Schmudget Blog


Why It’s Time to Ditch Washington’s Harmful Property Tax Restriction

Posted by Andy Nicholas at Sep 01, 2017 12:55 PM |

All of Washington’s kids deserve great schools, but the hard truth is that too many of them will remain saddled with under-resourced K-12 schools as long as a damaging law that arbitrarily suppresses state property tax collections remains on the books. This law starves Washington’s schools of adequate funding – and children of color have been disproportionately harmed by the chronic lack of investment in schools that it has created.  

That’s why our organization, in partnership with the Equity in Education Coalition and three state legislators, has submitted an amicus brief to the Washington State Supreme Court focused on this damaging law. Our brief demonstrates to the court – as the justices are in the process of ruling whether the legislature has fulfilled its duty to amply fund schools under the McCleary case – that this law should be struck down as an unconstitutional barrier to funding the great schools our kids deserve. 

First enacted in 2001 with the passage of Tim Eyman’s Initiative 747 (and later reenacted by the legislature after I-747 was struck down by the state Supreme Court), the restriction significantly weakened the state property tax, which is a major source of funding for Washington schools. The restriction arbitrarily caps annual growth in state property tax revenues to 1 percent (or the rate of inflation, whichever is lower) plus the value of new construction. Given that the annual costs to recruit and keep excellent teachers, purchase up-to-date computers and other classroom technologies, and buy other important resources grow faster than the law allows state property tax revenues to grow, the restriction has effectively drained billions of dollars in resources from our local schools over most of the last two decades. It will continue to do so if it’s not significantly reformed or taken off the books.

As shown in Figure 1 from the brief, from 1992 to 2000, the period of economic expansion immediately before the restriction was enacted, the state property tax was a robust and stable source of funding for our schools, growing at nearly the same average annual rate as property values. But our property tax revenue foundation grew much weaker after the restriction was enacted in late 2001. While property values grew at an average annual rate of 10 percent between 2002 and 2009, state property tax revenues grew by only 3.4 percent per year on average during this period.

[Click on graphic to enlarge.]

Harmful_Prop_Tax_Restriction_1

The property tax restriction took an especially large toll on school funding in the wake of the Great Recession. Although the Recession nominally ended in early 2009, its lingering effects caused property values to decline for several years afterward, bottoming out in 2013.

The construction boom that followed led to a rapid turnaround, with property values growing by 7 percent per year on average between 2013 and 2016. But again, the restriction did exactly what it was designed to do: it held property tax revenue to an average growth rate of only 2.1 percent during this period, preventing our schools from reaping any meaningful benefit from the booming recovery. 

The gap between state property tax collections and school funding has steadily ballooned under the restriction (see Figure 2). As part of their McCleary “fix,” lawmakers this year temporarily suspended the restriction to raise new state property tax resources for schools. However, it is slated to go back into effect in 2022. If this happens, the restriction will quickly erase most of the school funding progress achieved this year. In fact, the gap will rise to $27 billion in the 2025-27 cycle from the current shortfall of $16 billion.

[Click on graphic to enlarge.]

Harmful_Prop_Tax_Restriction_2

The property tax restriction has taken an especially heavy toll on kids of color throughout Washington. As our brief states, 

“The opportunity gap widened at an alarming rate following the imposition of the 1 percent revenue cap in 2002.  For example, between 2003 and 2015, Education Week Research Center found that while reading and math proficiency of Washington fourth and eighth graders improved overall, the gap between low-income students and their wealthier counterparts increased more than any other state in America.”  

While much more will need to be done to close the opportunity gap, eliminating the property tax restriction would free up resources needed to bolster opportunities for kids of color and kids from families with lower incomes in every corner of our state.

It’s important to note that while eliminating the restriction would allow property taxes to increase, lawmakers can take actions to ensure that lower- and middle-income households don’t wind up saddled with unaffordably high property tax bills. (Information about our safeguard rebate proposal and other equitable reforms to our property tax code, for example, is available here and here.)

