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Washington needs spending reform, not just tax reform - Pacific Research Institute

Washington needs spending reform, not just tax reform

Washingtonians are struggling with unemployment and a sluggish economic recovery. In these conditions, it’s worth understanding how tax policies in Olympia are hurting a state the recession has hit particularly hard.

Washington’s unemployment rate, which stood at 9.5 percent in March, has increased or remained the same every month since March 2007, when it was 4.4 percent.

More than 332,000 Washingtonians are now looking for work, and 25.9 percent of those unemployed in 2009 were without work for more than 27 weeks. More than one in 10 (11.7 percent) unemployed workers in 2009 experienced joblessness for more than a year.

Part of the state’s economic malaise is a function of the larger national recession. Tax policies emanating from Olympia, however, haven’t made things better.

According to Census Bureau data, Washington had the 10th-highest burden of government in the country. State and local spending represented 17.2 percent of the state’s economy in 2007, the most recent year for which information is available. Washingtonians can assess whether they have the 10th-best education, public safety and infrastructure.

How those resources are extracted also matters. Some taxes impose much higher economic costs than others by altering incentives to work, save, invest and be entrepreneurial, the foundations of a prosperous society.

Washington’s tax design does have some major bright spots. Washington is one of only seven states that does not impose personal income taxes and one of a handful that does not use corporate income taxes. The state does maintain a fairly high sales tax (6.5 percent), ninth-highest in the country, along with property taxes. More worrying is the use of alternative capital-based taxes on businesses. Among the 50 states, Washington ranks dead last for use of these taxes.

Washington’s business and occupation (B&O) tax extracts revenues at varying rates, up to 1.8 percent for services. The rate may sound innocuous but the government takes this percentage off the top of business receipts, irrespective of profitability.

The revenues from this tax, relative to the size of the business sector, are far higher than in any other state. The use of this tax is particularly worrying since it strongly discourages investment and business development, the heart of job creation.

When the state tax burden is combined with its structure, it ranks a dismal 40th out of 50 states. Safe to say, a significant portion of Washington’s economic problems are rooted in these tax policies.

Fortunately, the solution to these problems is straightforward. Washington must reform the way in which it spends in order to cut costs while providing better results. There are lessons across the country, as well as abroad, regarding how to achieve this goal. The state also needs to reduce taxes and must reduce or eliminate the alternative capital taxes on firms.

These reforms would allow for permanently lower taxes that improve incentives for work, savings, investment and entrepreneurship, coupled with better services.

Such a combination is the recipe for a lasting return to economic prosperity in the Evergreen State.

Jason Clemens is the director of research at the Pacific Research Institute, a California-based free-market advocacy organization, and co-author with Robert Murphy of the recently released Taxifornia study (www.pacificresearch.org.)

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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