This is a red letter day for Ron Sims. He won the same sex marriage lawsuit in which he was a defendant (See pucknomad's diary on Gay Marriage Victory in Washington boosted earlier to the main page today) and he presented his tax reform plan today to the voters of the state of Washington. The gay marriage win was huge, but the potential of the tax reform plan to fundamentally change this state sets a tidal wave of its own in motion.
The proposal has four parts. It would entirely eliminate the state B&O tax on gross business income; entirely eliminate the state portion of the sales tax (6.5 %); and give property owners an exemption for the first $100,000 of value on property taxes. These tax repeals and rollbacks would be offset by a graduated income tax from 4-10%, with standard deductions of $15,000 per person, and $10,000 per child. Under Sims' plan a family of four earning $50,000 would pay no income tax, no state sales tax, and have their property taxes reduced.
The really bold part of Sims' plan, besides the much admired but feared income tax, is his decision not the replace the B&O tax with a corporate profits tax. Gregoire has been suggesting that Sims can't get rid of the B&O tax because replacing it with a corporate tax on profits that would require a rebellion-inducing corporate rate of almost 15%. Sims met that taunt with a little jujitsu of his own. Hear Sims now! No business tax at all. That could have some liberals intially jumping off buildings. But, wait!
Haven't we always said that we want a progressive tax system that generates sufficient income for our state's needs, that is progressive, but which doesn't discourage business investment, and which is politically feasible to pass? Under Sims plan, if a company reinvests its earnings into the business by expanding infrastructure and creating jobs then it will pay no business tax. When the profits are taken out of the business, however, then they will be subject to tax. This is a plan to grow the Washington economy.
Failing to see where her constituents line up, Gregoire protests that the plan would leave Washington State with the highest income tax in the nation. Not true, as usual. It might be the highest on persons with incomes over $200,000, but that would be the only tax besides property tax that they would pay, and they've been paying only 3.3 % of their income on state and local taxes for decades, while low income people have been paying 17.8%. So it's about time. Eighty percent of Washington taxpayers will pay less under this plan than they currently pay; ten percent of taxpayers will pay the same when one factors in their new ability to deduct the state income tax from their federal income tax. Only ten percent, those most able to pay, would face any tax increase.
And here's how the politics work. The income tax gets the support of the progressive community. The removal of the B&O tax without replacing it with a corporate flat tax earns the rabid support of the business community. Dino Rossi--take that! The $100,000 property tax exemption earns the support of the middle class seniors and lower income people. The removal of the sales tax earns all our support. That's quite a coalition: progressives, business, seniors, the middle class and low income people.
What's different about this proposal from earlier income tax proposals that have been rejected? First, we are in a crisis of funding. We've been cutting and cutting, but we can't cut anymore. Yet, we can't fund the education programs and health care proposals Washington citizens want. Second, this approach totally replaces the state B&O tax and sales tax. This isn't like the earlier proposals that just reduced these taxes, but didn't replace them. Voters then were rightly suspicious that the reductions in sales tax and business taxes might slowly creep back up. But under this proposal, the taxes will be repealed. The legislature would have to pass the whole tax again, not just quietly raise the rates. Third, as indicated above, this tax package provides tax relief for vast majority of voters.
Sims accepts that his proposal might require a constitutional amendment. While I doubt that it will, it is probably good politics not to try to fight this battle at this point. There will be plenty of time. Sims projects that the earliest this could go into effect would be 2008 after the legislature passes a constitutional amendment which would be ratified by a vote of the people. In the end I think there will be a simply referendum, not a constitutional amendment. But finally we've got some leadership on this subject and a formidable coalition to support it.