Guest Post: Sales Tax = 1/4 of New State Revenue

This is a guest piece from Hanna Krieg at “The Burner,” a new local publication covering politics. The opinion shared are those of the authors and do not necessarily represent the opinions of Ron Davis and the Rondezvous Newsletter.

State Democrats talked a big game about flipping the State's uniquely upside-down tax code closer to right-side-up this session. But when big business flexed and the frugal Governor flinched, Washington lawmakers doubled down on sales taxes. For every dollar in new revenue the Washington State Legislature approved this session, about a quarter comes from new sales taxes.

While the specific goods and services subject to the new sales taxes may not have advocates up in arms, choosing to dig Washington deeper into its reliance on sales taxes instead of levying taxes against the richest Washingtonians, fails to advance their ultimate goal of a fairer tax code. 

“It’s a mixed bag,” said Executive Director of Washington Budget and Policy Center Eli Taylor Goss. “It could be better, it could be worse, but we can't just keep tweaking our existing system. We need new progressive revenue.”

The Death Of The Wealth Tax

This session, the Legislature faced the unenviable task of balancing a $16 billion budget shortfall over the next four years. At first, Democrats came out swinging with an ambitious revenue package that not only included a first-of-its-kind, wealth tax that would generate a whopping $4 billion, but also proposed cuts to sales taxes, which disproportionately strain the poorest Washingtonians. 

Long story short, it tanked.

Advocates point fingers at two culprits: Corporate lobbyists and Gov. Bob Ferguson. 

Microsoft led the charge on a spendy effort to kill the wealth tax, as the Seattle Times reported, 

Executive Director of the Economic Opportunity Institute (EOI) Rian Watt slammed the outcome in a public statement: “...corporate backroom deals and big-money interests resulted in a tax code that continues to prioritize profits over people.”

But Goss didn’t let Ferguson off the hook. “Lawmakers were really backed into a corner,” they said. 

Sen. Noel Frame (D-Seattle), one of the fiercest proponents of the wealth tax, said the wealth tax died when Ferguson publicly announced that he would veto her $4 billion proposal for fear the tax would fail legal scrutiny, leaving a crater in the budget. Instead, he floated the idea for a  measly $100 million wealth tax, nowhere near mission critical for the budget, as a sort of test balloon. As soon as the tax became auxiliary to the main objective to fill in the shortfall, it was no longer a priority, Frame said. 

“It is hard to get my colleagues excited about a revenue tool unless it is needed to raise revenue in the moment,” Frame said. “There was still a lot of support for [the wealth tax], it just wasn’t the focus.” 

Instead…

Now, lawmakers sent the Governor a $9.4 billion revenue package without a wealth tax or statewide payroll tax. Most of that — about $5.6 billion over 4 years — comes from hiking the State’s Business & Occupation taxes. But the second largest new revenue stream, about $2.7 billion, comes from new sales taxes. 

If signed into law, the new sales taxes established by Senate Bill 5814, will extend retail sales tax to more services, including advertising, security, lobbying, and temporary staffing. SB 5814 would also impose new taxes on products containing nicotine, such as ZYN pouches, and an additional tax on cigarettes. 

As progressive revenue advocates won’t let anyone forget, sales taxes disproportionately burden lower-income households because those households spend more of their income than higher-income households. More concretely, the Institute on Taxation and Economic Policy’s (ITEP) 2024 “Who Pays” report found that the lowest 20% of earners in Washington spent about 10.9% of their income on sales tax while the top 1% spent just 1.6%. 

But let's be real — the sales tax expansion on services may fit the literal definition of regressive, but it isn't as heinously anti-poor as, for example, a grocery tax. It is unclear how much low and middle income Washingtonians shell out for advertising or lobbying, so this particular sales tax hasn’t garnered much backlash. 

As for nicotine taxation, research from the American Economic Association found taxing cigarettes disproportionately burdens lower income groups. But some argue the public health benefits outweigh the regressive nature of the tax. Research shows that every 10 percent increase in the price of cigarettes reduces consumption by 3% to 5% among adults and the hikes work up to three times as well on deterring youth. 

