In Washington State we have an initiative this election cycle called I-1098. This initiative would impose an income tax in the state, while at the same time reducing the state property and B&O tax. In a move that has put me in the minority with my more liberal friends, I personally oppose this. This is not to say I don't agree with the general point that Washington's tax structure is regressive and that it does not serve the needs of a state to have a reliable means of income.
Washington State is primarily funded by property and sales taxes with some money being provided by a B&O tax. With this structure it is very difficult for the state to accurately anticipate tax revenues and budget accordingly. The result is that during good times, we have a surplus (and as a result start hearing from republican politicians that we need a tax cut), and and bad times we have a deficit. What compounds the problem is that we do all of our budgeting on projections. When this is based on sales tax, that creates a major problem. It's much easier for a consumer to get spooked and stop spending, which drives down sales tax revenues, than it is for them to stop working. Certainly, when the economic situation gets bad enough you'll have job losses, but it's not the same kind of volatility you get with sales tax revenues.
Additionally, when I was unemployed for a period of time last year, I took the initiative to try to start my own business. Imagine my surprise when I learned that not only do I have pay state B&O taxes on my profit, no, I have to pay them on everything! It was frightening and confusing and stopped me from trying to expand my business. The B&O tax is a major hurdle to building a business in Washington State and must be replaced.
That said, I am completely opposed to I-1098. First and foremost, it's unfair. If you are going to levy an income tax, something that I support for a variety of reasons, you do so across the board, not just on the rich. AND more importantly you remove other taxation. All 1098 does is reduce other taxation, it reduces B&O but does not eliminate. It reduces the state portion of the property tax but does nothing for the local portion. It reduces the state sales tax but does not remove. So now we have 4 different tax schemes as opposed to 3 and due to the idiotic targeting, we encourage higher income earners to leave the state. Washington has to do something with it's regressive tax structure that doesn't allow the state to adequately predict income... but this... isn't it... and this is from a liberal!
I am curious as to why you think Washington's tax structure is regressive? The taxes you mentioned are all pretty flat with the B&O being slightly progressive.
ReplyDeleteI'm also interested to hear why you think it is easier for people to stop spending money than it is for businesses to lay people off. Sales taxes, I think are a little more volatile than income taxes, but they are also less extreme (lots of rapid but smaller changes in revenue as oppose to somewhat slower larger ones).
I do agree with your main point and the largest problem I have with the many other taxes is the overhead. The B&O tax, for example, was no direct financial barrier to my business as my totals fell far below the minimum and I therefore didn't owe. It was a large administrative and indirect cost barrier as I had to both do research and hire an accountant to file the paperwork and confirm it was done correctly. The state had to spend money on forms, mailings, processing, etc. So this tax cost both me and the state money, which makes little sense.
What tax would you propose which with tax the rich without encouraging them to leave the state?
Well I think they miss the point of the post. Which is Washington needs a less regressive and more predictable source of income, but that this isn't it. For one thing it's focused solely on the rich, which as we've discussed before is a redistribution of wealth, and neither of us is in favor of redistributing wealth regardless of where it goes.
ReplyDeleteAlso a sales tax is fairly regressive as it's a larger percentage of poorer people's incomes and required and necessary goods for living aren't exempt (sure some are, but not enough). I agree with your points on the B&O tax and mentioned as much in the post. The problem is the RAPID yet smaller changes.. it makes it impossible, as has been observed the last few cycles to accurately predict the incoming revenues and thereby plan.
Generally businesses won't lay people off as long as their still selling or anticipate selling their products. They will accurately plan out their staffing needs based on real sales and real world conditions. I on the other hand am much more likely to be responsive to fear. For example, Let's assume I am in a secure position... the likelihood of my getting laid off is minimal, however, my friend gets laid off. This scares me. At this point, for no real financial reason I can suspend spending with no consequences to myself other than I have to wait for the iPad... sucks for me. However if a business lays me off they have to contend with the opportunity of the lost productivity and the possible costs of bringing someone new up to speed when they need them. Additionally, they won't lay people off if they can help it when they have a deliverable that may slip due to lack of staff. A general consumer has no such concerns and therefore can make a decision without factoring these costs.
