Q&A: Who pays the most and least and why
Seattle Times staff reporters
How true that is depends largely on how you look at the numbers. On a per-capita basis, state and local taxes in Washington rose 35 percent through the better part of the 1990s. But measured against income, Washington taxes actually fell 10 percent over that same period.
Where does fact end and ingrained belief start? Who really pays the taxes? How is a system that hasn't changed much since the Great Depression holding up in the Information Age?
Here are answers to some basic tax questions.
How much do we pay in taxes, anyway?
The per-capita state and local tax bill in Washington was $3,148 in 1999, the most recent year on record with the U.S. Census Bureau. That includes sales taxes, property taxes, business taxes, gasoline taxes, "sin" taxes on items such as cigarettes and alcohol, and a plethora of smaller charges.
Are we paying more than we used to?
Just over a third more: In 1992, the per-person figure tracked by the Census Bureau was $2,326.
How meaningful are those per-person rankings?
They leave something to be desired, especially in a state that's home to folks like Bill Gates and Craig McCaw on one end and unemployed millworkers on the other. Nor do they take into account differences in people's life circumstances: Newborn babies, schoolkids and retirees count the same as working, taxpaying adults. Finally, they ignore the fact that incomes also have risen over the years, not just taxes.
For those reasons, many economists prefer to examine taxes per $1,000 of personal income, a measure that's more comparable across households, states and income classes. Looked at that way, Washington taxes in 1999 were $111.25 per $1,000.
How do we rank? I keep hearing that Washington's a fairly high-tax state.
In terms of state and local taxes per $1,000, Washington in 1999 ranked 20th among the 50 states and the District of Columbia. The state ranked 12th in 1992, when taxes were $122.17 per $1,000.
In per-capita terms, the Census pegs Washington as 14th-highest. That status didn't change much through the '90s; in 1992, Washington ranked 13th.
Wait a minute. Didn't I hear we were the second-highest in the country?
You may have; it was one of the arguments made by backers of Initiative 776, the tax-cut measure that passed this month. That ranking, which comes from a Washington, D.C.-based research group called the Tax Foundation, includes federal income tax, which makes a big difference.
In the foundation's 2002 rankings of overall tax burden, Washington placed second (third if you include D.C.), with $11,899 in taxes per person or 35.6 percent of income. (The foundation uses data from the Bureau of Economic Analysis rather than the Census Bureau, so its numbers are more recent.)
But when just state and local taxes are considered, Washington drops to 21st in the foundation's ranking — $3,498 per person, or 10.5 percent of income.
Why do federal taxes, which are the same in every state, affect Washington's ranking so much?
There are three main reasons:
• Washington is a relatively high-income state: 15th in per-capita income, according to the Tax Foundation. That means it bears a bigger share of the personal income tax.
• Washington also is home to big companies like Microsoft, Washington Mutual and Costco, so it bears a bigger share of the federal corporate income tax relative to its population. That also plays into the foundation's rankings.
• Finally, Washington relies very heavily on sales taxes — which, unlike state income-tax payments, can't be deducted from federal taxes. If all the sales taxes Washingtonians paid in 1999 were deducted from federal income tax, taxpayers would have saved $523 million in federal tax, the state Revenue Department estimates.
Where does all that money go?
To the state, first off. Last year, Washingtonians paid nearly $12 billion in state taxes, or $1,997 for every man, woman and child. That included everything from sales taxes ($5.5 billion) to a tax on boxing and wrestling matches ($43,000).
Local governments get another big chunk of our taxes. In 2000 (statewide totals for 2001 aren't in yet), counties, cities, ports and transit districts — the major units of local government — collected $4.56 billion, or $772 per person. Most of that came from local property and sales taxes.
And don't forget schools. Washington's 296 local school districts levied nearly $1.9 billion in property taxes this year. That equaled $314 per person, though the actual tab varies widely from district to district.
Have taxes been rising all that time?
The state sales-tax rate has been 6.5 percent for nearly two decades. But as local governments have grown more reliant on sales taxes, the average local rate (which is added to the state rate) has risen from 1.235 percent to 1.889 percent over that same period.
