount duty clause.  Our founders believed–and the common perception today–is that this strong state constitutional language directly translates into better educational quality and higher funding for our kids.

As chair of the Finance Committee grappling with funding of our state budget, I believe there is philosophical and policy value in raising the uncomfortable argument that our foundational premise may not, in fact, be true.

The state’s paramount duty clause was penned in the day of the one-room schoolhouse when we had a kindergarten through 8th grade system. The core purpose of Article IX was to establish state oversight of the system of hundreds of local school districts and to ensure good management of the public lands granted to the state by the federal government for the benefit of public schools. There is no question that framers of our state constitution thought this lucrative endowment would result in an unprecedented level of funding for common schools.

Since 1889 this philosophical assumption has not played out for real kids living real lives.

Today, early learning and higher education are more than ancillary, they are core to our desire to educate the whole child and whole person. We cannot have a system where “the paramount duty” is only K-12 and leave the other aspects of education as second class citizens. It doesn’t work for kids, parents, business or an educated civic society.

Washington is a “state” funded education system where most tax dollars are sent to Olympia to be distributed back to local schools and small local levies are intended for modest enhancements. The model has been so fractured, grandfathered, redesigned and reconfigured that it’s unrecognizable.

Our global challenge states—those with high quality of life that we aspire to compete with in constructive ways—have generally chosen to follow a different path through primarily locally funded school systems. The state’s role in those other states is to focus not on primary funding but on structural tax fairness and educational quality.

In our state, the romantic image of strong funding from the state government has not been realized. Political impasse over generations has created a system with unconstitutional funding structures, relatively poor student outcomes and great inequality.

A case can be made that Washington’s top-down approach disconnects schools from their natural, strongest base of support—local families and communities.

The paramount duty has not been fulfilled. Many factors have contributed to the disjointed, ineffective tax and funding structure we have today, a structure that virtually guarantees inequitable access and outcomes. Unfortunately, longstanding political and social constructs bar meaningful progress. Nothing, over 40 years of legal battles where the State has been consistently been told to address the inadequate and inequitable system, has really changed.

We are so much more as a state than what we’ve become.

There are, in fact, other models that might deliver on the Paramount Duty in a more fulsome way than our top-down, centralized approach.

A new model would have to have some critical elements:

  • The State’s responsibility is to provide education at all levels. Operating and funding common schools is a fundamental duty of the State but shared with local districts. The State must ensure equity, taking into consideration each schools property values, student need and the cost of implementing the state’s definition of Basic Education.
  • General and Uniform-The State must provide for a system of public schools and must define a minimum program that all districts offer. The implementation duty is shared with local school districts, which are authorized to provide funding and programming beyond the foundational program established by the district base regular levy, the state equalization system, and state law establishing minimum program requirements.
  • State must require school districts to collect a base regular levy, the amount of which will vary per law based on property values and student needs.

There are states with both higher funding levels and educational quality outcomes that are worth a look. Here’s how they do it.

Massachusetts

School funding in Massachusetts is meant to ensure that all school districts have enough resources to provide all students with a high-quality education, taking into account the ability of each local government to contribute financial resources. The formula directs more money to students who need it more and directs more money to districts that have a lower ability to provide local resources. The one, central job of the state government is to ensure equity for all its students through tax equity and thus ability to pay.

Step 1: Calculate district foundation budget

Multiply the number of students at each grade level and demographic group (Low-income, Special Education and more) by a series of education spending categories (Compensation, professional development, etc…).The total across all categories in summed and put into per-student terms. ELL, Special Education, and low-income students generate additional allocations.

Step 2: Required Local Contribution

Each municipality is required to contribute a defined amount in locally raised tax revenues. A uniform statewide percent of local property and state income tax is determined and each municipality must contribute that amount, at minimum, to public education.

Step 3: Fill in the gaps

The required local contribution is subtracted from the district foundation budget (Step 1). The state then pays the difference between those two amounts to the district to make their budget whole.

Step 4: Municipalities may contribute additional local support if they desire

The district budget determines the minimum amount needed to provide a high-quality education, but districts are able to raise local dollars beyond the foundation budget to enhance their local education system.

