Efforts to Improve Tax Fairness and

Tax Adequacy in Washington

1889-2002

Forum on Tax Reform in Washington

February 22, 2003

Olympia, WA

Don Burrows

The Early Years, 1889-1930 (1)

• Property tax dominant• Early concerns with tax fairness

– Gov Rodgers, 1897 “(our tax structure) throws the burden of government almost entirely upon property owners of small means”

– Bd. Of Tax Commissioners, 1909“Our tax system is crude, unjust, unfair . . .”

“. . the test of taxation should be ability to pay.”

– 1921 Tax Investigation CommitteeCommittee says Sales Tax, No; Income Tax, Yes

– 1929 Tax Study Committee

graduated income tax

The Early Years, 1889-1931 (2)

New taxes added

o Insurance premiums, 1891 o Inheritance tax, 1901 o State poll tax, 1921 o Gasoline tax, 1921

Other important changes o Initiative & referendum amendment, 1912 o Property tax classification & exemption amendment, 1930

Rejected changes

o 1929 bank income tax – unconstitutional o 1931 graduated income taxes – vetoed by Gov Hartley

The Great Depression, New Tax Structure, & WWII (1)

1932-1946

Impact of “Great Depression”

o Widespread unemploymento Loss of incomeso Property tax delinquencies

Citizen action

o 40 Mill (2%) property tax limit initiative, 1932

o Graduated income tax initiative, 1932 - Unconstitutional

The Great DepressionAnd a New Tax Structure (2)

1932 -1946

Legislative action

o 1933 business activities tax – Court OKso 1935 Revenue Act – Retail sales tax and 15 others

Voters defeat income tax amendments

Economic recovery

o Helped by new deal measureso Plus mobilization for WWII

War years produce state tax surpluses

Post WW II and the Baby Boomers (1)1947-1964

Surpluses disappear

o Welfare initiativeso Deferred expenditureso Baby boomers & schoolso Deficits persist

Legislative action

o Gov. Langlie's Corporate Excise Tax unconstitutional, 1951o Increase in excise taxes

Post WWII and the Baby Boomers (2)1946-1964

Gov. Rosellini's Tax Advisory Council, 1957

o Composition of Councilo Tie vote on income taxo Recommends revenue from sales and property taxo Governor supports recommendations

Legislative action, 1959

o Tax on services rejectedo Rate increases in existing taxes

Budget and Accounting Act

New Tax Limits, Income Taxes Rejected &Business Tax Benefits (1)

1965-1976

The revenue shortfall continues, ’65 session

Property Tax Concerns

o Special school levies on the riseo Concern about 50% assessment ordero 30% versus 25% assessment debateo HJR 7 senior citizen property tax exemption, 1966

The manufactures’ tax credit, 1965

Gov. Evans' Tax Advisory Council, 1965-1968

o Single rate income taxeso Reduce property taxes, sales, B&O, etc.o Repeal MTC

New Tax Limits, Income Taxes Rejected &Business Tax Incentives (2)

1965 - 1976

Evans supports income tax

HJR 42 tax reform measure, defeated in 1969

Legislative/Voter action after HJR 42

o Legislature authorizes first city/county sales tax, 1970o Current use assessment amendment, 1970o SJR 1, 1% property tax limit, approved in 1971

HJR 37 tax reform measure, defeated in 1973

o Why defeated?

The Good and Bad Tax Years1977-1984

The good tax years -1977-1980

o Baby boomers stimulate economy

o Reductions absorbed by revenue growth

Sales tax on food exempt, 1978 Inheritance tax repealed, 1982 Funding of basic education reduces special levies, 1977 Retail sales & B&O surtaxes eliminated

Gov Ray’s tax committee

The Good and Bad Tax Years (2)1977 - 1984

The bad tax years – 1981-1984

o Worst recession since great depressiono Tax revenues fall precipitously

Gov. Spellman's Tax Advisory Council, 1982

o Recommends income taxes - Gov. rejects

Large budget cuts and repeated tax increases

o Sales tax back on food – 14 monthso Surtaxes across-the-boardo Large increases in retail sales & B&O taxes

Forecast Council created

Tax Earmarking, another Recession, and New Tax Limits (1)

1985-1996

Tax revenues grow again, 1985

o Recession endso Higher tax rates in place

Gov. Gardner's Committee on WA Financial Future, 1989

o Income tax with limitso Legislature rejects

No major “general government” tax increases from 1985 to 1993

Several tax increases “earmarked” for new programs

New and expanded business “tax incentives”

Tax Earmarking, another Recession, &New Tax Limits (2)

Fall in revenues - 1992-1993 recession

Gov. Lowry faces $1.6 billion shortfall

Legislature imposes large tax increases

o Most of tax increase on B&Oo The service tax compromise

Initiative 601 limit approved, 1993

1994-96 – B&O tax rollbacks and additional business taxexemptions, credits

o Spending limits create surpluses

The Standoff with Initiatives (1)Filling the Void

1997-2002

Recovery and large surpluses, 1997

I-601 limits expenditures

Gov. Locke vetoes B&O tax rollbacks

Compromise on smaller B&O rollbacks

The end around Locke move

o 1997 - Property tax relief - (R-47)o 1998 - From general fund to transportation fund – (R-49)

The Standoff with InitiativesFilling the Void (2)

Citizens tax reduction and spending initiativespassed

o 1999 - MVET elimination (I-695)o 2001 - New property tax limit (I-747)o 2001 - Cigarette tax increase for health care (I-773)o 2002 - School class size reduction (I-728)o 2001 - Teachers cost-of-living increase (I-732)o 2002 - Local government MVET eliminated (I-776)

A New Tax Study Committee - The GatesCommittee

o Tax Reform Recommended

The Standoff with Initiatives Filling the Void (3)

• R-51 on transportation funding, 2002 (defeated)

• Recession 9/11 attack severely reduce state’s revenue

• $2.4 billion shortfall projected

• Governor chooses budget reductions over tax increases

• “Priorities of Government” used to distribute cuts

• Legislative approach so far ºNew exemptions & “incentives”ºTax-Me-More Bill