Tax Breaks For You — Yes, You — Are Among Washington State's Costliest
Technically speaking, Alicia Goodwin knows she's benefiting from one of Washington state's biggest tax exemptions just by checking out at the grocery store. Sales taxes aren't charged on food purchases.
"But does it matter that I don't think food should be taxed?" Goodwin said, her cart stocked with the milk, bread and yogurt she'd just bought on a recent Friday afternoon. "So I don't even think of it as an exemption."
It doesn't help that they're called a "tax breaks," Goodwin added, because the term suggests they only help a select few. But in fact, many benefit from tax exemptions that rank among Washington state's costliest.
What You Save — And What You Don't
The sales tax exemption for food products cost Washington an estimated $1.1 billion this year. Another on prescription drug sales cost nearly $520 million. Still another exemption on sales of motor vehicle fuel costs another $850 million. (See a visual breakdown of these exemptions here.)
These exemptions aren't unusual. Most U.S. states don't charge sales tax on groceries; even fewer tax prescription drugs. And even if fuel is exempt from sales taxes, Washington state's gasoline tax is still one of the nation's highest.
But they still prove costly. Exemptions on food, fuel and prescriptions account for nearly one-fifth of the $12 billion state taxpayers saved in 2012 because of tax breaks, according to estimates by the state Department of Revenue.
That's not even counting what you save in taxes you don't pay your barber or your accountant. An exemption for many personal consumer services — like haircuts, laundry or veterinary care — cost the state another estimated $212 million this year. (If you include exemptions for all other professional services such as janitorial, accounting or legal services, the cost jumps to more than $1.9 billion.)
'The Less Money You Have, The Worse Off You Are'
Yet the savings only soften a heavy blow. The sales tax burden in Washington state is still higher for low- and middle-income residents than in any other state else in the U.S., according to an Institute on Taxation & Economic Policy (ITEP) report that named Washington's tax system the most regressive in the country.
Goodwin, the shopper mentioned above, just saved $2.47 on a nearly $26 grocery bill because of one of Washington state's largest tax exemptions. But she says that doesn't mean the system feels fair.
"It's a horribly regressive tax system where the less money you have, the worse off you are," she said, "and conversely, the more money you have, the better the system is for you."
Ending Sales Tax Breaks? Proposals On The Table
Gov. Jay Inslee's proposed two-year budget calls for ending several sales tax exemptions, with each repeal promising millions in added revenue for the state.
Removing bottled water from the existing food tax exemption would net the state another $44.4 million, his budget office estimates. Ending point-of-sale exemptions for out-of-state residents from sales taxes in Washington would bring in another $51.5 million. Applying sales tax to vehicle trade-ins valued over $10,000 would collect more than $105 million.
The state budget office also estimates ending these exemptions would impact thousands of individuals. More than 85,000 taxpayers would feel the impact of a limited vehicle trade-in exemption over the next two years; another 195,000 would pay a higher price for bottled water.
'Ultimately, People Pay Taxes'
But ending tax exemptions is no simple way to generate new revenue. End the most lucrative sales tax exemptions — such as on food, drugs or services — and individuals will feel it. But ending tax breaks or preferential rates for businesses has its perils, too.
"What a lot of academics will tell you is that, ultimately, people pay taxes," said Dick Conway, a regional economist who has argued for an income tax in Washington state.
The reason is that businesses dealing locally easily pass along any tax increase to their customers, a phenomenon the Washington State Tax Structure Study Committee noted in its 2002 report.
"They’re competing with other local businesses. And they look at each other and they see a tax coming, and they say, 'I’ll just pass it along to the customer. It won’t make me any worse off competitively. Nobody will probably even know the difference,'" Conway said.
On the other hand, Conway worries about the impact of increases on larger corporations based in Washington state. He says the fear with increasing Boeing's tax burden, for instance, is that the company would either move jobs away or wouldn't be able to keep up with their competition, Airbus. Either scenario hurts Washington state's economy, and, in turn, individuals.
Another Way To Tax?
To Goodwin, the fairest solution is to simply start over.
"I would completely pay an income tax if I could have less of a sales tax, for example," she said. "I would think that's more fair. I should pay more."
"We all pay sales tax, but I can afford to pay sales tax more than most people, statistically speaking," Goodwin added. "It's just not that big of a deal for me."
Editor's Note: We're taking a closer look at Washington's tax system through a week-long series. This is the fourth installment of “Where’s the Dough? On the Hunt for Washington’s Missing Tax Dollars." The first installment explored the history of the state's tax system, and the second story took a closer look at the efficacy of tax exemptions. The third piece looked at the tax incentives Washington approved for Boeing.
In the next installment, two state lawmakers will weigh in on whether total overhaul of Washington's tax system is practical or even possible.