I would support a flat state income tax with welfare and unemployment exempted so long as other taxes are removed. The biggest problem I have with 1098 is it leaves all current taxation in place and then adds another one. That means that all 4 will rise given time. While I feel that government does have a role to play in funding a social safety net, education and some infrastructure maintenance and improvement, I don't think it should -always- continually expand. Also, I am for the simplest way that serves the need of funding the government.
Sales Tax is complex due to the various deductions and planning, (i.e. is that food taxed or not, etc.) The B&O tax is poorly implemented and poorly enforced. Property taxes makes sense for local jurisdictions and perhaps should be limited to that but they can be part of the whole solution so as to not put all state funding options in to one option. I end by saying I'm not opposed to an income tax generally, but I think this is a poor implementation as it targets a single group of people with a whole new tax. We can talk about the progressive income tax, but generally everyone gets hit with INCOME TAX, and depending on your income you pay more or less. In this case those below 200,000 are exempt. It's clearly targeted at the upper middle class and rich, and class targeting of tax is too much. Income below a small amount is exempt in the federal income tax... but really that's because up to a certain amount taking that tax isn't worth it, you'll knock some people who would otherwise make it into the welfare rolls and that doesn't make sense. A <200K exemption is close to class warfare and doesn't make sense.
I agree with you that the proposal is a bad one, if not for all of the same reasons.
ReplyDeleteI'm still a bit puzzled by how you believe the sales tax system is regressive. Sales tax would only be regressive if poor people spent a lower percentage of their income than wealthy people, which is not generally true. Still, it is not a significant issue since I believe in a somewhat progressive tax system and agree that Washington's is fairly flat.
As for your comments about business layoffs vs consumer spending adjustments, I think you exaggerate the difference. Certainly businesses will be slower to lay people off and slower to higher people than consumers are to stop spending, and if we were looking at budgets on a weekly or monthly scale I would agree with you, but on a quarterly and yearly scale, I think that the rapid changes in the consumer behavior are mostly smoothed out and would more closely match the business reactions.
Again I feel that you are looking at only part of the picture, the side you point out about businesses concern for lost potential revenue is valid, however, you overlook the cost savings of the layoff. Yes, businesses will be less reactionary, you might make financial decisions for weeks and months and the business will make it for quarters or years. The business decisions, however, will also be much larger. Is having much larger slower peaks and troughs more stable than rapid shallow ones? I don't think so.
Finally I agree with you that having an income tax targeted at $200,000 is ridiculous, but mostly because it will not raise much revenue and will hurt only those on the low end. The wealthy can afford to work many possible loopholes to avoid paying Washington those taxes without having a major impact to themselves or their business (they might have to buy an out of state house or lease an out of state office or something similar), but many small business owners will get hit with that tax. That will not only raise far less than the expected revenues, but it will have a very depressive effect on small business.
I don't see how small business owners get hit with these income taxes.. Could you explain that more thoroughly? I think you overstate the impact that higher income taxes have on business. I have heard references to 3% of small businesses will be affected. And perhaps it's due to how they file. I'm interested on why you think it'll have a 'very depressive' effect on small business.
ReplyDeleteAlso, Looking at the size of the consumer base, and how we get most of our state income from sales taxes and not business taxes, I don't think there is an exaggeration of impact. You seem to create a false choice between sales taxes and business layoffs, or the fact that income taxes will create layoffs. Seems tenuous.
Small businesses owners are hit by these taxes because many small business owners are sole proprietorships which file their taxes as personal income. So the personal income tax is taxing the business revenue and not the individual.
ReplyDeleteYour number is correct, about 3% of small businesses will be effected, but it is also true that around 50% of small business revenue will be effected. The reason for this disparity is that the vast majority of registered small businesses are tiny side ventures which make little to no money. The top 3% of small businesses make about 50% of small business revenue.
As for very depressive, it obviously depends on what the tax rate is. Certainly you can have a small increase in taxes which will have a smaller negative effect. What I meant to say was that pulling that money from business will have a greater depressive effect than the stimulative effect created by giving it to the government.
I don't understand your last sentence. What choice am I defining?