Still, the policy, without adding new progressive revenue streams, continues the State’s strategy of relying on sales tax rather than more progressive revenue, a long held tradition that’s earned Washington a reputation as the state with the second most regressive tax code in the nation. 

Frame said that these new sales taxes are not her “preferred path.” She maintains that selective sales taxes are less harmful than a blanket increase. She said she “tried to be thoughtful” and update the code to “be reflective of the current economy.” Frame compared the change to the 2017 Marketplace Fairness Act, which she said did not make the tax code more progressive, but certainly “modernized” it to include online retailers, taking away their advantage over brick-and-mortar businesses. In the same way, she argued, SB 5814, includes sales that should have been included all along. 

The Beef With B&O

The largest new revenue stream comes from changes to the State’s B&O taxes in House Bill 2081. The bill imposes a permanent hike to the State’s B&O tax rate and three-year B&O surcharge on 400 of Washington’s biggest businesses with a cheeky little exemption for Boeing.

While the tax targets businesses, the B&O doesn’t exactly tickle every progressive revenue champ. In a recent post, ITEP Senior Analyst Dylan Grundman O'Neill called the B&O tax a “sales tax by another name.”

“Because the B&O tax is so broad and is based directly on sales – rather than profits – businesses account for such a tax by raising prices in proportion to the tax,” Grundman O’Neill wrote. “So although it does not appear on the customer’s receipt (as does a sales tax), it is passed to the customer in the form of higher prices.”

In regards to the surcharge on big business, Grundman O’Neill added that “customers of large businesses (e.g. shoppers at big box retail stores) are not necessarily any higher income than the customers of smaller businesses. In other words, the tax ultimately comes out of the consumer’s pocket, not the business owner’s, so much of the tax is paid by middle- and low-income families.”

ITEP’s analysis pitted the B&O tax against the Senate’s original plan to pass a statewide payroll tax on Washington’s biggest businesses. Grundman O’Neill conceded that businesses pass the taxes onto others in both cases, but his analysis found that they would pass the payroll tax along to their high-salary employees through lower wages and pass the B&O tax on to general consumers, including low-income people, through higher prices. Grundman O’Neill wrote that if the State required businesses to pay payroll taxes on high salaries, “nearly all of the payroll tax would be paid by households with income over about 175,000, while the majority of the revenue from the B&O proposal would ultimately come from households with income below that amount.”

While ITEP argued the payroll tax would pull from a higher tax bracket than the B&O, neither target the richest of the rich as precisely as a wealth tax, which in every proposal this year would only apply to 4,300 taxpayers with $50 million in intangible assets.

The Bright Side

As for the other new revenue sources, advocates had no gripes over ​​Senate Bill 5813. The bill adds a new tier to the existing capital gains tax to target 900 taxpayers who got rich on stocks and revises the state’s estate tax to bump up the rate, but also exclude more property. If passed, these revisions will raise $636 million. They also didn’t complain about Senate Bill 5794, which rolled back existing tax breaks to the tune of $385 million over four years. And no one seemed too pressed about the $55 million tax targeting Tesla either. Damn, did that company do something?

While advocates for a fairer tax code are not entirely pleased with the final package, they feel well-positioned to next year pass their magnum opus, the first-in-the-nation wealth tax. On the last day of session, in a surprise move, Frame called for a vote on a new wealth tax proposal, even though she knew the House would not act on it. The bill married some language from her original bill and the House version to raise an estimated $1.5 billion for education. Her colleagues, one after the next, delivered impassioned floor speeches in support of the wealth tax and it passed with just two Democrats voting against it. 

“The Senate has never been the liberal bastion for tax reform, the fact that we had 26 votes is very important for people to understand,” Frame said.

According to Frame, the bill will pick back up next session in the Senate Rules Committee unless lawmakers decide to make major changes and send it backward in the process. 

In sum, Frame said, “This fight is not even remotely over.”

You can see the original story over at The Burner: