Washington Research Council Blog

New Brief: Nation's Seventh-Best Business Climate?

Last week, the Tax Foundation released its annual ranking of state business tax climates.  Washington--largely thanks to our lack of an income tax--ranks seventh in the nation.  In a policy brief, we discuss the ranking and what it means for Washington.  This brief builds on a post from Dick last week.

Seattle Times, Microsoft executive urge action on higher education

Sunday's Seattle Times carried a strong editorial page call to action. "Losing kids on the path to prosperity" charts a course from early learning through higher education. Editorial page editor Kate Riley explains the urgency.

The state of Washington's education system — and by system, we mean the ways we educate our citizens from birth through graduate school — is imperiled. State decision-makers over the years have prioritized many things over this core function of government, which underpins our economy and quality of life.

She singles out a significant higher education gap.

The state's higher-ed institutions are economic engines in their communities, educating our own citizens to take the jobs our businesses offer. But there is a gap: Even in this era of high unemployment, many jobs in our state want for qualified Washington applicants.

Elsewhere on the page, Microsoft General Counsel and EVP Brad Smith makes the case for widespread reform, noting that the budget challenge creates an opportunity to make substantial progress.

The education debate this legislative session cannot be limited to a conversation about funding. Because the solution is not just investment; it requires putting our dollars into what works in helping students succeed. Student success is the single most important outcome against which our teachers and schools should be measured. And it is toward that outcome that our public resources should be directed.

I encourage you to read the whole thing. 

Tax Foundation: WA has nation's 7th best business tax climate. There's more.

The Tax Foundation, a respected national tax policy research group, released its annual report ranking the business tax climate in the 50 states. As it has in the past, the group gives Washington generally high marks. This year, the state comes in No. 7, up one from last year's 8th place ranking. 

Here's the TF news release, blog post, and full study.  

Although we've been critical of the TF methodology in the past (see here, for example), we believe the study provides an abundance of good information about state tax policy and its impact on business. Moreover, they have consistently improved their methodology. Our criticism focuses on two issues:

1. It's not clear to us that it is possible to rank states fairly on a single business tax climate index. There's simply too much variation in how tax policy treats different sectors for the ranking to be as clean as most analysts would like.
2. The TF methodology gives extraordinary weight to income tax issues. The top 10 states in this year's ranking are, in order, Wyoming, South Dakota, Nevada, Alaska, Florida, New Hampshire, Washington, Montana, Texas and Utah. 

TF explictily accepts the charge of overweighting the absence of a major tax.

It is obvious that the absence of a major tax is a dominant factor in vaulting many of these 10 states to the top of the rankings. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. 

Several of these states, including Washington, have also been high growth states. As noted in our analysis of Initiative 1098, states with steep progressive income tax rates have been substantial losers in the competition for jobs and investment. In that policy brief, we cited the 2010 TF report,

No matter what the average rates are, the high marginal rates will affect the state’s position in several prominent national business climate rankings. Washington ranks 9th best in the Tax Foundation’s 2010 State Business Tax Climate Index. The overall index bends five major components indexes: corporate tax, individual income tax, sales tax, unemployment insurance tax and property tax. Washington ranked 33rd, 1st, 50th, 26th, and 21st respectively in these components. The state’s high overall ranking was largely dueto the lack of an income tax, which resulted in the “number one” ranking in that component.

This year, we rank 30th in corporate tax, 1st in individual income tax, 48th in sales tax, 18th in unemployment insurance and 22nd in property tax.

It's important to read the Tax Foundation report as one useful barometer of business tax climate. Another, complementary, approach is taken by the Council on State Taxation. We reported on the COST business tax study in a blog post last summer. The crux:

COST finds that state and local business taxes in Washington amount to 5.4 percent of Gross State Product, significantly higher than the US average of 5.0 percent. 

In my column this morning, I write about legislative proposals for a new personal and business income tax, a capital gains tax, and extending the sales tax to personal and professional services. Each of these proposals would exert a drag on our business tax climate. I'll not go into detail here. Please read the column. I should note this finding from the TF report:

States with the worst scores on the [sales tax]  are Hawaii, New Mexico, Washington, South Dakota and North Carolina. Their tax systems hamper economic growth by including too many business inputs, excluding too many consumer goods and services, and/or excessive rates of excise taxation.

Keep that in mind when you hear charges of "excessive" use of tax incentives in this state. 

We and others have been critical of business taxes here. There's room for improvement. And there are some things we're getting right. It would be a tragic mistake to use the good news to promote bad business tax proposals. 

