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Wednesday, December 4, 2002 - Page updated at 12:00 AM

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State income tax urged again: Experts say it's fair, but few expect quick action

Seattle Times Olympia bureau

OLYMPIA — Washington state's tax structure is outdated, unfair and bad for the economy and should be replaced, preferably with a system that includes a personal income tax, a panel headed by Bill Gates Sr. told state lawmakers yesterday.

But persuading politicians, let alone the public, to go along with such a plan will be about as easy as selling gift certificates for the dentist.

After nearly a year of work, the Washington State Tax Structure Study Committee yesterday handed lawmakers a 139-page report pointing out numerous flaws in the state's tax system and offering a broad array of fixes, mostly in the form of new taxes.

Gates said the group's proposals warrant immediate attention from lawmakers. But he and other committee members said they realize that is not going to happen, and that it might take a decade or more for people to accept that the state's tax system needs an overhaul.

"If people knew a little bit more about what they're paying, they might be willing to look at something else," said Hugh Spitzer, a law professor at the University of Washington and vice chairman of the committee.

Washington, one of just six states without a personal income tax, gets the bulk of its tax revenue from three sources: retail-sales taxes, business-and-occupation taxes and property taxes.

The biggest problem with the system is that it is highly unfair to people in lower income brackets, the committee concluded. The state's poorest families lose as much as 16 percent of their income to taxes, while the wealthiest pay as little as 4 percent.

This problem is compounded by the fact that, since the 1980s, people have not been allowed to deduct what they pay in sales taxes from their federal income-tax bills. If Washington replaced the sales tax with an income tax, residents here could save as much as $1.5 billion in federal taxes each year, according to the report.

The committee also found that, under the existing tax system, state revenue has not grown on pace with the overall economy. The state's tax base is being eroded partly because people spend more of their money on non-taxed services, such as cable TV, and by shopping in other states or on the Internet.

Gates said the most obvious solution to many of the tax system's flaws would be to impose a new personal-income tax, which would hit people more proportionally at different income levels. The committee said any changes should be "revenue neutral," meaning the state's overall tax take would remain the same.

The committee offered a variety of income-tax variations that could replace all or part of the state's sales and property taxes.

The report also suggested replacing the state's business-and-occupation tax, which the committee said hits some businesses harder than others. And it suggested putting in place a constitutionally protected "rainy-day" account that could grow in good economic times and only be tapped during economic slumps.

The tax study was mandated by the Legislature last year. The committee included three legislators, but the majority of seats were held by university professors with expertise in economics, accounting, business and law.

Gates and other members delivered their report yesterday to a joint meeting of House and Senate fiscal committees.

If history is an indication, however, the study will not spark much change in the near future. Before this one, there were at least six major tax studies over the past five decades. Most reached the same primary conclusion — that the state's tax system is unfair — and suggested, among other things, imposing an income tax.

Political leaders have tried in vain to overhaul what former Gov. Mike Lowry once referred to as "our stupid tax system."

In the late 1980s, then-Gov. Booth Gardner traveled statewide trying to drum up support for an income tax. But even after a yearlong effort, public support had grown only slightly to about 27 percent, said Bill Wilkerson, who ran Gardner's tax campaign.

"I don't think the politics have changed in the last 15 years to the point where the people are going to support an income tax," said Wilkerson, who now runs the Washington Forest Protection Association. "The people just don't trust government to hand over a new taxing tool."

Committee members said they realize their report will not generate quick fixes. Imposing an income tax likely would require a statewide vote. Voters have repeatedly rejected income-tax proposals at the polls, most recently in 1973 by a 3-to-1 ratio.

It will take time, Spitzer said, and lots of bold political leadership to sell the public on big change.

Many politicians yesterday praised the committee's findings, but few rushed to embrace its recommendations.

"It's a good starting point for some long-term discussions," said Roger Nyhus, Gov. Gary Locke's spokesman. "Long-term is the key."

Some lawmakers want to move sooner.

"The reality is that this is not that big of a political issue," said Rep. Jim McIntire, D-Seattle, a member of the tax-study panel. "This is not civil rights, this is not restructuring the state constitution. It's something that 44 other states have done."

But after last month's election, which gave Republicans a one-seat majority in the Senate, new taxes look especially unlikely in the coming legislative session.

Sen. Dino Rossi, R-Issaquah, who will soon take over as chairman of the Senate Ways and Means Committee, said he disagrees with many of the committee's key findings, including the conclusion that Washington's tax system is unfair to poor people. And he said, like most voters, he doesn't believe those who say they want an income tax only because it would be more fair.

"The only reason they would want to do this is to get more money," said Rossi.

Sen. Lisa Brown, D-Spokane, who sponsored the bill to launch the tax study, said she has no answer to such suspicions. But she said eventually the state's tax structure will become such a "sore thumb" that people will look to changes like those the committee proposed.

"I don't see it springing off the lips of our political leaders right now," Brown said. "But that doesn't mean it couldn't change."

Ralph Thomas: 360-943-9882 or rthomas@seattletimes.com.

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