This Washington

Freshman Democrats Introduce 1 Percent Income Tax Proposal

By Erica C. Barnett January 5, 2012

Two freshman Democratic legislators, Rep. Chris Reykdal (D-22) and Sen. David Frockt (D-46), rolled out legislation today that would completely eliminate the state's 1.8 percent business and occupation (B&O) tax, lower the state sales tax from 6.5 percent to 5 percent, and offset the loss in revenue with a one-percent tax on adjusted gross income and on gross profits for businesses---the highest income tax that can be mandated without a vote of the people

Reykdal and Frockt estimate that cutting the B&O tax would cost the state $3.1 billion, and that lowering the sales tax would cost $1.5 billion. Those costs would be offset by an estimated $1.6 billion from the new sales tax on services and $3.5 billion from the new income tax. The new revenues would go into the Education Levy Trust Account, which pays for higher education---hence the proposal's name, the Higher Opportunity Promise for Education (HOPE) Act.

The proposal would also extend the sales tax to professional and personal services like advertising, legal help, veterinary services, and salons---an idea that has been controversial here and in other states.

In a letter, Reykdal and Frockt argued that "If government needs to be reformed, than the mechanism that funds that government should also be part of that conversation particularly since our state is funded by a tax system unique from virtually every other state in the union. We believe that our tax code cries out for holistic reform. It is a system that is biased against startup businesses struggling to make a profit. And, of course, it is highly regressive."

Although the web site promoting the proposal says it would "slightly shift the [sales tax] burden from goods to higher end services (legal services, accounting services, consulting, etc.)," the new tax would actually apply to all services, including not just high-end services but more widely used services like auto repair, movies, cable TV, and salons. Overall,  the progressive Economic Opportunity Institute says a tax on services could end up being "slightly regressive," depending on which services are taxed. However, EOI also notes that taxing services could  raise $2 billion annually, according to the state Department of Revenue.

Reykdal acknowledges that taxing services is "controversial," but says that no one has ever proposed both eliminating the B&O tax and lowering the sales tax in addition to taxing services. "You can't sustain the state budget, at some point, without lowering rates and expanding" the sales tax to services as we shift from a manufacturing- to a service-based economy," Reykdal says.

Despite the EOI's reservations about taxing services, EOI director John Burbank called the proposal "excellent," saying that it "enables the state to meet its responsibilities for higher education, and generates individual opportunity and economic dynamism.

"It also creates a tax system which, through the consideration of personal and business income, is evenhanded, and can generate the revenues necessary for public services," Burbank said.

The new income tax would apply to all state workers except the very poor---those who make too little money to file federal income tax returns---and to all gross profits from businesses.

Reykdal says the bill will be ready by next week, and that he has not yet sought co-sponsors. Sen. Ed Murray, the senate budget committee chair, calls the proposal "one of several great ideas that members will be proposing."
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