The bottom line is the property tax restriction makes it even harder to sustainably fund Washington’s kids’ classrooms, which is particularly detrimental to children of color. All kids should have access to great schools with up-to-date textbooks, learning resources, and facilities – so that they can have the opportunity to thrive. That’s why we urge the Supreme Court to strike down this damaging restriction.

See the entire amicus brief that we submitted in partnership with the Equity in Education Coalition, Sen. Jamie Pedersen, Rep. Laurie Jinkins, and Rep. Gerry Pollet here.

And read the Seattle Times article about all of the amicus briefs submitted to the Supreme Court for the McCleary case here.

 

Three Reasons Why a New Tax Break for Manufacturers Is Bad for Washington State

Posted by Andy Nicholas at Jul 03, 2017 06:50 PM |
Filed under: State Budget, Tax Break

In the final hours of intense, behind-the-scenes negotiations over the recently enacted 2017-19 state budget, lawmakers in Washington state snuck in a major new tax break for manufacturers. This new tax break, which is one of 13 new or extended tax breaks included in Senate Bill 5977, would reduce the business and occupation (B&O) tax rate applied to Washington state-based manufacturers from the current rate of 0.484 percent to 0.2904 percent over the next four years. 

This Senate tax break bill is one of several bills that still need to be signed by Governor Inslee in order to become law. It is bad policy and it should not be enacted. Here are three reasons why:

  1. Once fully implemented, the new break will eliminate $39 million per year in funding that would otherwise support schools, health care, and other investments that form the foundation of a strong state economy. Structuring this tax break to gradually phase in allowed lawmakers to balance the state budget over the next four years. But after 2022, the mounting costs of this tax break will make it ever more difficult to balance the budget and adequately fund schools and other priorities.
  2. It includes no accountability to the public. It’s unacceptable that lawmakers neglected to apply any of the standard transparency and accountability provisions applied to other recently enacted tax breaks to this tax break – such as identifying a specific public purpose or goal, designating metrics to assess its success or failure in achieving those goals, or setting an expiration date.
  3. It will largely benefit shareholders and out-of-state consumers. The new tax break might allow manufacturers to very modestly reduce the prices of the goods they sell, but that would mostly benefit consumers in other states and countries where those goods are primarily sold. Manufacturers could also use the tax savings to pad their profits for the benefit of their own shareholders. Either way, that means millions of dollars in resources that would otherwise be used to support communities throughout Washington state will be diverted to other states and countries.

McCleary Reality Check: Legitimate Solutions Required to Fully Fund Schools

This is the second in a series of schmudget blog posts about property taxes in Washington state and the role they play in funding basic K-12 education. 

By Kelli Smith, policy analyst, and Andy Nicholas, associate director of fiscal policy

Complying with the state Supreme Court’s McCleary mandate to develop a dependable source of revenue to fund our K-12 schools should be lawmakers’ top priority when they gather in Olympia early next year. Lawmakers must not waste time promoting non-starter proposals like “revenue-neutral property tax levy swaps” that would generate none of the additional resources needed to build the education system our kids need to thrive. 

Under its 2012 McCleary decision, the Washington State Supreme Court ruled that it is the state’s duty to fully fund basic K-12 education. Yet school districts in our state have for years been relying on local property tax levy dollars to provide students with the basics that the state is supposed to be providing – such as textbooks, school supplies, transportation, salaries for teachers and nurses, and other essentials. Because of this, the court ruled that the state is failing in its paramount duty to fund education for all of Washington’s schoolchildren. 

To be clear, the court did not rule that local levies have to be reduced or eliminated. These levies can be kept in place to support the multiple services our schools provide beyond a basic education, such as after-school clubs and advanced placement programs. 

But opponents of providing new forms of revenue to pay for schools have been promoting the idea that local levies must be reduced or eliminated in order to fulfill the requirements of McCleary. And instead of finding equitable and dependable new sources of revenue to fulfill their duty, these lawmakers are fixating on revenue-neutral levy swap proposals. As we wrote previously, these swaps are complex shell games involving increases to the state property tax levy and decreases to local school districts’ levies. They generate no new resources overall.

