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The political pressure valve and tax reform

October 27, 2013

The political history of Washington’s struggle to design an intelligent tax structure reads like a Steinbeck novel–or a graduate school thesis.  The fierce urgency of the radical, unstable politics of the 1930s united land-rich but cash-poor rural farmers–unable to pay heavy property taxes– with low-wage workers in the city to successfully push for a state income tax against the powerful financial interests generally in control of the politics. The electoral success was short lived due to court and political interventions, and the status of the most regressive system of taxation in the nation–50 out of 50 states–stands unmolested in the corner like an uncomfortable Civil War statue in the South.

Since the Washington Grange led our state into battle for a progressive income tax, the tide of history has washed over our collective consciousness about economics, elections and policies. It is as if the political subculture decided it was ‘too close for comfort’ and they had better rethink whether it is safe or wise to allow such coalitions because real change could happen.

How did the big tent coalition of activist small business, labor, organized poor rural farmers and city workers–that at one time seized control from both big business and big government–become but a dusty footnote in history books?

Perhaps one answer lies in the romance and mystique–authentically, powerfully and emotionally rooted in Jeffersonian history–that political support for ‘America’s family farms’ requires absolute fidelity to the notion that agriculture is a particularly special class of economic interests. The image of the multi-generational family farmer alone is sufficient to silence critics or prevent the dialogue from surfacing in polite company that perhaps we should modernize our approach. The wave of industrialization and urbanism that defines our nation since Alexander Hamilton and Thomas Jefferson first fought the intellectual battle is as if a dream when it comes to the mystique of the farmer.

And so, not without a rational basis in understanding politics we, like many states, have effectively and figuratively carved out most agricultural interests from paying any meaningful or measurable level of taxes in Washington.

The political pressure valve that represented at least 50% or more of that old coalition–the agricultural heartland of our state–was released.

Yet the story goes deeper. The structural challenge begins to grow as we reflect upon the fact that we as a state have also embraced these romantic notions of industry in the areas of timber, aerospace and key elements of information technology.

The pressure valve released further pressure.

Thus, whether we are comfortable acknowledging it or not, these four industries and elements of others of our economy–notably ‘services’ rather than ‘goods’–are essentially released from the standard taxation model. Many of the preferential tax exemptions, rates and credits in the state have the effect of carving our one or more of these industries to some extent.

I have long believed that the most effective tax structure is one that has low rates, broadly applied, with few exemptions, that can have the effect of ‘depoliticizing’ tax policy. Instead, we have the opposite: A highly politicized system that rewards powerful interests with the ability to seek exemptions.

Each and every year interests descend upon Olympia to seek additional tax exemptions, credits and rates because our current system does, in fact, punish many industries in economic inefficient ways. And so their ‘business case’ is strong when they ask for relief from the negative impacts and externalities of high sales taxes and high B&O rates.

But the ‘cost shift’ from those with the ability to be carved out to those unable to make the case grows year after year.

I maintain hope and genuine optimism in the sense that many traditional economists share a view that low rates, broadly applied with few exemptions has a better chance of mirroring our state’s economic growth and structure as it changes and evolves. The tipping point of pressure is nearing because we have so little room to continue to carve out additional industries. Those businesses and individuals who feel the impact of that cost shift are restless.

The political coalition of the 1930s that seized control of our state’s political discourse demanding equity and efficiency in our economic system imploded and exists no more.

Low wage, low skill, service-oriented workers in the city had no one to release the political pressure valve for them.

These workers in the service sector enjoy no such romantic image as high tech workers, aerospace employees or of course family farmers. There is no elevation of their unique role in history or society. Low wage, low skill service workers are the untouchables who seem in popular lore to offer less than they can contribute–despite the fact that so many in each generation are ambitious immigrants who work tirelessly to build a better life for their families.

Today, Washington stands alone atop the regressive pyramid with a wildly inefficient system of revenue that taxes goods not services and shifts the burden to small businesses and low income individuals without political might. It is not the fault of farmers, high tech workers, aerospace employees or timber workers that they have managed to carve themselves out of a full tax obligation as anyone would want to be a part of a better system.

But it is incumbent upon all of us to acknowledge that our system today is bad economics–and unjust social policy– because it shifts the burden to small business in politically weak industries and to the poorest of the poor individuals. It is unsustainable and, at some point, it will likely implode.

We are now in the bottom quartile in the nation in the per capita level of taxation in combined state and local taxes. Is that too high or low? It really is a question of whether we can build the level of public services our citizens require. So the more meaningful question is: Do we have the level of services and quality of life that we seek together?