Proposed capital gains tax would add volatility to state tax structure

State Rep. Laurie Jinkins, D-Tacoma, has proposed a new, 5 percent capital gains tax. Introduced as HB 2563, the measure has picked up 26 Democratic sponsors and will doubtless generate a bit of buzz. At least the think tank that germinated the idea is pleased. Here's what the Washington State Budget and Policy Center has to say about it today:

House Bill 2563, which would create a new 5 percent excise tax on high-end capital gains in Washington, would tap this highly concentrated economic resource in order to restore public investments in health care, education, and other public structures proven to foster job-creation and broadly-shared prosperity.

The Center displays a graph based on Congressional Budget Office data showing that capital gains are increasingly more concentrated among the nation's wealthiest taxpayers. The graph ends at 2007, as do most of the media reports of the growing wealth disparity in this country. It reminded me to check back on this Alan Reynolds op-ed in in the Wall Street Journal. 

Looking at the CBO's report on income inequality, Reynolds writes:

...here's a question: Why did the report stop at 2007? The CBO didn't say, although its report briefly acknowledged—in a footnote—that "high income taxpayers had especially large declines in adjusted gross income between 2007 and 2009."

No kidding. Once these two years are brought into the picture, the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported for 2007.

The larger truth is that recessions always destroy wealth and small business incomes at the top. Perhaps those who obsess over income shares should welcome stock market crashes and deep recessions because such calamities invariably reduce "inequality."

Setting aside the unanswerable "fair share" questions, let's consider what taxing capital gains might mean to the state's revenue stream. As Reynolds points out, incomes at the top tend to be volatile. California serves as a poster child for the hazards of overreliance on taxes that fall most heavily on the wealthy.

Stateline.org reports: 

With a revenue system that's heavily dependent on income taxes on the wealthy, California's budget has a history of unexpected booms and busts that reflect the vagaries of the national economy. In that context, it's notable that the state Legislative Analyst's Office (LAO) has declared that "revenue estimates are an even bigger question mark than usual for the Legislature this year."

Sure, there's the uncertainty associated with taking a tax plan to the voters. But even clearing that hurdle doesn't solve the problem. Capital gains taxes are tricky.

Forecasting capital gains is notoriously difficult. That's partially because all economic forecasting is imprecise, but also because capital gains can rise and fall suddenly, independent of the expansions and contractions of the economy as a whole...

The very wealthy tend to claim a greater proportion of their income in capital gains. For that reason, the revenue from Brown's income tax plan depends heavily on the capital gains number. By targeting the rich, Brown's plan would make California's tax code more progressive, but also potentially more volatile. 

That "potentially" is a nice, but unnecessary, qualifier.  

Capitol Weekly has this.

Gov. Brown’s latest budget reflects California’s risky, roller-coaster reliance on uncertain revenues generated by wealthy taxpayers. And there’s no immediate end in sight, given that the governor wants voters’ permission to raise those taxes further in November.

That assessment from the Legislature’s nonpartisan fiscal adviser is at the heart of its analysis of the governor’s draft budget for the 2012-13 fiscal year which he hastily unveiled last week amid a staff mix-up. The year begins July 1.

“Already, California's budget is dependent on volatile income tax payments by the state's wealthiest individuals,” the Legislative Analyst noted.

I understand that lawmakers here are interested in some new revenue. If they're serious about long-term sustainability, capital gains taxes should be the last place they look. No need to take that roller coaster ride.

A longer-term look at state budget gaps

Sunday the Seattle Times editorial board released a series of reforms necessary to guide the state back to a sustainable budget. It's a smart list, including a number of ideas that we have written about in the Thrive Washington series and in various WRC policy briefs.

As important, the editorial examines the growing gap between available revenues and projected spending. This is an issue framed early by Sen. Jim Kastama (D - Puyallup) in an informative video. The WRC has taken a look at the trend lines, and using information from the state budget office, updated the information. The trends are, as Kastama noted, alarming. The Times editorial includes our graph.

When a trend cannot continue, goes Stein's law, it must come to an end. Sooner, rather than later, we hope.

Boeing CEO explains what business wants from the other Washington

A good op-ed by Boeing CEO Jim McNerney appears in today's Wall Street Journal.

For the good of the nation, our elected leaders must now find it within themselves to pass sound laws, regulate judiciously, and put aside escalating tactical political battles. If the super committee succeeds [in its deficit-reduction mission], the White House and Congress should build on the momentum and:

• enact comprehensive, pro-growth tax reform that benefits everyone;

• proceed with regulatory reform; and

• reform and restructure existing entitlement programs.