Funding the basics can and should be accomplished with additional state revenue. In fact, in his July 2016 brief to the court, the state attorney general, who represents the legislature and the state government in the McCleary case, points out the various ways the legislature could fully fund basic education. The brief references numerous revenue proposals including taxing high-end capital gains, modifying a damaging law that restricts property tax revenue growth to a maximum of 1 percent per year, eliminating wasteful corporate tax breaks, and increasing the state property tax levy. 

The McCleary ruling is an enormous opportunity for policymakers to get to work on building a world-class education system for all of Washington’s children. The current levy swap proposals are intended to distract the legislature from making the most of this opportunity. Our kids will only get the education they deserve when lawmakers refocus on generating significant new tax revenues from equitable sources.

 

Slight Boost in Projected Tax Revenues Won’t Fix School Funding Crisis

Posted by Andy Nicholas at Sep 21, 2016 08:20 PM |

Although the newest state revenue projections anticipate a modest increase in available tax resources in the coming years, that uptick is minuscule compared to the billions of additional dollars needed to fund schools in Washington state.

In its September forecast, the Washington State Economic and Revenue Forecast Council projects that state tax revenues will increase, relative to the previous forecast, by $336 million (0.9 percent) for the remainder of the current two-year budget cycle ending in June 2017. In the next budget cycle, for 2017-2019, the council projects that state tax resources will increase by $134 million (0.3 percent). (1) These increases are largely attributable to higher-than-expected revenues from the sales tax and taxes on the sale of real estate.

Despite this boost in tax revenues, the council’s projections show that our state rainy day fund and other reserves will remain dangerously low at the end of the current budget cycle. They also show total budget reserves will be at about $1.8 billion by June 2017. That’s approximately 9.5 percent of annual state spending on public services, far below the 15 percent cushion that many economists and public finance experts recommend to ensure that schools, health care, and other important investments can be maintained when a recession or other state emergency strikes.

Lawmakers can’t depend on modest growth in existing tax resources to build the world-class education system that Washington’s kids will need to compete in this 21st century economy. To fulfill their obligation to our schoolchildren as mandated by the state Supreme Court, lawmakers must focus on raising additional new revenues from equitable sources. 

1. The revenue numbers reflect total state-only Near General Fund + Education Legacy Trust Fund + Opportunity Pathways Account

 

Funding Schools for Washington’s Kids Can’t Be Done through Property Tax Gimmicks

This is the first in a series of schmudget blog posts about property taxes in Washington state and the role they play in funding basic K-12 education. 

By Kelli Smith, policy analyst, and Andy Nicholas, associate director of fiscal policy

In the upcoming 2017 legislative session, Washington state lawmakers have an important opportunity to help all schoolchildren. In order to provide Washington’s kids with the opportunity for a future that includes better jobs, more civic engagement, and greater economic security, legislators must provide the resources needed to improve basic public education, as defined in the State Supreme Court’s McCleary decision – while also making other key investments that support thriving communities. 

Yes, it’s a tall order, requiring billions of dollars annually in additional resources. But it can and must be done for the sake of Washington’s future. And it must be done in a way that protects investments in priorities that help Washingtonians who are struggling to make ends meet – especially those investments that help ameliorate the effects of systemic racism and other structural barriers to opportunity. 

State and local property tax levies supply a foundation of funding for K-12 education in Washington state. A number of proposals involving changes to property tax levies have been introduced by state policymakers in the last few years. Few of these proposals would tackle the real challenges involved in ensuring we have adequate funding for schools, however.

So-called “revenue-neutral levy swaps” – shell games involving increases to the state property tax levy accompanied by decreases to local school districts’ levies – would generate no additional overall resources for schools. And though some lawmakers argue that a levy swap is necessary for the legislature to fulfill the mandate of the Supreme Court, the reality is that replacing local levies with the state levy won’t provide the funding to address the court’s primary concern – helping every kid in Washington state to get a top-quality education. 