The state of Massachusetts pays for 42% of public education, while 51% comes from local sources.

http://www.massbudget.org/report_window.php?loc=Facts_10_22_10.html

Minnesota

Every student generates a base per-pupil allocation. This base allocation is further enhanced for students participating in the Free and Reduced Price meals program, the extended time program, and English language learner program. Additional funding is also provided through gifted students funding and alternative compensation revenue among others.

Alternative Revenue Compensation is additional money provided to districts that develop an alternative compensation model and get it approved by the state.

State covers about 60% of the cost of education with local revenues contributing 32% and federal sources contributing 8%.

http://www.house.leg.state.mn.us/hrd/pubs/mnschfin.pdf

Maryland

The Foundation Program provides base per- student funding for public schools in Maryland, $6,694 in 2010. The state pays districts a certain portion of the Foundation Program amount with a minimum state contribution per student of $1,004 or 15% of the Foundation Program base. Districts are required to contribute the shortfall between the Foundation Program base amount and the actual state contribution. The amount of expected local contribution varies depending on the average per-student wealth of the district relative to the state average.

Additionally, the Foundation Program base amount varies across districts due to the Geographical Cost of Education Index. This index adjusts for variations in the cost of providing education across the state.

Districts receive additional enhancements for low-income, special education, and English language learner students. The enhancement for these categorical programs is dependent on the relative wealth of the district. Property poor districts receive a higher per-pupil categorical enhancement for these programs than property rich districts

Guaranteed Tax Base Formula – Additional enhancements are provided to districts that provide more local funding than is required by the state formula; this Guaranteed Tax Base formula gives greater enhancements to lower-income districts.

The state of Maryland pays for 42% of public education, while 51% comes from local sources.

http://files.eric.ed.gov/fulltext/ED508459.pdf

Educational outcomes

The real point is to pursue a funding system that produces results for students. Washington ranks 30th in the nation in our high school graduation rate with 79% of incoming freshman graduating in four years. Minnesota ranks 7th in the nation at 88%; Massachusetts ranks 12th at 86%; Maryland ranks 16th at 84%.

The national average in 2011-2012 for per-student funding was $10,667. Washington came in below the average at $9,617 while Minnesota came in above at $10,781; Massachusetts at $14,844 and Maryland at $13,871.

Here is the data from each of these states in three areas (4th grade reading, high school graduation and post-secondary enrollment)

Subgroup WashingtonGrad Rate MassachusettsGrad Rate Maryland Grad Rate Minnesota Grad Rate
Black 68% 75% 81% 58%
Latino 67% 69% 78% 59%
Asian 87% 92% 95% 78%
White 81% 91% 92% 85%
Native American 54% 76% 87% 49%
ELL 54% 64% 54% 59%
Low-Income 66% 76% 78% 64%
Special Education 56% 69% 64% 58%
All Students 77% 86% 86% 80%

2013 NAEP Data

4th Grade Reading

Subgroup Washington Massachusetts Maryland Minnesota
Black 25% 21% 22% 21%
Latino 19% 20% 35% 23%
Asian 61% 56% 73% 44%
White 46% 57% 60% 47%
Low-Income 23% 25% 24% 23%
Non Low-Income 53% 62% 58% 52%
All Students 40% 48% 44% 41%

Postsecondary Attendance

Below is a chart showing the college going rate for students who graduate high school and enroll directly into a postsecondary institution

College Going Rate

  Washington Massachusetts Maryland Minnesota
2010 48% 73% 64% 71%

http://www.higheredinfo.org/dbrowser/index.php?measure=32

There is a clear, compelling and influential linkage between those states with locally-oriented education funding systems and both quality outcomes and higher funding levels.  It doesn’t mean they are right and we are wrong or there is only one answer.  It just opens the dialogue for us to put tough questions on the table about what type of modern, 21st Century educational finance system we want to build.

Ironically, perhaps we can implement the values of our state constitution to invest in public education more effectively by making a change to our constitution to reconnect our local dollars to local schools.

Perhaps we should use of the opportunity of the crisis—the McCleary lawsuit and public pressure to increase funding and improve outcomes—to reconsider our approach itself.

Your partner in service,

Reuven.

