SOUNDOFF: Income tax would hurt state

Faced with a recurring state budget crisis and voter opposition to new tax increases, some policymakers and interest groups are pushing for a complete overhaul of our state tax system. High business taxes, a slumping economy and a severe budget shortfall are generating speculation that our current tax system can no longer pay for an expanding public sector while also allowing the economy to prosper.

Last year the legislature created a Tax Structure Study Committee to look at possible ways to reshape our state’s tax system. A state income tax could be among the committee’s recommendation when it releases its final report in November.

Washington is one of only seven states that do not tax citizens’ incomes. Doing so would fundamentally alter the state’s tax structure, changing it from one that mainly taxes consumption to one that also taxes productivity.

Before taking such a drastic step, it is important to look at the experiences of other states to learn if an income tax makes sense for Washington.

Washington Policy Center, a member of the committee’s advisory group, is researching the effects of different tax policies on state economies. Each state levies a different combination of taxes on the people who live, do business or travel within its borders. These different types and levels of taxation have a profound impact on the actions of residents and businesses and can significantly impede economic growth. More than any other type of tax, an income tax can stifle a state’s economic growth and limit people’s take-home income.

Long-term economic trends in states that adopted income taxes are troubling. Since 1967, nine states have imposed an income tax. In those states, government spending growth increased an average of 41.8 percent and personal income growth decreased an average of 64.2 percent after enacting the new tax. If an income tax causes the same trends to occur in Washington state, government spending would increase by an inflation-adjusted $48 billion over the next ten years. Over the same period growth in personal incomes would be reduced by some $210 billion. By 2012, the average salary of Washingtonians would be $5,740 lower than what they would expect to earn without an income tax.

A comparison among states also shows that states without an income tax consume a significantly smaller portion of their citizens’ earnings and tend to be better stewards of the taxes they do collect. In states that do not have an income tax, taxes account for an average of only $89 per $1,000 of household income. In contrast, the eight states with the highest income tax rates collected an average of $131 per $1,000 of household income.

An income tax will have other important effects on the Washington economy. Our research shows that income taxes reduce state competitiveness, add cost and complexity to the tax code and reduce the incentive for people to work, save and invest - all vital components of a vibrant, prosperous community.

The Washington economy is already struggling to recover from a prolonged agricultural, industrial and technological downturn. Rather than increasing the tax burden by enacting an income tax, state policymakers should consider sensible reforms that foster growth and economic opportunity for state residents. Some recommendations include:

Reducing tax complexity by eliminating special interest exemptions and multiple, fluctuating tax rates. Washington small business owners cite tax complexity as a major barrier to their ability to succeed.

A reduction in overall tax rates to stimulate growth and development. By limiting tax exemptions, the state can reduce rates for all taxpayers, regardless of industry, occupation or special interest.

Restore limits on the growth of government spending. Washington’s now-defunct state spending limit reduced state government spending increases from an average 12 percent per biennium from 1985 to 1993 to just over 8 percent in the years following.

A state income tax is not the answer to Olympia’s budget woes. The experiences of other states shows that an income tax would reduce personal income growth increase the rate of government spending and reduce the competitiveness of the business climate. Instead, lower tax rates and an easing of the rapid expansion of government would help end the constant sense of crisis in public financing and bring some relief to hard-pressed taxpayers. People could then spend more time working themselves and their families and less time working to pay for government.

Eric Montague is a policy analyst with the non-profit Washington Policy Center.

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