In Fiscal Year (FY) 2011, Washington collected $28.4 billion in state and local taxes. While this is an impressive sum of money, it tells us little about whether or not the average Washington taxpayer can afford this level of taxation.
As shown in the charts below, Washington’s state and local tax burden (tax collections divided by personal income) was the fourteenth lowest in the nation for FY 2011 at 9.6 percent—or 7.9 percent below the national average of 10.5 percent. Washington’s tax burden has increased over time by a modest 28.8 percent to 9.6 percent in FY 2011 from 7.5 percent in FY 1950.
Washington’s low state and local tax burden is driven by the fact that it does not have a state individual income tax or state corporate income tax. Additionally, relative to the national average, the property tax burden is 15 percent lower (2.9 percent vs. 3.5 percent). However, the sales tax is the highest in the country which offsets lower taxes elsewhere (4.4 percent vs. 2.4 percent).
The sales tax burden is a concern even beyond its high burden. According to the Tax Foundation, Washington’s combined state and local sales tax rate is a whopping 8.87 percent—the 4th highest in the country.
Additionally, Washington’s sales tax is actually a gross receipts tax meaning that it is levied on very broad-based number of goods and services and leads to tax pyramiding. Tax pyramiding creates all kinds of very bad economic distortions (pdf) by imposing higher effective tax burdens on some industries, but not others—especially industries that are near the end of the value-added chain.
In the near future, Key Policy Data will look at state tax reform options since Washington does need to ditch the gross receipts tax, but at the same time adopting an income tax is not the answer either . . . please stay tuned!
J. Scott Moody has over 18 years as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.