2015 constituent survey results: Follow the money

January 31, 2015

The good folks of our legislative district are engaged, educated and passionate about our state’s quality of life.  We have a 90% voter registration rate and, in a presidential year, a 90% voter turnout–consistently more than any other legislative district in Washington. In fact, given our district’s civic engagement, it’s hard not to enjoy the trivial and irrelevant point that in both 2014 and 2012 I received more votes than anyone else running for the Legislature in any seat statewide.  In appreciating our district, this year I’ve once again reached out with a comprehensive constituent survey to ask how folks are feeling about issues and ideas that matter on the front lines of life.  And this year once again I am deeply humbled by the profound sense of commitment to building us up as a community together.

As chair of the Finance committee, much of my work is focused around taxes and spending.

Here are the results of this year’s survey.

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I also received literally more than 500 private comments about important issues, ideas and concerns impacting people in their lives today, and perspectives on how state government can more effectively serve our community.  I am choosing not to share those individual comments since many have personal concerns, but I will share with you how impactful the comments are about tough issues.  There is a genuine sense in our district that we can be so much more as a state than what we’ve become, and we can invest more effectively in public education and infrastructure to enable our children to enjoy a quality of life we’ve enjoyed.  Those blessings are under threat as we as a state fail to spend the public’s hard-earned tax dollars as effectively as possible but also express a lack of willingness statewide to invest sufficiently in public services.

We are all the government.  It is not some distant  entity, it is all of us.  Our representative democracy is under threat, however, by the influence of money.  We must make government more responsible, more connected to real people living real lives and more engaged in solving the right issues.  I am torn in that on some days I am angry at the bureaucracy for losing site of how hard the public works to earn tax dollars, and other times when I feel the public has lost site of the need to engage in civic issues in constructive ways that benefit all of us.  The juxtaposition of these views is probably inevitable and healthy, but they also point to the need for active civic engagement at all times.  Vigilance is the price of liberty!

I am so deeply honored to represent the people of our district and our state.  Serving as a part-time citizen legislator is not easy or for the faint of heart, but it is rewarding.

Please share your thoughts and insights as we move forward during the 2015 legislative session.  Comment here, email me at reuven.carlyle@leg.wa.gov, follow me on @reuvencarlyle or ask to connect on Facebook.

Your partner in service,

Reuven.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coasting on fumes toward low taxes: Is this our vision?

January 4, 2015

orcasseattle

There is a public narrative that is so accepted it floats along unmolested by facts on the ground. It has become almost religious in its conviction and unquestioned among elected officials attuned to the public’s frequency: Washington is a high-tax state.

The evidence is overwhelmingly clear that this was the case…in 1995.

Today, we are on the march toward being a low tax, low service state. Of course the public feels as if Washington is a high-tax environment because we are irrationally nickeled and dimed in a fashion that doesn’t track with how people live their lives.

The real measure of whether a state’s revenue is too high, low or just right is whether it meets the needs of its residents. The people, through their voices in government and votes, determine the answer to that statement.

On the revenue side of the ledger, however, it’s useful to unwrap the neatly crafted political rhetoric and look at the data. Not that the data can survive the campaign season’s flamboyance, but it is worth examining if for no other reason than esoteric truth let loose in the world.

The General Accountability Office (GAO) recently released a jolting bit of news, well presented in the Washington Post’s GovBeat, suggesting that tax revenues as a percentage of gross domestic product will not return to the historical high reached in 2007, just before the recession hit, until 2058. Few states show the dramatic change of the “systems issues” identified by the GAO more than Washington.

In 1995, Washington state ranked 11th in the nation in the combined level of all state and local taxes based on personal income, the most commonly used metric by economists to measure tax burden, according to the U.S. Bureau of Economic Analysis, U.S. Census and the state Department of Revenue. State and local taxes include state property, sales, vehicle, liquor and other excise taxes as well as taxes imposed by cities, counties, and special purpose districts and every other category combined.

In 2011, the most recent year that data is available and released in 2014, Washington ranked 35th in the nation in the combined level of all state and local taxes, according to the bureau.

