Fixing the Fix
Wednesday, March 27, 2019
FIXING THE FIX: Elected representatives took to their town halls last week to talk with voters about their achievements and challenges at the midpoint of a productive session of the state Legislature. Now comes the hard, slogging work as bills that survived on the floor of one chamber in our bicameral government are passed to the opposite chamber for discussion, adjustment, and possible approval. Lawmakers’ attention must also shift to the budget, and consideration of tax and spending measures during the remaining days of this year’s scheduled 105-day session.
Despite advances in responsive legislation and much for the governor to sign into law, Democrats failed in one of their key objectives this session—discovering a fix to the McCleary Fix to fund public schools.
In 2012, the state Supreme Court issued its McCleary decision, ordering the state to fully fund K-12 public schools as required by Article IX of the Washington Constitution. Years passed as a divided and paralyzed Legislature failed to provide a plan to fund schools. In 2017, a slim majority in both houses approved a funding plan, which immediately required a property tax adjustment in 2018, to pay for the basic education of children.
But basic education, as defined by state law, is not everything a school district offers. Special education, although mandated, isn’t part of basic education, and neither are programs like early childhood education. Local property tax levies are still required to fund these programs and other school operations. And there remain significant issues in fairness and equity that arose from the 2018 property tax adjustment that further shifted the tax burden to fund basic education from rural areas to the population centers of the Puget Sound region. Essentially, conservative Eastern Washington got a little break in their property taxes, while progressive Western Washington pays a little more.
An apparent solution might be to make it a little easier for rural areas like Eastern Washington to pass their property tax levies in future years with the same frequency that populous Western Washington communities readily pass theirs by a wide margin. That would lessen funding disparities between districts and unwind some program imbalances in communities where levies often fail, but likely involves easing the supermajority requirement on local property taxes.
The problem dates back to the Great Depression, when the state thought it was a good idea to require a supermajority of 60 percent to approve capital bonds through a property tax levy. The requirement gives outsized power to a minority of voters to thwart certain tax increases. But a return to a simple majority would require an amendment to the state constitution—itself a high threshold.
It appears two different strategies to tackle this issue have each failed this session. The more strongly supported of these, Senate Joint Resolution 8201, would amend the state constitution to lower the threshold of voter approval required for property tax levies from two-thirds (60 percent) to a simple majority. The measure failed because it did not garner the two-thirds majority vote in the Senate required to pass constitutional amendments.
This all points to a much larger structural problem with state revenues than is immediately obvious.
As the Washington State Economic and Revenue Forecast Council notes in their analysis of the 2019 state budget, “Our tax system—put in place in the 1930s, when rotary phones and manual typewriters were the norm—does not reflect the state’s modern, service-based economy.”
In essence, we do not tax services to the extent that we tax commodities, and services have grown to a much larger portion of the state’s economy.
“That is partly why our state and local tax systems no longer keep pace with the growth of our economy,” forecasters note. “Each year, as our tax revenues fall further behind, we face a growing structural imbalance in our state budget.
“Consider this: In the early 1990s, State General Fund revenue collections equaled nearly 7 percent of the overall economy (as measured by total personal income). But today, revenue collections as a share of the economy have declined steadily, to less than 5 percent.”
Washington is falling behind other states as well. During the mid-1990s, Washington ranked 11th nationwide in state and local taxes as a share of the economy. By 2013, the state’s ranking had fallen to 35th—well below the average for all states.
“A multitude of factors have been stripping the gears of the state’s tax and revenue system, the bulk of which was put in place 80 years ago, when the state economy looked much different than it does today,” forecasters commented. “Washington gets nearly half its revenue through retail sales taxes, primarily on goods. Besides making the state’s tax system the most regressive in the nation, our heavy reliance on a goods-based sales tax also helps explain why we continue falling behind in revenue collections.”
Unlike some states, Washington does not impose a sales tax on most services. Yet people today are spending a smaller share of their disposable income on goods and a greater share on services. In fact, over the past 40 years, services have more than doubled as a share of the total economy, while the bottom has collapsed in the collection of sales tax as a result of online shopping and changes in consumer preferences.
Additionally, since the mid-1930s, Washington has adopted more than 650 state and local tax exemptions, worth billions of dollars. Nearly a third of those were put in place during the past 15 years. Many others are outdated or no longer serve their original purpose.
“Saddled with a flawed and inefficient tax and revenue system, the state in recent years has too often relied on ‘one time’ money—such as through fund shifts or tapping reserves—to solve budget shortfalls. As a result, budget shortfalls reappear at the start of each biennium.”
The state could use an overhaul of its revenue system to create better equity and parity with states of similar size, and create better outcomes for taxpayers. But the task to do so in a maze of supermajority requirements is all but impossible.