Washington's Tax Surplus:
Keeping Faith with Washington's Taxpayers
1998-04
What should be done with extra money when the state raises more in tax revenue than it is legally entitled to spend?
That question is presented by official estimates that in the current (1997-1999) biennium Washington State will raise approximately $350 million more in revenues than has been appropriated. The state also has a $502 million surplus carried forward from the previous (1995-1997) biennium. To help citizens understand their options, the Washington Institute Foundation recently published a study by former Senator Emilio Cantu and Craig Schmid.
The Foundation believes there is no such thing as "public money." State revenues are nothing more than the money of citizens and taxpayers appropriated to public use through taxation. The first claim on excess revenues, therefore, belongs to the working men and women who earned that money.
In 1992, voters enacted Initiative 601, explicitly directing state lawmakers to prevent government spending from growing faster than inflation plus population growth in the last three years. The 601 limits first went into effect for the 1995-1997 biennium, establishing an absolute cap on the amount of spending the Legislature may authorize from the state's general fund.
Under the 601 formula, the total general fund spending for the current biennium may not exceed $19,270,000,000. Any excess revenues must be set aside into an emergency reserve fund, commonly called the "rainy day fund." It is accessible only in limited circumstances by a two-thirds vote of the Legislature. The emergency reserve fund may accumulate up to 5% of the state's budget ($954 million for the current biennium). If revenues exceed the 5% limit, the surplus must be deposited into an education construction fund.
Clearly, voters intended to break the old vicious cycle in which, ratchet by ratchet, spending increased with surpluses and taxes increased with deficits.
In the absence of any reserve funds, a period of economic recession can create an immediate crisis in the state budget, as current programs must be curbed or taxes raised to balance the budget. The rainy day fund is, in essence, a savings account the state can draw upon to allow a more gradual adjustment to changed economic circumstances.
The Foundation's study concluded that the current $500 million reserve provides the state with sufficient "breathing room" to adjust to any economic downturn. Additional accumulations above that level should be slowed and the state's budget balanced by appropriate tax reductions, restoring to taxpayers more control over the fruits of their labor.
One policy choice the Foundation believes is unsound is a one-time tax rebate of the surplus to taxpayers. A refund is a big government solution, which leaves in place the mechanism for generating surpluses and the temptation to amend Initiative 601 to spend them. A far better solution: return the money to Washington's families and businesses with sound tax cuts applying not only to 1998 but to future years. If additional revenue is required after that, let the Legislature make its case to voters then.
The study analyzed five separate taxes and set forth the impact of reducing each tax.
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The Sales Tax. The sales tax produces 52% of the general fund. A reduction from its current level of 6.5% to 6.3% would reduce revenue by $296 million if applied to the current biennium, well within the projected surplus. Such a sales tax cut would save the average family of four $200 a year.
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The Real Estate Excise Tax. The REET imposes a state tax of 1.28% on the price of every sale of real estate and is expected to raise $622 million for the state between 1997-1999. Cutting the state portion of the tax in half would save taxpayers $311 million. On the sale of a $200,000 house, taxpayers would save $1,280.
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The Motor Vehicle Excise Tax. The state levies an annual excise tax of 2.2% of the value of each automobile licensed in Washington. The MVET will raise approximately $1.59 billion in the current biennium, most of which is earmarked for transportation, criminal justice or local government support. Twenty four percent goes into the general fund. Reducing the rate from 2.2% to 1.8% would essentially eliminate the general fund portion and cut state revenues by $289 million. The owner of a car whose depreciated value was $10,000 would save $40 per year.
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The Business and Occupation Tax. The state's second largest tax source, the B&O tax, is imposed upon the gross receipts of all businesses in the state at rates ranging from .00471 to .015 percent, effective July 1, 1998. A 7.5% across the board reduction would cut revenues by $265 million.
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Sales Tax on Highway Construction. Washington's 23 cent gas tax is constitutionally dedicated for highway construction. The cost of construction is itself subject to sales tax, thus transferring 6.5% of highway construction costs from the motor vehicle fund into the general fund. Eliminating the sales tax on highway construction would cost the general fund $54 million in the next biennium, making that amount available for highway construction. The savings are nearly the same as a one cent increase in the gas tax.
Washington's current surplus is an opportunity to significantly reduce taxes. Any of the options analyzed in the Foundation's study fall within the current surplus and, as the study shows, a combination of lesser reductions could accomplish the same result: returning to taxpayers more control over their money.