As House Finance chair, I am in no way arguing that any one ranking is perfect–neither 11 nor 35–but rather to make the policy and political case that our 19th Century tax structure is so economically inefficient and unfair that it does not map to our modern economy. The goal is not to be an outlier state at the high or low ends–this is one area where average is a smart target–but rather to be more intelligent by designing a modern system that grows and breathes with the taxpayer’s reality and our economy’s structure.

I maintain my personal philosophical conviction that the best state tax structure is low rates, broadly and fairly applied to everyone with few special breaks. We have the diametric opposite with high rates, narrowly and unfairly applied with hundreds of special tax breaks. It’s unfair to those without lobbyists and campaign cash. Washington’s reliance on a high sales tax, state property tax and gross-receipts business tax is, without qualification, unique in the nation and not in a handsome way.

How did Washington migrate from 11th in the nation to 35th in less than 20 years?

While many anti-tax crusaders argue that government spending is wildly out of control–and there is much legitimate criticism of how tax dollars are spent–the real issue behind the rhetoric is that four structural factors united in the past two decades to erode the state’s main tax base.

First, the sales tax has been carved out by the economy itself. This means, simply, that in today’s service-based economy about 66% of what consumers purchase is not touched by the sales tax, while only about 33% is directly taxed. In 1950, those numbers were reversed and around 1970 it was 50% to 50% (services to goods). And there is the small problem of on-line shopping, where many a sales tax bills are avoided.

Second, the people as the final arbiters of democracy have limited property tax growth to 1% by initiative.  Property taxes–initially designed to fund public education–are tactically off the table as a source of revenue growth without genuine structural reform, and each year continue to be a smaller and smaller portion of overall state taxes as larger economic growth occurs in other areas.

Third, the Legislature has essentially carved out and shifted the state’s main business tax, the gross receipts-based business and occupation tax (B&O), by creating hundreds of tax breaks for influential corporations, organizations, industries and economic sectors. In 2013 the state collected a total of $3.0954 billion in B&O taxes. Of this amount, the aerospace sector paid a total aggregate amount of B&O taxes of $71.8 million after all of the credits. The technology sector paid a total aggregate of $28.2 million in state B&O taxes after credits. The entire agriculture, timber and mining sectors in Washington–combined–paid $14.6 million in state B&O taxes after credits, according to the state Department of Revenue.

To be clear:  These sectors and industries–and the companies they comprise–also pay various sales, excise, property, unemployment insurance, worker’s compensation and other taxes and fees so calculating their true effective tax rate requires integrating all of the data.  Still, the B&O remains our state’s primary business tax and for many of the most profitable global companies the combined state effective tax rate is generally in the very low single digits or even negative range.

To put the corporate taxes in perspective on the spending side, five of the major industries listed–aerospace, information technology, agriculture, timber and mining– in the state paid a total of $114.6 million in state B&O taxes while the base budget from taxpayers to fund the University of Washington alone is $270.9 million.  The state general fund budget is $16.9 billion a year or $33.8 billion on a biennial basis.

When a tax break (i.e. tax preference, tax exemption or tax incentive) is adopted by the Legislature for a given company or industry, it is essentially a “tax shift” more than an actual reduction and in most cases the real philosophical losers are at least small businesses–the vast majority of our state’s 345,961 total registered businesses that earn $250,000 per year or less in revenues that don’t receive the preferential treatment.

The cost of granting the tax breaks also disappears into the political mist. In the decade of the 1990s, for example, the Legislature created 103 new tax preferences of the combined 655 total we see today. The total fiscal impact today in foregone revenues is $1.5 billion from those preferences alone. Nowhere does that cost show up on the books. We have created a system where tax breaks are “off-budget” until and unless they are set to expire, and only during the political process of renewing the tax break does the “opportunity cost” of how those dollars are spent surface in the budget process.

Fourth, the Legislature has directed increasing state tax dollars to local governments during this period using a variety of tax instruments that have the net effect of shifting dollars to the local level.  Also, nearly 1,800 special purpose taxing districts, such as fire, library, cemetery, flood control, hospital and transit districts, have been created at the local level, so local governments in aggregate now account for a larger portion of revenue growth than the state general fund. This is the policy equivalent of a tax preference for local governments when those dollars would previously have been dedicated to the state’s general fund budget. In many cases, city and county governments are acting as agents of the state, so the transfer of taxing authority is naturally commensurate to the new service obligations. Irrespective of the degree of merit, however, it has taken a major toll on general state revenues.

