A Tale of Two Tax Systems

 Washington’s sales tax, which carries the revenue load in the Evergreen State, faces a shrinking tax base because of the growth of online sales and the ease of driving to Oregon that doesn’t have a general sales tax.

Washington’s sales tax, which carries the revenue load in the Evergreen State, faces a shrinking tax base because of the growth of online sales and the ease of driving to Oregon that doesn’t have a general sales tax.

Oregonians regard their state tax system as the worst possible – except for all the alternatives, especially a sales tax. That hasn’t blunted calls for “tax reform” in Oregon, including a new initiative to subject large corporations to a gross receipts tax.

KUOW, the NPR affiliate in Seattle, aired a story about the woes of Washington’s state tax system, which depends heavily on a sales tax. The punch line of the piece was that if Washington had Oregon’s system that taxes income, it would raise almost double what the state generates now per fiscal period.

That “unofficial calculation” by the Washington Department of Revenue is based on data that shows the Evergreen State’s sales tax base is shriveling as a percent of an expanding economy, while Oregon’s relatively progressive income tax rakes in increasing revenue when the economy expands. 

Studies in both states have shown that a sales tax may be a little less volatile than an income tax in up and down economic cycles. But Washington’s analysis of its sales tax base shows it may be inadequate to the task of keeping pace with economic growth when more and more economic growth occurs online. It doesn’t help that Washingtonians cross the border into Oregon and make purchases they can cart home without paying sales tax. 

KUOW’s online version of its story includes “Washington’s Chart of Doom,” an analysis by Treasurer James McIntire that shows sales tax revenues peaked in 1987 as 6.93 percent of the state’s economy and have steadily declined since then to 4.8 percent in 2015. McIntire projects revenue to keep falling to 4.65 percent by 2021.

That’s a tough trend line, aggravated by economic and population growth that places new demands on public revenues.

Oregon and Washington have talked for years about the three-legged stool of taxation – income, sales and property. You don’t have to look far for a state with all three – Idaho. The KUOW report says if Washington adopted Idaho’s tax system, it would collect $10 billion more per fiscal period.

Oregon goes through spasms of tax reform fever, which often involve brief romances with a sales tax. The KUOW story quotes Oregon Legislative Revenue Director Paul Warner as estimating it would take a 12 percent sales tax to equal what the state’s income tax yields. Washington’s state sales tax rate is 6.5 percent.

Contrasts between the two states note that Oregon has no sales tax, which isn’t exactly true. Oregon and some Oregon localities have imposed a few selective sales taxes, most notably on hotel and motel stays, and in some tourist-centric towns on food and entertainment. When you add in Oregon’s gas tax and state-controlled pricing on distilled spirits, one of the main selling points of a sales tax – capturing revenue from tourists – isn’t especially convincing, not that Oregonians seem persuadable on the subject anyway.

There is little motivation from retail businesses to support a sales tax, especially in border communities like Portland that reap benefits from Washington commuters who already drive here to work, eat lunch at restaurants, shop on their way home and pay income tax on their Oregon-based earnings. This explains the success of the Costco store on the Oregon side of the Glenn Jackson Bridge. 

The Oregon tax system demon is economic volatility, which produces plentiful revenues in good times and sparse revenues in bad times. Economic theory would say that problem is curable by stashing away “excess revenue” during economic booms to fill in gaps when the economy lags. This is where economic and political theory diverge. With growing demands for spending, “excess revenue” is hard to define. That drove a GOP-led legislature many years ago to install, with voter approval, the personal income tax kicker, which rebates revenue that exceeds a state revenue forecast by 2 percent or more. Oregonians received a modest personal income tax kicker rebate based on their 2015 tax returns, which averaged around $125 and sucked $402 million out of the state’s General Fund.

It’s inevitable some Washingtonians and Oregonians will continue to cast covetous eyes at each other’s tax system as political leaders struggle with how to generate revenue, particularly for public education. It’s unlikely the two states will trade out their current core taxes, but very likely they will keep complaining about their shortcomings.