Property-tax rates are actually lower than in 1992. The statewide average rate crept up between 1992 and 1997, but it has fallen back since, due in part to tax-limiting ballot measures. The average rate this year is $12.52 per $1,000 of assessed value, down from $13.25 in 1992. But while rates have been dropping, property values have been rising, and many property owners still feel squeezed.
The rate schedule for the business-and- occupation tax gets rewritten just about every time lawmakers get together. Several business activities were consolidated into lower rate categories in 1998, though overall collections continued rising until this year.
The gasoline tax has been 23 cents a gallon since 1991. Cigarette taxes have been raised repeatedly and, at $1.425 a pack, are now the second-highest in the nation; taxes on beer, wine and spirits also have been raised.
Does it matter where in Washington you live?
It sure does — levies, property values and sales-tax rates are all over the map. Literally.
Take average property-tax rates, which usually are expressed as an amount per $1,000 of assessed value. They range from $8.11 in San Juan County to $15.83 in Garfield County.
King County's average rate, $11.17, is among the state's lowest, but even that doesn't mean much: Due to the overlapping of hundreds of taxing districts, the county has 265 distinct total tax rates, ranging from $7.43 in Hunts Point to $14.24 in an unincorporated area near Tiger Mountain.
Sales-tax rates vary considerably. The state rate is 6.5 percent everywhere, but localities add anywhere from 0.5 percent to 2.8 percent; the latter rate applies to bar and restaurant sales in King County and includes a 0.5 percent surtax to help pay off Safeco Field. All other retail sales in King County are taxed at 2.3 percent in addition to the state's 6.5 percent.
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.
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 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.
Property taxes are doubtless the most despised in the state. In the Times poll, 51 percent of people called the tax unfair, and 53 percent said their property taxes had gone up more than any other tax over the past decade or so.
Ironically, this most unpopular of taxes funds some of the most popular services: public schools, police and fire service, courts and libraries. Statewide, about a third of K-12 school revenue comes from property taxes; King County gets 46 percent of its current-expense money from them.
Haven't we voted to limit property taxes?
More times than you probably realize. The first limit was in 1932, when Initiative 64 capped taxes at 2 percent of "true and fair" value; the most recent effort, last year's I-747, limited increases in regular levy collections (those made without a public vote) to 1 percent a year.
But while we limit how much governments can tax us, we're still willing to tax ourselves. Statewide, more than a third of this year's total $5.98 billion property-tax levy had been specifically approved by voters; this year, King County voters have approved 47 of the 61 property-tax measures submitted to them.
Is that why my taxes are so much higher than when I bought my house?
It's part of the reason, but only part.
Remember, our houses are worth a lot more than they used to be. From 1992 to 2002, assessed values in King County more than doubled; a house worth $200,000 in 1992 would be valued at $406,060 today. Property valued in Snohomish County rose nearly as much.
So if my property value doubles, my tax bill doubles too, right?
Actually, no. That may have seemed the case in the past, but especially since Referendum 47 in 1997 and Initiative 747 last year, there's not a direct link between property values and taxes.
With most taxes, a fixed rate is applied to a tax base, producing revenue for government. (Think of the sales tax.) Property taxes work the other way around: The amount to be raised is decided in advance, and the rate is set to generate that much tax revenue. Ultimately, whether your taxes rise or fall depends on decisions by government officials.
Here's how it works: Each year cities, counties, school districts, fire districts and other agencies decide how much money they'll need. The county assessor totals how much each taxing district has decided to raise, adds any special levies voters have approved, divides that total by the property value in the district, and arrives at a rate. Your final tax bill may comprise a dozen or more separate rates.
Where in the state have property taxes gone up the most?
Pend Oreille County, in the northeast corner of the state, takes the prize for the biggest increase in its average levy rate — 20.6 percent, from $10.90 per $1,000 of assessed value in 1992 to $13.15 this year. In terms of total dollars collected, Clark County in fast-growing Southwest Washington had the biggest rise: 163 percent, from $125.9 million in 1992 to $331.2 million last year.
What happened statewide?
The average levy rate statewide actually fell, from $13.25 per $1,000 in 1992 to $12.52 this year. Average rates rose in only 12 of 39 counties. But total collections statewide still rose over the decade by nearly $2.9 billion, or 92.8 percent. (They'll rise again next year, once all the bonds, levies and other voter-approved measures are worked into the 2003 tax bills.)