In all four of these categories there are frequently rational policy reasons for the actions taken. This is art not science and there is no one mystical answer. The challenge arises with the convergence of the four long-term, structural problems when we face a perfect storm of nearly 20 years of tax erosion of the state’s main budget.

The result? A court order to increase funding for public education; a court order to increase funding for mental health services; disastrous cuts to foster youth and children’s services; the doubling of tuition for college students; poorly paid teachers; insufficient investments in Puget Sound cleanup and so much more.

All of these dense policy issues fail to capture the human impact of morally bankrupt tax system. By any standard our tax system has become the most unfair to the middle class and low income in the nation. According to the Institute of Taxation and Economic Policy, the lowest 20% of income earners in Washington–making an average income of $11,500 per year–pay 16.9% of their income in state and local taxes. The national average for this group is 11.1%. The top end–the proverbial one percent earning average income of $1.1 million per year–pay 2.8% of their income in combined taxes in Washington, dramatically less than the 5.6% national average.

We can no longer continue down the same path of tinkering with a broken, unfair and economically inefficient tax system that is divorced from our economy and fails to serve our communities. The 20-year trend shows absolutely no signs of relenting.  In a handful of years we are likely to be 40th in the nation in the combined level of state and local taxes based on personal income.  And a few years beyond that we can expect to reach 45th.  Is that our vision for ourselves? Are we so caustically anti-tax that we would close the doors of our colleges to our own children?  Would we close foster homes for our most vulnerable?  Would we allow traffic to suffocate our industrial economy and our quality of life?

In an era of divided government, let’s put labels aside and design a modern tax structure that drives us into the future. When it comes to taxes, let’s move toward the national average by building a healthy system that grows with our real economy not our tainted politics.

It’s time for tax reset of our antiquated, outlier system that is responsive to our community needs and built for a 21st Century economy. That’s not a veiled euphemism for an income tax or a shallow retreat into old rhetorical battles. It’s a call for courageous honesty both to raise sufficient revenues and to demand rigorous, authentic and fierce accountability for how those hard-earned tax dollars are invested.

We are an educated, entrepreneurial, innovative state.  We are also coasting on fumes from a time when our tax system mapped more intelligently and capably to our role in the global community.

We are so much more than what we’ve become.

Your partner in service,

Reuven.

Want a tax break? Publicly share your “pay as you go” ideas.

December 2, 2014

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“Pay as you go” is a budgeting principal that has been tried in Congress and in many states and failed in almost as many places.  It’s popular on the left and right during good times but understandably struggles during difficult economic times.  It was seen as important to balancing the budget in the 1990s under divided government, and the concept has had starts and stalls since, mostly when political pressure forces tough decisions “off budget.”  The concept is simple:  Force a legislator to formally identify a source of funding (revenue increase, spending decrease or combination thereof) for her or his new spending idea whether a tax expenditure or appropriated spending.  The real reason for the failure, of course, is that publicly identifying a way to pay for a tax expenditure or spending increase is hard work and makes double the enemies one often needs to get a deal done quietly.

A strong case can be made that pay as you go makes the most sense at the state level where we don’t print money and must balance a budget each biennium.

Ultimately budget writers are forced to institute a pay as you go plan behind the scenes and in the back rooms of state government.  We line up the list of spending proposals (good, bad and ugly) from the base level budget and our colleagues and juxtapose it against available or new revenues.  And we try and make the two sides of the ledger match by moving the lego pieces around until a package balances financially and politically.

Four years ago I posted a blog entry about the importance of a “pay as you go” approach in the Legislature.  As a back bencher the idea was naturally unceremoniously ignored.  Now, as chair of the Finance Committee, I have slightly more institutional authority and credibility to implement elements of such a policy, and I intend to do just that because it brings actual sunlight into the budgeting process.

For tax incentives, exemptions and preferences that come before the committee in 2015, I intend to respectfully ask proponents to publicly make specific recommendations for how to fund their individual proposals.  I do not mean this to put unnecessary or inappropriate pressure on guests or to make individuals uncomfortable, but I do intend to make it clear that each request for tax expenditures does require a source of financing.  The pipeline of tax expenditures is not innoccuous from a fiscal perspective and it shouldn’t be assumed that it is simply a matter of priorities.  Tax expenditures are appropriations just as much as appropriated budget items when they literally reduce revenues.  That is not a value judgement but a fact of budgeting life.