Some will dismiss these prescriptions as the same tired lines from business. Others, rather than offer solutions, may take another opportunity to demonize all businesses for the part a small few had in contributing to the recession. But political leaders must rise above the vitriol and focus the country on the future.

Sound advice for this Washington too.

Governor wants state workers to pay more for health care benefits...they decline

State workers enjoy significantly richer health care benefits than do most private sector employees, as documented in this Thrive Washington paper.

Currently, Washington pays 88 percent of the premium costs for state employees for individual or family coverage.  In 2003-05, state employees paid, on average, 16.3 percent of the cost of their coverage (up from 6 percent in FY2001).  In 2005, the first budget enacted after public employees were allowed to bargain collectively, the state employee share of premium costs was reduced to the current 12 percent.

By comparison, the 2010 survey of employer health benefits conducted by the Kaiser Family Foundation and Health Research and Education Trust found that “on average (covered workers) contribute 19 percent of the total premium for single coverage (up from 17 percent in 2009) and 30 percent for family coverage (up from 2 percent in 2009).”

The latest collective bargaining agreement boosted the 12 percent to 15 percent - the governor had proposed workers pay 26 percent. Still, as the Kaiser Foundation reports, state employees have an uncommonly good deal.

The governor yesterday asked to reopen the contract to reduce state costs in the face of a $2 billion shortfall. Union groups quickly declined her invitation. According to the Seattle Times,

The governor's office said it still proposes to reduce by $16 million the state's contribution to employee health-care benefits this biennium. Gregoire's office maintains that would not affect the benefits because workers are tapping their insurance at a lower rate than previously anticipated, so that money would be missed.

Sounds like a pretty easy giveback - the money's apparently not needed to cover benefit costs anyway. Yet, the WFSE says,

 Federation Executive Director Greg Devereux told the WashingtonStateWire.com on Wednesday:

“‘State employees have given as much or more than anyone else in our state, and they are tired of this administration and the Legislature feeling like there are an endless amount of takeaways,’ he said. ‘All [the governor] has to do is look out the window and see Occupy Olympia, Occupy Seattle, Occupy Spokane. People are fed up.’ [Ed. note: That's a heck of a view from the dome.]

“Devereux said it makes more sense for the Legislature to order a three percent cut in all corporate tax breaks. ‘I think if we do that the $2 billion deficit goes away. Let’s just have a 3 percent across the board cut on all tax breaks.

Washington Policy Center analyst Jason Mercier notes the politics and the implications:

The unions' refusal to cooperate with the Governor's request is not surprising. Unions exist to fight for their members, not to advocate for policy that is in the best interest of taxpayers. This why it is incumbent on the Legislature to have the authority to weigh all spending requests equally in the context of the priorities of all taxpayers and citizens and not be cut out of budget decisions totaling millions of dollars.

All of which underscores the point made in a thoughtful editorial in the Herald of Everett.

 

If [proposed new revenue is] not accompanied by meaningful budget reforms that minimize the chance of further shortfalls, though, good luck getting it past skeptical, recession-battered voters.

 

Yes.

Taxes on table in NY, Colorado; California governor wants pension reform

As Washington lawmakers look at bleak budget options, they may find some guidance in proposals elsewhere.

Colorado voters decide the fate of Proposition 103 next Tuesday. Stateline.org describes it this way:

Proposition 103, a measure that would increase sales and income taxes to provide money for public education. The controversial measure, which would generate $2.9 billion over the five years the tax increase would be in effect, is lauded by supporters as “standing up for better schools” and vilified by opponents as a “job killer.” 

The arguments don't change much from state to state. 

The most recent poll, taken in August by the group Public Policy Polling, showed opposition to the measure leading by a margin of 47 percent to 45 percent — well within the four percent margin of error. 

While that looks close, any tax hike polling that low this close to the election has to be considered a long shot.

In New York, a millionaire's tax is scheduled to expire at the end of the year. Gov. Cuomo wants to let it go; predictably, a lot of folks disagree with him. Here's a link to the story at NPR.

The competitiveness of this state is hurt when you're one of the highest tax states in the nation, and businesses and people are more mobile than ever before," Cuomo said. "I also believe that point is all but inarguable."

True. But he's getting an argument anyway from the OWS crowd, liberal activists, and union leaders. (That's not entirely redundant, though there's obvious overlap.)

Tackling the spending side of the ledger, California Gov. Jerry Brown wants pension reform. Calculated Risk says if he's successful, it's a model for other states.