I believe we are on the march toward being a low tax, low service, low quality of life state. The goal is not more taxes but a smarter system of taxation and revenue collection that accurately mirrors our 21st Century economy and does so in a socially just manner.

One day–perhaps soon and perhaps in many years to come–Washington will build a smarter tax structure that better maps to the 21st Century because it’s good economic policy.

The authentic answer: A modern, globally competitive structure that lowers rates, broadens the base, eliminates exemptions and depoliticizes our political system of carve-outs.

We are so much more than what we have become.

Your partner in service,

Reuven.

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6 Comments leave one →
  1. Bruce C. Mitchell permalink
    October 28, 2013 12:39 am

    A hard job, at the heart of the challenge to politics as an institution of our society, but essential to the viability of the state and the nation. As change accelerates in the 21st century, balanced financial resources become increasingly crucial to capacity to sustain learning in effective schools, and to act in times of need. Broken schools and disintegrating bridges make the future far more of challenging than it needs to be. More effective communication with the public at large is needed. How can the a better route into the future be made desirable to mindsets like those of the financiers, blind to larger issues, who led us into the Financial Collapse of 2008?

  2. October 28, 2013 2:48 am

    Bruce, recently I read a reference to much of Wall Street as ‘frivolous and unnecessary. We need to take away the power of the gambling club, Reuven is taking a stand. It is notable that Boeing has warned us for decades that ‘their employees’ needed top schools and roads. Now they are leaving and the blind governor offers them more exemptions.

  3. Linda Seltzer permalink
    October 29, 2013 8:35 pm

    There is currently a petition on moveon.org stating that all tax exemptions in WA State should be listed as expenditures (i.e. tax expenditures) in the budget. What comments do you have on this idea?

  4. November 7, 2013 9:27 pm

    Listing tax exemptions as expenditures sure sounds right. It’s unfortunate that we feel the need to give another round of preferences to Boeing just to keep them here.

    It would be great if every tax expenditure automatically expired after a couple of years and had to be debated and voted on again after that.

  5. Terry Taylor permalink
    November 10, 2013 4:50 pm

    Why is it that the Legislature can drop everything to be at the beck and call of Boeing but continues to ignore the structural deficit and educational (transportation, etc.) funding problems of the state? I, for one, have no interest in racing South Carolina to the bottom. If only you could show the same enthusiasm for our needs rather than those of large corporations who are cutting benefits while paying excessive salaries (untouched by taxes in WA) to executives.

  6. mickey permalink
    November 12, 2013 10:16 pm

    Whad’ya know? Another politician proves to be a total fake.

    Mr. Carlyle, you’ve spent the last year presenting yourself as some sort of paragon of virtue when it comes to reigning in outmoded and unnecessary tax breaks for corporations. And yet, the first chance you get to prove your worth…you fold like a lawn chair. In fact, you were one of the main architects of the recently rushed legislation giving Boeing nearly $9 billion in new tax breaks…tax breaks that are locked in until 2040! Most of us will be dead by the time those tax breaks expire. Congratulations. I guess Boeing didn’t adequately demonstrate to you and your spineless cohorts just how disloyal the company is to Washington after the LAST piece of blackmail they threw at us in 2003. After they had already moved their headquarters to Chicago. How’d that South Carolina, China, Italy trifecta of Dreamliner manufacturing work out for us?

    Your outrageous multi-billion dollar giveaway to Boeing sent one clear message to the machinists’ union and the taxpayers: “Go to hell.” Believe me, we get the message. You should be ashamed of yourself, but, of course, you’re just another politician who talks the talk, but when it comes time to walk the walk on repealing corporate welfare, you cower.

    Boeing is a Fortune 500 company that pulls in $85 billion in revenues and $4 billion in profits annually. CEO Jay McInerny made more in bonuses last year than most people will ever make in five years of wages.

    As Terry Taylor already noted above, we have important programs that need to be funded in this state — education and transportation among them. Mr. Carlyle, does the McCleary decision ring any bells??? Funny how the legislature quickly scurried into position as soon as Inslee and the Boeing brass whistled…but you all neglected to deal with transit funding for Metro. What a failure. Now King County will raise MVET — again — to cover transit costs that seem to rise exponentially, even as bus routes are slashed.

    You’ve wasted all this time and all this blog space pretending to be something you’re not, pretending to deal with an issue that has plagued us for decades. With this one payoff to Boeing, you have shown your true colors. And you’re not looking very pretty today.

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