Recently, Governor Inslee outlined his vision for extending the sales tax on electric vehicles.  This is a legitimate public policy issue and warrants a thoughtful public discussion about the economic, environmental and transportation policy implications.  While I strongly support the importance of migrating to a non-fossil fuel based transportation system, we do have a difficult position in our obligations to secure adequate funding for the 2015-2017 operating budget.  The total fiscal cost over the coming four years of the plan stretches to $60 million in out-of-pocket costs.  There was media coverage of the discussion of Inslee’s plan and my thoughts on the issue here and here.

The cost of tax expenditures has reached a tipping point of pressure especially in light of the Supreme Court’s ruling holding the Legislature in contempt for failing to amply fund public education. It’s critical that proponents from the Governor to legislative colleagues to lobbyists to CEOs appreciate the importance of the opportunity cost of a tax policy decision.  I said of the Governor, “If he wants this tax break I respectfully invite him, like all others in Olympia, to propose a specific, off-setting revenue source or spending cuts to pay for it.” If it’s good enough for the Governor and budget writers behind the scenes, then it’s good enough for the public, by the public, in the public arena.

Your partner in service,

Reuven.

Inside the flow of the political year

November 16, 2014

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Before the campaign season fades and the governing noise of the 2015 Legislature begins, it’s valuable to use this brief window of time to reflect on the flow of the political year.

In public life one quickly realizes that there is an inside game to government and an outside game.  In the inside game, there are rules of engagement, codes of behavior and expectations.  A central challenge and decision facing most legislators is whether you have the disposition and orientation to play the inside game well enough to deliver for your constituents, community and state without losing a sense of self.  Or whether you will find yourself at odds with the general way of getting thing done and, most likely, discover a lack of success at passing substantial legislation.  There is no one pathway but playing only the inside game, or only the outside game, seems to rarely work.

One of the central tenants of the inside game is to pay close attention to the intangible, insider-driven flow of the political year.

The Legislature meets for 60 days sessions in even numbered years and for 105 days in odd numbered years.  One major reason is that legislators want to head home quickly by mid March during election years, and leave the complexity of budgets for the marathon 105 day sessions during non election years.

Going into an election year, there are many incumbents running for reelection as well as many open seats.  Most of the 49 legislative district seats are, as in Congress, relatively ‘safe’ for one side or another and only a handful are truly ‘swing seats’ that could go either way depending candidates, turnout and campaign strength.

First time candidates of both parties begin to engage in a dance of political intimacy for voter support and campaign dollars.  It begins in earnest by April, May or June of each election year when candidates start answering requests from interest groups to fill out dozens and dozens of questionnaires that attempt to assess their views on the organizations’ priority issues.  The Seattle Times editorial board picked up the cause of asking candidates to make their special interest questionnairs publicly available for all to see.  I assume everything I say and write while in public office is public, so it certainly doesn’t bother me, but there are many who disagree.

For those endorsed by an interest group, the fundraising success begins to increase.  After you have finished with friends and family, the calls begin to lobbyists, advocates, donors and coordinating fundraising from among like-minded supporters.

In the inside game, lobbyists–business, labor, environmental, social services, health care, civil rights and much more–are extremely influential in the determination of who will be endorsed by whom.  A candidate meets with lobbyists over coffee and auditions their story, pitch, public policy knowledge and political acumen.  Lobbyists look for clues to who will win a race, such as whether a candidate has lost weight or sports a tan–signaling many hours spent doorbelling in the summer sun.  Campaign contributions are often given in person over coffee, so the lobbyist can strengthen the relationship with the candidate further.  Public Disclosure Reports track money raised, which is scrutinized by insiders.  Who gave how much to whom?

Business oriented lobbyists will select the more ‘pro business’ candidate in a race and campaign dollars will follow if it is a priority race in a priority district.  Labor-friendly legislators will focus on labor endorsements and resources.  It quickly becomes clear who is on what side of most issues.  Newspaper endorsements, Municipal League ratings, hard work and other factors will come into play as the primary comes and goes and the political establishment reassesses who is expected to win in November.