Lawmakers must address the real barrier to creating the education system our kids deserve: a deeply inequitable state and local tax system that not only overly relies on the people least able to pay taxes, but that also doesn’t provide adequate revenue to support schools and other public priorities.

Before upending the current balance between the state and local levies, lawmakers should adopt more comprehensive solutions and work to make the overall property tax system a more equitable and reliable source of funds for schools and other priorities. The legislature should enact the following common-sense reforms to benefit all schoolchildren:

  • Enact property tax credits specifically designed to reduce taxes for lower-income and middle-income homeowners as well as renters who can’t afford higher property tax bills that get passed down to them through higher rents.
  • Eliminate the damaging law that restricts property tax revenue growth to 1 percent per year (or the rate of inflation, whichever is lower), which saps billions of dollars from schools. 
  • Remove the rigid “ten-dollar limit,” which makes it difficult for some cities and counties to meet needs for emergency services, public safety, parks, and other priorities by arbitrarily limiting the sum of all regular levies (those that do not have to be reauthorized by voters on an ongoing basis) to $10 per $1,000 of assessed property value. 
  • Raise the state property tax levy, which at $2 per $1,000 of assessed value, is near record lows. This would equitably generate additional revenue for schools throughout Washington state. 

Making these changes would be a key step toward fixing our state’s broken and inequitable tax system. And it would provide significant additional funding to help the legislature give Washington’s kids the high-quality schools they deserve. 

Future posts in this series will explain these important property tax reforms in more detail. They will also examine the strengths and weaknesses of Washington state’s property tax system as an instrument for funding basic K-12 education. Our analysis of each proposal will take into account the need for racial and gender equity. 

 

All Income Growth is Going to the Richest 1 Percent of Washingtonians

It’s time for policymakers in Washington state to take steps to reverse decades of widening economic disparities that threaten broad prosperity, now that it has again been shown that all income growth since 2009 continues to flow to the wealthiest Washingtonians.

An updated report from the Economic Policy Institute (EPI) shows that the richest 1 percent of households – those making over $388,000 a year – captured all of the new income generated in Washington state between 2009 and 2013 (see graph). By contrast, and in a stark reversal from past decades, average incomes among the remaining 99 percent of Washingtonians declined during this period, causing far too many hardworking families to fall even further behind.

2016-6_Top_1_Percent_Income_GrowthEPI

The richest 1 percent of Washingtonians didn’t always reap such an outsized share of income gains during periods of economic growth. Prior to 1980, the 99 percent typically captured at least 80 percent of all income gains during economic expansions.

Further, as the EPI report points out, it used to be considered outrageous for executives to receive multimillion dollar salaries and outsized bonuses while laying off workers. Today, as the vast majority of working people and families in Washington state continue to struggle, super-rich CEOs living here are doing better than ever. In fact, in 2015, the CEO of Washington state-based Expedia received the highest pay ($94.6 million) of any corporate chief executive in the county.

It has become abundantly clear in recent years that everyday Americans and Washingtonians are tired of the economic inequality that has become the norm. In our state, we need policies that help all communities thrive by strengthening employment and creating more living-wage jobs. We need to make sure our tax code doesn’t favor the wealthy and the politically connected over the common good.

In fact, our upside-down tax system – where Washingtonians with the lowest incomes pay seven times as much in state and local taxes as a share of their income than the richest 1 percent – makes it even harder for the 99 percent to get ahead.   

Building a stronger Washington economy requires greater economic equality and overall equity. Lawmakers must undo the systemic inequities that have created gaps in opportunity for many people of color to receive good jobs and living-wage salaries.

