Washington And Oregon Have A Tax Off. Who Wins?

Washington has to pony up $3.5 billion for basic education – but how the heck is that going to happen?

A back-of-the-envelope calculation by the Department of Revenue makes the solution look simple: Be like Oregon – or Idaho – and get an income tax.

Before your eyes pop out of your head, consider this: If Washington had Oregon’s tax structure, it would have the revenue it needs twice over – with crumbs in the billions leftover.

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Not that Oregon is perfect, of course. Washington and Oregon are both odd ducks when it comes to taxes.

More than 40 states use the full suite of state taxes to pay the bills – including sales and income tax. But not Washington and Oregon.

Oregon has income tax, but no sales tax. Washington has high state sales taxes – but no income tax.

It's a Pacific Northwest taxation experiment – and one with a clear revenue winner. Oregon trumps Washington. But the bigger winner is Idaho, the only Pacific Northwest state with income tax and sales tax.

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An unofficial calculation prepared by Washington’s Department of Revenue indicates that if Washington state had Oregon’s income-tax system, it would collect $9.6 billion more per fiscal period than it does now.

Instead of pulling in $11.7 billion in a fiscal cycle, Washington would raise $21.3 billion – enough to fund the gap in K-12 education spending more than twice over.

The calculation also says that if Washington had Idaho’s tax system – a combination of income and sales tax – the state would be $10 billion richer.

Washington and Oregon went near broke during the Great Recession, but they remained stubbornly tied to their tax structures. Voters in each state were given opportunities to change them but did not. Meanwhile, other states responded by adopting more taxes.

Looking at Washington, Oregon finds little reason to switch places.

“We’d have to have a 12 percent sales tax in Oregon to collect the amount of revenue we collect from a personal income tax,” said Paul Warner, legislative revenue officer for Oregon.

Precisely: Washington’s state sales tax rate is 6.5 percent. If Oregon and Washington switched tax systems, Oregon would need a 12 per cent sales tax just to bring in the revenue it has come to expect.

Warner, who watches bulletins from Washington’s revenue forecasting agency, notes another problem for his neighbor to the north: “Over time, the sales tax base has declined relative to the economy. “

This is a popular subject with Washington’s treasurer, James McIntire, who calls the graph that shows the decline, “the chart of doom.”

Washington’s sales taxes have declined since the 1990s, largely because of the Internet. People just aren’t paying taxes as often on items they buy online.

The portion of the Washington economy that ends up in the state’s tax system is down by around a third since 1995. That loss has been compounding for years.

Washington’s sales tax revenues have been shrinking compared to the size of our economy.

Our state adds jobs and wealth – and sales tax revenues grow, too, but only a little. This is one of the perils of running a state on a sales tax.

“The gap just gets bigger and bigger every year,” said McIntire, who has been staring at our shrinking revenue for years.

If it weren’t for the eroding tax base, Washington would have “another $15 billion in the state treasury, to be used for education, health care and other social services,” he said.

Washington’s economic growth means, among other things, more people.

The state has a hundred thousand more school-aged children to educate than it did in 1995.

“If you’re going to sustain education, you cannot do it,” he said. “It’s mathematically impossible to sustain it on a shrinking tax base.”

Explore the graphic to see how taxes in Seattle stack up against other cities.

(Note: A negative number under income tax means the state offers a tax credit to low-income earners.)

Source: Government of The District Of Columbia, 2014

Comparing with Washington and other states has become something of a sport for state economists in Oregon. They’ve publicly compared sales and income taxes and examined tax system volatility.

Their interest comes from a problem both Washington and Oregon share: There is constant concern that state government is not raising enough money to do its job.

Washington consistently collects less money than Oregon and faces a deadline to restore $3.5 billion worth of funding to basic education.

Oregon is particularly concerned about its system's instability.

Both Washington and Oregon were forced to slash government spending during the Great Recession of 2008. But Oregon economists say their state made deeper cuts – increasing the economic pain at a time when people expected state government to help.

When Oregonians lose jobs, they effectively step out of the tax system, since it is based on an income tax. In Washington, people who lose jobs must still spend. The state collects sales tax when they do.

The results were devastating in Oregon, where revenue dropped by $2 billion from a $16 billion general fund. Oregon’s state economist Mark McMullen said the loss was a painful time.

School teachers were laid off. Class sizes ballooned even in Portland’s prosperous suburbs. Small communities lost law enforcement.

“Oregon started cutting school days,” said Tom Potiowsky, an economics professor at Portland State University and the former state economist. “I mean, these are serious problems.”

Which is why Oregon is looking to tear a single page from Washington’s book – a gross receipts tax like Washington’s oddly-named B&O, or business and occupations tax.

Washington is one of the few states that taxes businesses on everything they sell. It was meant to be a temporary tax to help the state through the Great Depression. But when the state income tax failed, the B&O stuck around. Some portion of it trickles down to consumers as companies pass the tax along.

But Oregon sees a chance for revenue to support Oregonians during hard times.

“There are people out there thinking about it,” Potiowsky said.

But no talk of a state sales tax. In Oregon’s view, that is still Washington’s thing.

This story was produced in partnership with the Ravitch Fiscal Reporting Program at the CUNY Graduate School of Journalism.