Tax systems not the crux of Washington's and Oregon's budget woes

PORTLAND, Ore. — Almost every state is experiencing hard-core, near-cataclysmic budget woes. States like Oregon that rely heavily on income tax. States like Washington that rely just as heavily on sales tax. States like California that rely on both.

So it is hard not to chuckle at the headline in Oregon's leading newspaper: "Oregon's state finances desperately need stability, and a sales tax would provide that."

Hmmm. Sounds like the flip side of the battle cry in Washington: If only we had an income tax, Washington's budget situation wouldn't be so bad.

Except that it would be.

The money is always greener on the other side.

Oregon lawmakers struggling with a wretched budget deficit may gaze across the Columbia River and see dollar signs in Washington's sales tax. Washingtonians, including Senate Majority Leader Lisa Brown, can look just as intently across the cool rushing river and imagine Oregon's income tax saving the day for our state.

Somewhere over the rainbow lies the better tax system.

Don't forget California, which has income and sales taxes. The Golden State is in bigger trouble than both Washington and Oregon, a situation that also flows from a citizen-initiative system hamstringing all three states. But I digress.

Let's face it: When the economy bombs, the entire West Coast is in trouble.

Statistics from the National Conference of State Legislatures show all major revenue sources are affected by a strong downturn. Oregon's budget deficit for fiscal year 2010 is projected to be 18 percent of the general fund budget; Washington's projected deficit, 19.9 percent. Not all that different really.

Local economist Dick Conway believes the income tax is better for financing state and local governments because the personal income tax base grows faster than retail sales tax — and is less volatile.

Two economists, three opinions. Mark Thoma, the University of Oregon economist who wrote the piece for The Oregonian, says income tax is less stable than sales tax.

As the economy plummeted, Oregon's employment tanked and revenues dropped. The state's 12 percent unemployment rate is second-highest in the nation. As the Washington economy cratered, people sat on their wallets and refused to spend. Sales tax revenues sailed southward.

Besides, voters in both states will never trust politicians to improve the tax system because the clamor for change usually arises when politicians seek more money.

It's a matter of trust — or lack of it. Both the call for an income tax in Washington and the cry for a sales tax for Oregon come dressed as ways to make the tax system more reliable.

But wise voters sense the outstretched hands. They don't believe the underlying tax would really go away, at least not for long. So it's an additional tax and they are not interested.

Both states might do better with a mixture of both taxes for stability.

During the latest budget session in Washington, Brown advocated an income tax and then dropped her plan. Gov. Chris Gregoire did not support the idea because all states are having trouble. No group of states is performing dramatically better than any other group, except those that extract and tax minerals from the ground.

Former King County Executive Ron Sims, the last politician to campaign on an income tax, challenged Gregoire in the Democratic primary for governor in 2004. He got walloped.

Washington and Oregon can trade a sales tax for an income tax or vice versa. But either way, both states will get sick in a down economy. There is no immunization from these tax systems for economic flu.

Joni Balter's column appears regularly on editorial pages of The Times. Her e-mail address is jbalter@seattletimes.com