Income tax won’t fix state’s budget mess
By ROBERT MEADOWS
Port Orchard Independent columnist
December 12, 2008 · Updated 12:00 PM
To get your minds off your household budgets, watch what our local and state government budget deliberations involve — and hope for some useful “myth busting.”
Local government entities have come to the end of their budget approval processes, but the state is just starting. The governor’s budget proposal is due in a few days.
One of the favorite myths of one side of the political spectrum is the need for a state income tax to achieve a “more stable” source of revenue for government operations.
If they actually want more revenue stability, the property tax is clearly the way to go. Instead of falling during the current recession, the total collected goes up by a little.
Even the retail sales tax revenue doesn’t decline as early and as severely in an economic downturn as income tax revenue would.
Look at any state in the union that relies on an income tax, and you will find worse drops in revenue than those experienced by Washington.
We already have the most stable state tax system in the nation, and this recession may make it even more obvious.
While many in the news media seem never to tire of telling us that the financial crisis is worse than at any time since the Great Depression, state revenue has so far not been affected as much as in the relatively mild recession of 2001-2002.
Even though growth over the previous few years was largely fueled by borrowed money for new homes and automobiles, total state revenue for the operating budget is forecast to rise during the coming biennial budget cycle despite an expected lengthy recession.
The state must apparently limit spending increases to about 2 percent a year in the 2009-2011 budget, rather than the 7 or 8 percent annual increases that had been planned.
The difference between the earlier plan and the impending reality causes the $5 billion budget shortfall you may have seen mentioned.
It seems clear that the people who advocate adoption of a state income tax really hope for “more revenue,” not “more stable revenue.”
Once again we may hear people refer to lower spending increases as “cuts,” but if you watch closely you may see through this particular myth.
If any particular program’s state funding is substantially reduced, look to see which spending increased. Unless the revenue forecast drops significantly, you are more likely to find a shift in spending from one thing to another than an overall reduction in spending.
At the local level, a favorite argument for property tax “lid lifts” when our assessed values were soaring involved pointing to the property tax rate and claiming that a declining rate equals declining revenue.
Now that assessed valuation for taxable property in Kitsap County is declining, we might see tax rates go up by a little.
Yet, the annual increases in total revenue collected by local government levies will be similar to previous years in which assessed values soared and tax rates went down.
It might become harder for lid lift proponents to divert attention from the rising revenue by pointing to the tax rate, and this would be a good thing.
No one can spend a tax rate, so we should look at the revenue to see whether a lid lift is needed.
The significant drop in the construction industry impacts two sources of local tax revenue — the sales tax and the property tax.
People who say “developers” like it’s a dirty word probably won’t notice, but the rest of us should see that sales tax revenue supporting our county and city governments can actually go down when real estate development slumps.
The money borrowed to build and purchase those new homes and places of business is paid back over time, but the sales tax on labor and materials used in the construction is collected when they are built.
When borrowing and building decline, so does current sales tax revenue.
For a few years, until the slump occurred, property development added to our property tax base and caused bigger annual increases in levy revenue without imposing an additional tax burden on the owners of existing homes.
If a prosperous local real estate development industry is bad, then what is the opposite situation?
It can be unpleasant to have an economy that grows to a peak and then slows or even shrinks, since total personal income and the tax revenue available to pay for government functions go up and down.
But a recession can provide a good opportunity to watch and learn from what actually happens with tax revenue and government spending. We might wish that both we and government had more in savings to tide us over to the next growth period, but wishing won’t make it so.
We have to find a way to afford what needs to be done, and myths don’t help.
Robert Meadows is a
Port Orchard resident.