Now that voters have rejected I-1033, the spending limit initiative, the talk in Olympia has turned to raising taxes.
Hiking taxes would be the wrong thing to do. Our economy is just showing signs of recovery. Gov. Chris Gregoire,D, hit the nail on the head in her remarks at the Association of Washington Business’ Policy Summit this September: “Tell me a tax that you’re going to increase that will give you $1 billion that doesn’t hurt business, hurt individuals, hurt our recovery.”
The governor’s words ring true with employers who are trying to compete in a cost-sensitive global economy and provide jobs for people struggling to pay their bills. Cash is tight for employers and families, for charitable organizations, and government. Taking more money from individuals and employers through higher taxes means less money for government and charities if businesses have to close or cut back further. It is a vicious cycle.
So, how do we provide more funds for necessary government services, public schools, community colleges and universities without increasing taxes or fees?
The answer lies in the source of our tax revenue: the private sector.
In Washington, businesses pay more than half of our state and local tax revenue through property, business and occupation and sales taxes. Private employers provide millions of jobs, enabling people to buy goods and services and pay their share of state and local taxes.
When businesses falter, tax revenues plummet and people get laid off, increasing the need for government services. When merchants and manufacturers thrive, employers expand and modernize and hire more people and therefore everybody pays more taxes. The key for the state then is to find ways to help businesses do better or at least do no further harm by hiking tax rates.
We learned this lesson the hard way 16 years ago.
In 1981 and 1993, our state found itself in bruising economic downturns. Governors John Spellman,R, and Mike Lowry, D, and state lawmakers levied higher taxes.
In 1981, Spellman and controlling Republicans not only raised taxes, but they cut incentives that stimulated manufacturing investments. In 1993, Lowry and the Democrat majority not only raised taxes but increased workers’ compensation and unemployment costs and implemented a costly new government-mandated health system.
In both instances, employers were forced to lay people off and found they could not pass all of those added costs on to their customers in the form of higher prices.
Simply put, the tax and fee increases drained fuel from our economic engine, delaying our recovery. Lowry also realized incentives make a difference.
In 1995, Lowry pushed the Legislature to approve a bill encouraging growth in the state’s manufacturing sector. The bill exempted manufacturers from the sales tax on new machinery, equipment, repair and replacement parts, and research and development. Some lawmakers protested that the state would “lose” money. But the incentive more than paid for itself in higher tax revenues and new businesses.
In its first 10 years, the exemption added $81.5 billion to state coffers, generated more than $16.5 billion in income and created almost 285,000 new jobs. The exemption is still paying dividends. State and local governments are expected to realize $2.1 billion in additional net tax revenues between 2007 and 2016.
No doubt the state’s next revenue forecast will be down again, increasing the financial stress on government, public schools, colleges and universities. As consumer confidence continues slipping, it means lower sales and less income for employers to hire, modernize or expand.
But as we saw in 1981 and 1993, raising taxes doesn’t help, it only compounds the problem. And our situation today is even worse. The recession is far more severe, global competition is fierce and consumers are more cost-sensitive.
Raising taxes won’t make consumers more confident, it won’t create jobs, and it won’t encourage employers to expand and hire.
We need to stimulate the private sector to lead us back to recovery. Only by increasing employment, stimulating investments and restoring consumer confidence will we find solid ground in these shaky times.