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Times' series on spending
(June 2002)
· Part 1
· Part 2
· Part 3
· Part 4

Sunday, November 17, 2002 - 12:00 a.m. Pacific

Questions and answers
Sales taxes
Q & A
Who pays the most and least — and why
Sales taxes
Property taxes
Business tax
Other taxes and fees
Looking ahead
Washington has one of the nation's highest sales taxes, though not the highest. Including maximum local-option rates, only three states (Alabama, Louisiana and Oklahoma) are higher.

Sales taxes do much of the heavy lifting when it comes to financing government in Washington. Last year, nearly half of all state tax revenues came from the sales tax.

But people don't seem to mind the tax. Two-thirds of respondents in the Times poll called the sales tax fair — stronger support than for any other tax, and consistent across all ages, incomes and education levels.

UW economics professor Neil Bruce credits the tax's ease of payment — no complicated forms — and its "nickel-and-dime" nature.

"It doesn't come in one big number, unlike the income tax and the property tax," said Bruce, who sits on a committee that's examining the state's tax system. "No one ever has cause to total up how much sales tax they pay over the year."
At least we all pay the same sales tax, right?

We all pay the same rate, true. But measured against income, we don't pay equal shares.

Rich folks spend less of their income on taxable items than do middle-income and poor people. That means sales taxes fall heaviest on those with the lowest incomes.

A study by the non-partisan Office of Program Research, which serves the state House of Representatives, found that households with incomes under $20,000 paid 7.1 percent of their incomes in sales taxes. The bite fell to 3.9 percent for households at $40,000-$60,000 in income and 2.5 percent for those over $130,000.

If the sales tax raises so much money, why is government complaining about a revenue shortfall?

Mainly because government spending has grown faster than revenue.

Washington's tax system, like that of most states, tracks economic ups and downs. It gushes cash during good times (the taxes on all those SUVs, foosball tables and Sub-Zero refrigerators add up), but when spending drops off, so does tax revenue. And the state's two-year economic slump has hammered government budgets.

So far this year, state general-fund revenues are running 0.25 percent below last year. That may not sound like much, but it means the state's main checking account has received $21.1 million less than it had by this time last year, at a time when demands — for everything from college classes to medical care to prison beds — continue to rise.

Things aren't expected to improve anytime soon: The state is projecting a shortfall of nearly $2 billion in the coming two-year budget cycle.

Why are tax revenues down?

Mainly because people aren't buying as many taxable items.

From the mid-1980s through 2000, taxable retail sales marched upward, climbing an average of 6.7 percent a year. But they dropped slightly last year, and were down again in the first half of this year — 0.9 percent below the first half of 2001, according to the Revenue Department.

This poses a predicament for politicians, who tend to expand programs and hand out tax breaks during boom times but get caught short during recessions.
?Did you know?
The sales tax is very sensitive to economic ups and downs. For every 1 percent the economy grows or shrinks, sales-tax collections rise or fall about 1.5 percent. (Source: state Department of Revenue)
But aren't sales taxes fairly stable over the long term? People will always be buying stuff.

They will. But more and more they're buying stuff that isn't taxed.

Like most states, Washington's sales tax mainly hits products and not services. A handful of services (such as auto repair, tanning parlors and landscape maintenance) are taxed, but most (such as legal and accounting services) are not.

Services, however, have become a major part of the U.S. economy, rising from 38 percent of gross domestic product in 1959 to 54.5 percent last year. (Gross domestic product is the value of all goods and services produced in the United States.)

Also, people's spending usually doesn't rise as fast as their income does, and the higher someone's income, the more likely he or she is to buy services rather than goods. The result: While both personal income and tax collections grew strongly during the 1990s, tax collections grew more slowly.

Those and other factors — as new as Internet sales and as old as people shopping in sales-tax-free Oregon — are gradually eroding the tax base. According to a Seattle Times analysis, taxable sales in 1981 were 51.8 percent of Washington's economy; last year, they were 46.6 percent.

Had that percentage stayed constant, the state would have collected an extra $640.7 million last year, and local governments would have reaped nearly $200 million more; King County's share of that hypothetical windfall would have been enough to keep all the parks, pools and libraries open.

Next: Property taxes »

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