After the long campaign season comes victory or defeat.

This year the obscene amount of money spent by insiders and outsiders resulted in virtually the lowest turnout in decades, a GOP sweep by those who did bother to vote, and a question of how divided government will work on a board level in our state.

Still, this year as after every election day, victors have about two months to prepare for the legislative session.  During that time dozens of additional meetings over coffee will occur with those same lobbyists who weeks before handed over a campaign contribution in the same coffee shop, to present the agenda for the next legislative session on behalf of a client or interest group or simply to strengthen the relationship further.  Legislator-elect members are, of course, grateful for the support received.  Often interest groups who backed the losing candidate will also seek meetings to build a new relationship.  Sometimes they, too, have a change of heart with the newly elected candidate and make substantial campaign contributions after the election to help pay off any campaign debt the victor may still have.  Those who lost often struggle to pay off campaign debts.  Meanwhile, seasoned incumbents are busy at work drafting bills in preparation for the session and meeting with interest groups with proposals in hand.

In politics as in life, it’s about relationships and this time is important to strengthening ties in preparation for the difficult policy work ahead.

The legislative session begins the second week of January.  Since it’s always an odd-numbered year following election season, lobbyists, activists, staff and legislators prepare for a 105-day-session at best.

Within days of the new session and throughout the session, as new legislators learn how to sign and introduce legislation, lobbyists often circulate legislation for support, asking legislators to assist with their priority bills.  As the session continues, tensions inevitable rise as controversial votes inch forward and decision time looms.  Vote counts of who stands where on important bills–formal and informal–occur as the dance of the legislative process flows through the session.  Those legislators who remained quiet or sent mixed signals often finally need to take a stand.

Major and minor bills pass through House or Senate committees, floor votes and on to the governor for signature, or they die somewhere along the process.  The overlay of politics encircles it all.

Relationships grow, fray and mend, as legislators, staff, lobbyists, activists learn how each other dances.  The uncomfortable side is that the dance changes depending upon whether it is campaign season, interim policy season, or the legislative session.

After the legislative session comes to an end, and everyone rests briefly, the lobbyists and interest groups begin their “legislative session report” of the year.  A ‘scorecard’ is developed for organizations from business and labor to social services and more.  Virtually every major group develops a scorecard of how legislators voted on the issues important to that group.  Most Republicans get strong scores on most business group scorecards, and most Democrats get respectable scores on labor-oriented scorecards.  There are exceptions, of course, but fewer than might be expected.

In the interim between the long legislative session and the next year, committees work hard to develop new agendas, often in partnership with those same interest groups.  Sometimes the agenda is set from the inside and sometimes from the outside.

The inside game is, by its very nature, interested in the status quo and preserving the institutional grip of current interests.  It is often the outside game–from initiative pressure from stakeholders to media, normal public pressure and particularly motivated interest groups–that pushes for change.

As long as we may serve in our part time citizen legislature our job as legislators is, in my view, to come to work with the urgency of citizen activists and oversee the people’s interests and not become reticent to speak out, engage, challenge and push for the public good.  Advocates and interest groups are good people doing their jobs, but the more they are allowed to set the political and financial agenda the more the inside calendar ultimately dominates the policy agenda.

The two worlds–inside and outside– exist in a vibrant, interactive, nuanced, evolving tension that is democracy itself.  No bill is certain if its genesis is inside pressure or outside pressure, but it does shed a bit more light on the journey.

It is also the reason I feel more strongly than ever that citizen legislators must not defer to the institutional grip of the professional establishment–staff, lobbyists, agency officials and others–but take our role as independent arbiters of policy decisions seriously.  Stronger disclosure rules, more transparency and more public linkages between the money flow and legislation is critical to educating the public about the implications of the inside and outside games.

None of this is to remotely suggest that bills and agenda items from insiders are inherently bad and that outside agenda items are inherently good or the other way around.  But it is not  unimportant to look for the invisible fingerprints on a bill and ask the question, “Where did this bill come from?  Really.”

Your partner in service,

Reuven.

 

 

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