In Washington state:

  • Voters can help advance economic equality and close the opportunity gap if Initiative 1433, now gathering signatures, makes it on the November ballot and passes. It would incrementally raise the minimum wage to $13.50 over four years, increasing the take-home pay for 730,000 people working across a range of sectors. It would also provide paid sick leave, so parents don’t lose wages when they need to take care of themselves or their children when they’re sick.
  • Lawmakers during the 2017 legislative session must pass the capital gains tax recently proposed by Governor Inslee and leaders in the State House, which has been endorsed by major papers and many community groups throughout our state. And they should use the revenue from capital gains to invest in education, health care, and other services that expand economic opportunities for everyone.

And as lawmakers work to craft policies that seek to provide economic opportunity to Washingtonians, they must be especially mindful that those policies empower those who have been most harmed by racism and other structural inequalities that fuel the rise in economic inequality.

Senate Budget Includes Massive Tax Giveaway to Giant Media Corporations

Posted by Andy Nicholas at Mar 16, 2016 05:25 PM |
Filed under: State Budget, Tax Break
corrected version*

Those who believe that the $57 million in new tax resources included in the Washington State Senate's latest budget proposal represents a significant compromise in the ongoing budget negotiations are in for a big disappointment.

The new resources are no compromise from the Senate leaders’ rigid position of being against any new taxes to support schools and other priorities. Rather, they are a one-time payoff from large TV, cable, and media companies in exchange for a permanent tax cut that in the years ahead will cost the state millions of dollars that could have been used to help build a stronger economy.

Worse, this sweetheart tax deal sets a troubling precedent: It rewards businesses that don’t fulfill their civic duties and that evade paying the taxes that are needed to support safe communities, public infrastructure, and other investments that benefit all Washingtonians.

For at least the past six years, many large national media companies that supply TV shows, movies, and other content to local broadcast stations have been dodging Business & Occupation (B&O) taxes on their advertising and royalty-income-generating activities in Washington state.

Before 2010, these and certain other businesses were able to avoid paying taxes on their activities in Washington state if they had no employees, agents soliciting sales, or property located here. In 2010, lawmakers wisely plugged that tax loophole, requiring these businesses to pay taxes on the portion of their incomes generated in our state.

But many large TV and cable companies failed to comply, avoiding about $11 million per year in B&O taxes tied to their Washington-based advertising activities, according to estimates from the state Department of Revenue. And now there is a threat of legal action from national media conglomerates doing business in Washington state that would seek to prevent the Department from collecting their unpaid taxes and enforcing the law in the future.

Senate Bill 6665 –  heard in the Senate Ways & Means Committee on March 11 along with the Senate’s latest budget proposal – would reward these businesses for shirking their responsibilities to Washington state. Companies in the mix would likely include multibillion-dollar corporations like Comcast-NBCUniversal and Fox Broadcasting Company.

Under the proposal, all fines and penalties assessed on unpaid taxes from June 2010 to July 2016 would be waived for any business that pays by October 2016. And the actual amount the companies owe in unpaid taxes from that time period would be cut in half.(1) Their tax responsibility moving forward would also be cut in half.

The upshot is that under SB 6665 there would be a one-time, $57 million boost in B&O tax revenues in our state from national media corporations as they rush to take advantage of a massive giveaway of public money that they’d be crazy to turn down. The deal allows them to pay a mere fraction of their total unpaid tax bills now and receive a large permanent reduction later.

Far from being a needed breakthrough that would enable policymakers to make real progress on addressing the many challenges communities face across our state, the latest Senate budget is really just more of the same: unsustainable gimmicks and wasteful tax breaks for large, profitable corporations that don’t need them.

(1) Under current law, these companies are required to pay B&O taxes on about 2.2 percent of their total nationwide advertising income, which amounts to an estimated $730 million per year, according to the Department of Revenue. But SB 6665 would permanently cap their Washington portion at 1.1 percent, or $360 million per year. Their cumulative tax bills on advertising revenue would be reduced from about $11 million per year to $5.6 million.

 *The original version of this post incorrectly stated that any taxes national media companies owed to Washington state from before January 2012 would be entirely forgiven under SB 6665.

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