This fall voters will have the opportunity to consider Initiative 1464 (Campaign Finance). Among the provisions in this 23 page, 37 section proposal is taxpayer funding of vouchers for voters to use to make campaign contributions. According to the Office of Financial Management (OFM) I-1464 would cost approximately $171.5 million over the next six years. Unlike previous ballot measures, however, I-1464 does provide a funding source by repealing the nonresident sales tax exemption. This sales tax exemption has actually been recommended for continuation by the Joint Legislative Audit & Review Committee (JLARC).

JLARC noted in its performance review of the nonresident sales tax exemption: 

"Economic literature suggests that Washington’s state and local sales tax rates, combined with bordering states with no sales tax (Oregon) or a lower rate (6 percent with no local tax in Idaho) creates a 'border tax problem.' Most border tax discussions and solutions focus on the revenue loss and inequities resulting from Washington residents who live near the border shopping outside the state to avoid paying Washington sales tax. This preference involves a different border tax issue – taking away the disincentive created by Washington’s sales tax for nonresidents from low or no tax states so that they will purchase goods here . . .

In its 1982 study of nonresident permits, the Department of Revenue noted that providing a sales tax exemption may 'level the playing field' so Washington retailers are not at a disadvantage when selling to nonresidents from states with a lower or no sales tax. The study also asserted that by enacting such a preference, the Legislature made the decision to forego state and local sales tax revenue in exchange for increased retail business activity."

Discussing why it is recommending the sales tax exemption be continued JLARC said: 

"Continuing the preference will continue to support Washington retail establishments by removing the disincentive for nonresidents from no or low sales tax locations to purchase goods in Washington . . . JLARC cannot determine the overall impact on the economy if the preference were terminated . . .

The overall impact of terminating the preference would likely not be uniform across the state. Along the Oregon border near the Portland metropolitan area, a reduction in retail sales to nonresidents could occur. Economic studies have found that sales in these locations are sensitive to changes in price. If the exemption were repealed, nonresidents near Portland may be less likely to purchase goods from Washington retailers, as they have access to many of the same goods without the sales tax nearby, in their home state.”

OFM also highlighted the potential for loss of B&O tax revenue in its fiscal analysis of I-1464: 

"In addition, the repeal of the nonresident retail sales tax exemption could affect the amount of goods purchased. This could cause price elasticity, which would affect state business and occupation (B&O) tax revenue. Price elasticity is a method used to calculate the change in consumption of a good when price increases or decreases. Due to price elasticity, state B&O tax revenue could decrease with the repeal of the retail sales tax exemption for nonresidents."

I-1464 requires the Department of Revenue (DOR) to estimate each year how much the repeal of the nonresident sales tax will generate and orders the Treasurer to transfer that amount to fund the measure's requirements. I asked DOR how it would comply with this requirement and was told: 

"Currently, businesses report the amount of sales they make to qualified non-residents. Revenue uses these data to estimate the sales tax revenue that would be collected if the non-residents sales tax deduction was repealed. Future forecasts are based on data provided by the Economic and Revenue Forecast Council.

Should the initiative pass, we would have to use historical data and determine appropriate growth factors to forecast future years. Those factors could include population, forecasted taxable sales data provided by the Economic and Revenue Forecast Council, personal income, etc."

If, however, the amount DOR estimates is less that the amount designated by I-1464 the proposal says "the treasurer shall transfer the amount of the difference . . . from the general fund."

Given the potential for lost retail sales from nonresidents no longer crossing the border to shop in the state, this may mean significant funding for I-1464's requirements will come from Washington taxpayers out of the general fund. 

Over the coming weeks we'll take a closer look at I-1464's other provisions.