Have Referendum 47 and Initiative 747 done anything to slow the growth of property taxes?
Apparently so. R-47, passed in 1997, was an effort to hold tax increases to the level of inflation. I-747 was more stringent, limiting increases in most tax collections to just 1 percent a year.
Although a few things are outside the I-747 limit (voter-approved levies, and taxes on new construction and building improvements), the measure's effect has been to drive down tax rates. It's not hard to see why: If property values rise by more than 1 percent, the only way to keep tax collections below that cap is to tax at a lower rate.
While a typical house in Bellevue, for example, has risen 26 percent in value since 2000, the tax rate on that house has fallen 15 percent, from $10.50 (per $1,000 of value) to $8.94.
But the tax rate on my house hasn't fallen.
There are two possible reasons. First, remember that voter-approved levies are outside the I-747 limit. Seattle's low-income-housing levy, Kirkland's $8.4 million parks bond and levy, and a $324 million bond issue by the Bellevue School District — all approved this year — will add to next year's tax bills, 1 percent limit or no.
In addition, many taxing districts can cushion I-747's impact with "banked" taxing authority — levies that were authorized in past years but never imposed.
Renton, for example, drew upon banked authority this year to collect 4.9 percent more money from property taxes; because of rising property values, the city could generate the extra money without changing its rate per $1,000 of value.
In King County, 32 taxing districts have a total of $72.1 million in banked levy capacity; 27 districts in Snohomish County have $9.4 million in banked capacity.
Once taxing districts have used all their banked authority, though, the I-747 limits kick in for good.
Although many people don't realize it, businesses pay about 46 percent of all Washington taxes — a greater share than in most states. Besides paying the same sales and property taxes that you do, Washington businesses also pay the business-and-occupation tax, or B&O.
Washington's B&O, unique in the country, essentially taxes gross sales; there are six rate categories covering every business activity, from retail sales to radioactive-waste disposal.
The B&O brought in almost $2 billion last year, making it the state's second-biggest revenue source behind the sales tax. Cities, which can impose local B&O taxes, took in $205.3 million from them in 2000, the last year for which figures are available.
I don't own a business. Does the B&O affect me?
It does, because often businesses pass along some if not all of their B&O burden to their customers.
Most products are taxed at every step of the production process, from raw material to finished item. The tax is then built into the price paid by the next guy down the line.
An example: A lumber company sells wood to a furniture maker. The company will pay tax on the sale, so it charges a little extra to compensate. Ditto for the furniture maker who builds a dresser from the wood and sells it to a distributor, for the distributor who sells the dresser to a furniture store, and for the store that sells the dresser to you. The retail price — on which you also pay sales tax, remember — reflects four layers of B&O.
I'm not sure I like that.
You're not alone. Businesses complain about this "pyramiding" effect because it results in widely varying effective tax rates depending on a company's structure and the nature of its industry.
Why else don't businesses like the B&O?
Because it taxes gross revenue rather than profits. That means that unprofitable or marginally profitable companies pay B&O at the same rate as highly profitable ones. With a corporate income tax, of the sort most states have, only profitable firms pay tax.
Critics of the B&O call it a burden on small business, and say it isn't fair to tax a software startup, which might not turn a profit for years, at the same level as Microsoft.
But defenders of the tax counter that all businesses benefit from government services and should help pay for them. They also note that, because businesses' net profits vary from year to year much more than their gross revenues, the B&O is a more stable tax than the corporate income tax.
Over the past two decades, collections have risen an average of 8 percent a year.
OTHER TAXES, FEES
Those are the major taxes you pay. But there also are a host of smaller taxes and fees — many of which finance specific government programs.
The cigarette tax is a good example. From the $1.425 tax on each pack, $1.01 goes to state health-care programs, 10.5 cents to violence-reduction and drug-enforcement programs, and 8 cents to water-quality programs (though last year some of that money was diverted to salmon recovery). Only 23 cents ends up in the state's general fund.
What are some of the other smaller taxes?
• There's an excise tax on real-estate sales, paid by the seller (1.53 percent or 1.78 percent in most places). The $589.2 million raised by the tax last year was shared by the state, cities and counties.
