Taxes take smaller bite of income

OLYMPIA – After living in California and Arizona, Meg McCoy went looking for a place to retire.

She found it in Spokane. Two of her children lived there. Housing was cheap. And the climate had four seasons, something the Chicago native missed in sunny San Jose.

Lastly, there was this: Washington is one of only a handful of states with no state income tax.

“That was one of the big selling points,” McCoy said. “My kids were telling me, ‘C’mon, Mom, there’s no income tax here.’ “

So she moved – and was surprised to discover that the sales tax and property tax were so high.

“What I’m afraid of is that the same thing will happen in Washington that happened in California: that property taxes will get so high that elderly people have to sell their homes,” she said.

Taxes are a perennial hot topic in Washington, D.C., and the Boise and Olympia statehouses. It’s a constant tug of war: Taxpayers and businesses say they’re being bled dry; public employees, teachers and social service advocates counter that their salaries and budgets are being cut to the bone.

“You can’t run governments without taxes,” said Pete Scobby, a retired space program trainer in Newport. “The question is: How much is enough?”

On average, state and local taxes in both Washington and Idaho don’t take as big a bite out of most people’s income as they used to. In the late 1990s, according to the conservative Tax Foundation, Washington had the unhappy distinction of having the third-highest tax rate in the nation, with residents, on average, paying a quarter of their income in federal, state and local taxes.

This year, that figure dropped to less than 19 percent. That’s still seventh-highest in the country, partly because Washingtonians can’t deduct state sales tax from their federal income tax. A new congressional proposal would change that.

In fact, if you just count state and federal taxes, according to the Washington Department of Revenue, Washington’s tax rate – compared to average income – is at its lowest since 1981.

Financial fears

The tax burden’s lower in Idaho. Idaho has been among the 10 lowest-taxed states for most of the past 35 years, according to the Tax Foundation. This year, Idahoans on average will have paid less than 16 percent of their income in taxes. That’s the fourth-lowest tax burden in America.

Still, taxes aren’t chump change, particularly for people whose incomes aren’t rising.

“I think politicians and the comfortable hugely underestimate the fear that the marginal working person bears with them every day of their lives,” said Bill Slusher, a retired helicopter pilot living in Okanogan. “They’ve worked hard, educated themselves, finally saved up a little bit of money and – bingo! – here comes some politician with a tax increase.”

What do taxes actually cost? Washingtonians, according to the Department of Revenue, paid an average of $101 in state and local taxes per $1,000 of personal income in 2002. For a family living on $35,000, the taxes averaged $3,217. The biggest chunk was sales tax – $1,355 – followed by property tax: $1,317. Idahoans averaged $100 in state and local taxes per $1,000 of personal income in 2002.

The numbers get much bigger if federal taxes and Social Security are included. Associated Taxpayers of Idaho, a business-backed group in Idaho, calculated that in 2002, an average Idaho family of four paid $12,707 in taxes, including roughly $3,300 in federal income tax, $4,300 in Social Security and $2,100 in Idaho income tax.

Some argue that taxes are the inevitable cost of civilized society.

“I think taxes suck, but in order to get things that we want in life, we have to pay,” said Denise Kin, a part-time day-care provider in Moscow, Idaho. “If they were to take away all the roads, the fire department, the police department, then people would start to understand. We’d have all our tax money, but we wouldn’t have anybody to fight our house fire or protect us from somebody beating us up. And we’d be driving on dirt.”

“In Europe, yes, they’re taxed like crazy, but they don’t have the same social ills and they’ve got pretty good health care,” said Jeffri Bohlscheid, a graduate student in Pullman. “Look at the closures of state parks here. Look at the roads in Spokane. It’s a mess.”

Tangled web

Washington’s tax system is remarkably complex. Over the past 75 years, lawmakers have given out hundreds of tax breaks. There’s no sales tax, for example, on bees, gun safes, or human body parts. There are tax breaks for uranium processors, aluminum ingots, and bull semen. Last year, Washington lawmakers enticed Boeing to stay in Puget Sound with a record $3.2 billion tax break.

Washington also has a unique business and occupation tax on gross revenues, instead of a tax on corporate profits, like most states do. This “B&O tax” tends to work against startup companies and those that make only a slim profit.

There’s also a soda syrup tax, a shellfish tax, a hazardous substance tax, an oil spill tax, and taxes on both baseball and football. One of the smallest is the state tax on boxing and wrestling, a rate unchanged since 1933.

All those taxes pale in comparison to Washington’s sales tax, which accounts for nearly half the state’s tax take. It’s 8.4 percent in most of the Spokane area, and 8.8 percent in Seattle. If voters approve an education tax hike next month, the rates would rise to 9.4 percent and 9.8 percent – among the highest in the nation. (The highest, according to tax researcher Vertex Inc., is 11 percent, in the town of Arab, Ala.)

In Idaho, the sales tax has risen from 3 percent in 1965 to 6 percent.

To retailers’ dismay, Washington’s sales tax laws are also extremely detailed. If you buy a bag of ice cubes, for example, you pay no sales tax. If the same ice is a block, you pay tax. Newspapers are untaxed – unless they contain a staple or glue. And a doughnut is untaxed – unless it is sold with a napkin or a utensil.

Unpopular reform

For all the complexity, however, Washington has managed to engineer the most regressive tax system in America, according to liberal critics. The poorer you are, the larger percentage of income you pay.

A family living on $20,000 or less pays an average of $1,837 a year in taxes, according to Washington’s Department of Revenue. That’s nearly 16 percent of income.

A family living on $130,000 or more pays an average of $9,198 – just over 4 percent of income.

In Idaho – where the state income tax rate rises with earnings – that gap is narrower. According to the liberal Institute on Taxation and Economic Policy, the very richest Idaho families pay 6 percent in state and local taxes. Families earning $25,000 to $42,000 pay 9 percent. Those making less than $14,000 pay nearly 10 percent.

Earlier this year, Democratic gubernatorial candidate Ron Sims vowed to make Washington’s tax system fairer, as well as cheaper for most residents. He said he’d cut the business tax and sales tax and start a state income tax. McCoy, convinced that an income tax would be fairer, voted for him.

Sims lost the Democratic primary by a landslide.

“I think Ron committed (political) suicide out of naiveté and honesty,” said Slusher, who met him. “He said it would cost people less, but voters don’t trust that.”

Sims’ defeat shouldn’t end the idea of a Washington state income tax, said Bohlscheid. But he agreed that it will be an uphill battle to sway skeptical Washington voters.

“There has to be a lot of transparency,” he said. You have to invite the people to come look at things, open up your books, and invite their ideas.

“There is a natural distrust of the government,” he said, “and it’s not unhealthy.”