Tax Analysts Blog

Want Bad Tax Policy? Here's a Blueprint

Posted on Jan 7, 2015

Washington Gov. Jay Inslee recently released his proposed budget. It illustrates a lot of what is wrong with tax policy in the states. The governor wants to raise taxes by $1.4 billion over the next two years. Conservatives may think this is terrible -- and it is. But the problem is how Inslee wants to raise the new revenue. He wants to impose a 7 percent capital gains tax on a narrow band of Washington residents. Specifically, he wants to impose the tax from the earnings sales of stocks, bonds, and other assets above $25,000 for individuals and $50,000 for those filing jointly. It would affect "only" an estimated 32,000 people who live in Washington.

Governments around the world are reducing their taxes on capital -- the District of Columbia did it last week! Yet Inslee would like to impose one. Why? The state needs the money, and the tax will raise nearly $800 million a year. The state needs the money -- isn't that what drug dealers and bank robbers say when asked why they do what they do?

Taxing mobile capital in a world economy is a dumb idea. But from what I understand, the Democrats in Washington will try to take advantage of the argument that the burden would fall on a tiny percentage of the state's population. There is nothing like taxing a small number of people to get money to purportedly help the masses. But such tactics illustrate all that is wrong with big government. If the services provided by Washington are so important, why aren't they funded with broad-based taxes? I will tell you why: Because nobody would want to pay. The sham is the promise of government goodies without any responsibility for paying. I note that not too long ago, the people of Washington rejected adoption of an income tax that would fall only on those making more than $400,000. People often see through the sham.

Inslee's cynical approach to who pays goes further. He wants to raise the cigarette tax by 50 cents a pack -- to a whopping $3.52 a pack. Why? He needs the money. No one opposes cigarette taxes, because smoking is bad for you and liberals who purportedly care about regressive taxes don't really care about poor people who smoke. The money will be used for all kinds of good things enjoyed by nonsmokers, so it is a win. Of course, it will lead to more smuggling and black-market sales of cigarettes, which will lead to stronger police action. I can't wait.

Just so we aren't confused about motivation, the cigarette tax increase has nothing to do with health. Inslee is also proposing a new excise tax on e-cigarettes and vapor products at 95 percent of the taxable sales price. Yes, 95 percent of the taxable sales price. If the government cared about the health of the poor, it would be subsidizing e-cigarettes. All indications are they are not remotely as dangerous as the real thing. Think of the money we would save on smoking-related Medicare and Medicaid costs. But you would have to care about the poor to think in those terms.

But there is more bad tax policy. Inslee would like to extend tax breaks for the biotechnology and environmental technology industries. You see, he wants people to invest in those industries -- then he can impose his capital gains tax when they sell their investments.

One good thing Inslee proposed is an earned income tax credit. He would like to provide a rebate to state residents who qualify for the federal EITC. I am a fan of providing tax relief to those on the bottom rung of the economic ladder, and the EITC is a good way of doing that.

In a state like Washington, heavily dependent on consumption taxes, many people favor various exemptions. States exempt necessities like food and medicine, but those exemptions violate all kinds of tax principles. Moreover, they provide relief to everyone who buys food and medicine. There really is no reason to exempt the family making $500,000 from paying sales tax on their filet mignon purchased at Whole Foods. Many businesses in Washington would like to see a sales tax holiday rather than an EITC. But sales tax holidays only benefit retailers. The EITC is the best possible solution to providing tax relief to the poor.

Read Comments (2)

edmund dantesJan 6, 2015

Excellent post!

It seems that the government wants the poor to smoke real tobacco instead of
e-cigarettes so that they will die sooner and reduce the surplus population.
Total lifetime Medicaid and Medicare expenditures are reduced for shorter

robert goulderJan 6, 2015

What a messed up way for Washington State to raise revenue.

You mention that the state's finances are highly dependent on consumption
taxes. Okay, so why not improve the RST? For starters, they could expand it to
include services. If you expand it enough, you could lower the rate across the
board and still raise revenue -- if that's the goal.

Some folks don't want to hear it, but a consumption tax base should be as broad
as possible. Narrowing the base for necessities (e.g., food) is the wrong way
to adjust for the regressive aspects of the tax. Such exclusions make people
feel like they're helping the poor, but such forms of relief are poorly
targeted. Better to eliminate all those preferences and consider other means
(e.g. EITC) of adjusting for distributional imbalances.

RST will always be regressive when viewed in isolation. Ditto for VAT or GST.
People need to accept this fact and stop trying to tinker with the tax base.
Sadly, I don't expect the political class to follow this advice.

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