A big "if" ...

The San Francisco Chronicle outlines the plan:

Gov. Jerry Brown unveiled a 12-point proposal on Thursday aimed at shrinking the costs of public employee pension benefits in California, in part by raising the retirement age for most new employees from 55 to 67.

The plan would affect state, city, county and other public workers, including teachers, police and firefighters. Public safety workers would be allowed to retire with full benefits before the age of 67 depending on their ability to perform their jobs.

Brown also called for workers to increase contributions toward their benefits, and wants to institute a "hybrid" pension model that would combine traditional pensions with a 401(k)-style plan. The Democratic governor's plan would require that all public workers pay as much into their retirement savings as the government does, and is forecast to save from $4 billion to $11 billion in public funds over the next three decades.

While Washington faces a more manageable problem than California, Brown's plan represents the kind of thing we need to see more often. And, with a nod to the pro-tax movement in Colorado, New York, and elsewhere - including Washington - structural spending reforms like this will have to occur before voters embrace widespread tax increases.

Gregoire on Cutting $2 Billion from State Budget: "Dreadful"

Consider Gov. Gregoire's press conference yesterday the kickoff for the official annual budget contest (it just doesn't seem appropriate to call something this consequential a "game"). As Austin Jenkins writes in the Washington Ledge, the conference had an air of deja vu.

Throughout the recession, we've witnessed many such announcements, with many of the same expressions of frustration. Just last December, Gregoire unveiled a budget plan that included $4 billion in reductions, saying "I hate my budget." Don't mistake this, though for the boy crying wolf. Each round of cuts narrows the options and increases the risks. 

Her Budget Reduction Alternatives document makes for grim reading. Also at the link is her letter to lawmakers stating the need for at least $2 billion in spending cuts and suggesting that the November forecast will likely include more bad news. Among the cuts she thinks will be in her proposed supplemental budget:

•  
  • Eliminate the Basic Health Plan, ending subsidized health care to 35,000 low-income individuals. 
  • Cut off medical services to 21,000 people enrolled in the state’s Disability Lifeline and ADATSA (Alcoholism and Drug Abuse Treatment Support Act) programs. 
  • Trim 15 percent from the support we provide to our colleges and universities. 
  • Reduce levy equalization, which helps property poor districts, by 50 percent. 
  • Cut the length of supervision for all offenders, based on severity of offense. Sex offenders will be supervised for 24 months, and all other offenders, for 12 months. 

Although yesterday's news conference focused on takeaways, the governor said she'd also consider tax increases. Speculation that the all-cuts release was a strategy to soften up taxpayers and lawmakers for a revenue hike seems misplaced. The governor has a responsibility to produce a budget within available revenues. She did that. Clearly, she's not happy with it and this year appears more willing to entertain new taxes. Any revenue boost, however, will require voter approval. And most voters are in the same or worse shape as they were last year when they overwhelmingly endorsed I-1053 requiring a supermajority or voter approval for new taxes. 

More later.

Plenty of initial response and news coverage:

AWB: Gregoire lays out $2 billion in possible cuts, kicking off difficult budget debate

Washington State Budget and Policy Center: Is this the kind of state we want?

Washington Policy Center: Governor provides lawmakers with budget recommendations

Senate Democrats: Majority Leader Brown and Sen. Murray on governor's alternatives

Senate Republicans: Zarelli gives governor credit for sharing budget options early

House Republicans: House Republican leaders issue statements on governor's budget ideas 

House Democrats: Governor announces "dreadful" budget options

WFSE: All cuts budget options announced; urge legislators to cut tax breaks and raise revenue

Stories in the Seattle Times, The News Tribune, Columbian, Washington State Wire, Everett Herald, Yakima Herald-Republic, and Olympian.

First media coverage of our impact analysis of I-1183 liquor privatization

Credit to Erik Smith at Washington State Wire for his report on the revenue impact analysis Special Report we released yesterday.

An initiative that would shutter the state liquor stores would generate huge revenue for state and local governments – an extra half-billion dollars over the first five years alone, according a new report from the Washington Research Council.

Initiative 1183, the liquor-store privatization measure that appears on the November ballot, would generate an additional $443 million for state and local governments between 2012 and 2017, the report says.

I also appreciate this:

It should be noted that the Research Council, a business-oriented think tank, produced its report with support from Costco and its business membership. But the non-partisan organization maintains a 79-year tradition of independence and strict attention to economic modeling.

We work hard to maintain that reputation. As they say, RTWT. Both of them, actually, Smith's story and our report.