The Straight Dope on Property Tax Reform

The fur is flying in Olympia, as lawmakers struggle to replace the unconstitutional 2001 property tax cap with... something else. A new report from the Washington State Budget and Policy Center provides a tremendous resource for understanding how Washington got itself into its current property tax mess-- and how it can dig itself out.

Read it on the Budget and Policy Center's website here.

State Cracks Down on Cigarette Tax Avoidance

Washington State has one of the highest cigarette tax rates in the nation-- just over $2 a pack. Smokers are reacting to the higher tax rate in two ways. Some are cutting back their cig consumption or quitting outright-- which is what some folks think a cigarette tax hike is supposed to do in the first place. But, people being people (and addicts being addicts), others are finding they would rather just not pay the tax-- and are buying cigarettes tax-free over the Internet.

The big news in Washington this week is that the state is making efforts to prevent cigarette tax cheating. One Washingtonian is making headlines for owing $8,000 in cigarette taxes on his Internet purchases-- which presumably means he bought a breathtaking 4,000 packs of cigarettes without paying the tax. The headlines might make state tax administrators cringe, but they shouldn't. Tax laws are made to be enforced-- and when tax enforcement efforts are this visible, it's usually because lawmakers have made bad fiscal policy decisions.

In particular, Washington State is losing an estimated $200 million a year in cigarette tax revenues because state lawmakers didn't have the stomach for needed tax reforms like repealing excessive property tax caps and instituting an income tax, and instead decided they'd tax smokers as much as they could. The higher tax rates go, the further people will go to avoid them. And state tax administrators are left to clean up the mess.

So when you see headlines about smokers have a quarter of their wages garnished to pay unpaid cig taxes, don't blame the enforcement behavior of the state tax department. Blame the tax cheats, of course, for deciding they're immune to the laws the rest of us follow. But don't forget to pin this one on your elected official, for taking the easy way out and relying so heavily on the cig tax to begin with.

Washington Needs a Tax Expenditure Budget

It's not the sexiest topic in the world. Heck, it's probably not even the sexiest tax-related report you'll read today. But the latest from the Washington State Budget and Policy Center, "Tax Expenditure Reports: A Tool for Transparent, Timely Budgeting," reminds Washington lawmakers that what they don't know about their own tax system could fill a warehouse.

A tax expenditure report, in its simplest form, is like a menu in a restaurant. It tells you what tax breaks a state currently offers, explains how they work and what they cost. Any lawmaker seeking to make their tax system fair-- let alone trying to balance a budget-- should have access to such information. Yet Washington policymakers don't.

Read the report here.

Sales Tax Reform Options: Exemptions Versus Credits

Washington's sales taxes are among the highest in the nation-- and these high sales taxes are an important reason why the state's tax system is the most unfair in the nation. A new policy brief on the "Fair Tax Washington" website describes two very different policy options for making the sales tax less unfair.

One option described in the brief is the traditional one currently used by Washington and many other states: exemptions. Exemptions allow anyone buying (for example) groceries to pay no sales tax on purchases of groceries. Because exemptions are across-the-board reductions in a regressive tax, they make the tax system less unfair overall-- but do so at a large cost because they are made available even to the wealthiest consumers. When states that have enacted a grocery tax exemption find later on that the cuts cost too much, they sometimes end up increasing the sales tax rate on all other taxable items (as North Carolina and New Mexico have done in recent years). It's hard to see why this ends up being a good deal for low-income families.

The second alternative discussed in the brief is a "refundable tax credit," which allows certain taxpayers to apply for a tax rebate. This rebates offer one very important advantage over exemptions: they can be targeted to whichever income groups or family types are deemed most in need of tax relief. The most obvious benefit of this approach is that targeted tax credits cost far less than universal sales tax exemptions.

The main shortcoming of the targeted credit approach? You have to apply for it, while exemptions are granted automatically. And as fans of the Earned Income Tax Credit now, a substantial public-private outreach program is necessary to ensure that low-income families who are eligible for these tax credits will actually apply for them.

Read the policy brief in full right here.