• A tax on hotel and motel rooms in King County (7 percent in Seattle, 2.8 percent elsewhere in the county) helps pay off the Washington State Convention & Trade Center. The tax raised $40.2 million last year.
• Manufacturers, groceries and drugstores pay a 0.015 percent "litter assessment" on 13 categories of products, from beer, wine and soft drinks to cigarettes, newspapers and magazines. The tax brought in less than $6 million last year but funded litter-reduction programs and squads of litter-collecting teenagers.
Now tell me more about those fees.
They're hardly small potatoes. In fiscal 2001, state government got about $617 million from licenses, permits and fees, and more than $1.1 billion in charges for services (much of that is college tuition). All told, those fees and charges accounted for nearly 8 percent of the state's revenue, up from 6.6 percent in fiscal 1991.
Local governments, with fewer tax options, rely on fees even more. Financial data for cities, counties, ports and transit districts show local governments get nearly one-third of their revenue from fees — $3.8 billion in fiscal 2000.
What are some of the fees I might pay?
They range from the tiny (10 cents a day for late Seattle Public Library books) to the hefty (almost $8,000 for all the permits needed to build a typical small office building). Other examples: marriage licenses ($46), birth certificates ($13), driver's licenses ($25 plus $10 for the exam), deer-hunting licenses ($39.42), freshwater-fishing licenses ($21.90) and King County pet licenses ($15 if the pet has been spayed or neutered).
Many of those fees may be heading higher as localities struggle with their own budget shortfalls. Seattle Mayor Greg Nickels has proposed raising some 367 fees and fines, from building permits to parking meters to trash collection; Snohomish County is debating whether to raise the fine for false burglar alarms.
The tax system is hardly static: Legislative decisions and ballot measures continually reshape it, in large ways and small.
How do this month's election results change the tax-and-fee picture?
The Seattle monorail plan, which is hanging on by a thread, would impose a new 1.4 percent annual tax on vehicles registered to Seattle addresses: $140 on a $10,000 car. New cars would be exempt for the first year — you'd pay the tax when you renewed your license tabs. In 2004, its first full year, the tax would raise an estimated $69.4 million.
Other motor-vehicle taxes may not be on your license-tab bill, thanks to I-776. The measure, designed to make license tabs a flat $30, cut the licensing fee for light trucks and repealed a 0.3 percent tax that helps support Sound Transit, as well as a $15-a-vehicle surcharge imposed by King, Pierce, Snohomish and Douglas counties. (On Friday, state Attorney General Christine Gregoire said Sound Transit and King County could continue collecting their car-tab charges because the revenue goes to pay off bonds that already have been sold.)
Referendum 51, the statewide transportation plan, would have raised the gas tax by 9 cents, added an extra 1 percent sales tax on vehicles and imposed higher registration fees on trucks. But the measure was resoundingly defeated, so all those taxes and fees stay where they are — leaving state legislators in a bit of a quandary.
Are any other tax changes coming?
That is largely up to the 2003 Legislature. Besides trying to decide what, if any, new transportation plan to approve and how to fund it, lawmakers will also be grappling with an estimated $2 billion gap in the 2003-05 budget. The gap represents the difference between what the state expects to take in and the estimated cost of maintaining current services.
Then there's the committee, chaired by prominent Seattle lawyer William H. Gates Sr., that's spent much of the past year studying the state's tax system. Looking mostly at long-term issues — who pays Washington's taxes, how stable the taxes are, what impact they have on the overall business climate — the committee is recommending creating a state income tax. The new tax would be used to lower the sales tax and eliminate the state portion of the property tax.
The panel also favors replacing the B&O with a Canadian-style value-added tax, or VAT; reviewing special-interest tax breaks every 10 years; and revamping the state's rainy-day fund with stricter rules for setting aside and withdrawing money. Its final report will be released early next month.
However, any ambitious reform proposals face rough sledding.
Political wrangling is sure to erupt over the budget shortfall and transportation spending. Washingtonians dislike the income tax even more than property taxes. And tax alternatives like the VAT are confusing even to economists.
Given all those obstacles, don't bet on a wide-ranging overhaul of the tax system anytime soon.