Gates Sr. On Taxes

William Gates, Sr. gave a presentation on a study that he was commissioned to chair on the tax structure of the state of Washington. The findings were interesting, and included the point that our state has the most regressive tax structure (which is to say that the poorer you are, the larger of a percentage of tax you pay) of all 50 states.

One audience member felt prompted to comment afterward, "We really need to keep a lid on this." Read on to find out why.

A couple weeks ago, I went to this:

William H. Gates, Sr., President, Bill & Melinda Gates Foundation, and John H. Beck, Ph.D., Professor of Economics, Gonzaga University, speakers.

In 2001, the [WA state] Legislature created a Tax Structure Study Committee to review our state's tax system to report on its strengths and weaknesses and to recommend possible alternatives. Bill Gates, Sr. chaired the committee, which was composed of professors in economics, accounting, and law from major universities across the state and four state legislators. After 14 months of study, in December 2002, the committee reported its evaluation of the existing tax structure based on criteria of fairness, stability, adequacy, neutrality among businesses, effect on the state's competitive position, and transparency (taxpayer awareness of when and how much tax is being paid). ...

Mr. Gates and Professor Beck talked about the committee's findings and recommendations, and lo, it was a worthwhile way to spend a couple of hours. It was novel to hear the father of the richest man on the planet point out that in Washington state, the wealthy aren't paying their fair share, and that it's driving the economy down. The two speakers traded off repeatedly throughout the rapid fire session and the main ideas, rather than quotes, were the best I could get down. What follows is not, I repeat, is not a transcript.

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The panel was set up with bipartisan participation from members of both houses of state government. The discussions were highly academic, and centered around determining a tax system based on equity and transparency.

First, they performed a comparison of Washington state taxes with typical state & local taxes. The average amount of revenue derived from state income tax is around 24% in states that use it, and about the same percentage in sales tax. Washington, by contrast, gets 47.6% of its revenue from sales tax. A figure that includes the Business & Operations (B&O) tax, on which, more later.

As compared with 7 other western states, including California and Oregon, the typical state gets 70% of its revenue from households. Washington gets 46% of its revenue from households, and by the measures of proportionality and progressivity, this approach gives poor results.

Examining the tax structure in Washington, the property tax seems the most fair, with the same percentage of tax falling on each income cohort. Yet with the excise tax (including both sales and B&O taxes), the top 1% of earners pay only around 1% of their income, while the bottom 20% of earners pay about 17% of their income to these taxes.

This makes Washington's tax structure the most regressive of all 50 states. And as a comparison with neighboring states shows [IIRC, the same 7 western states], graphs of state tax by income group would be nearly flat.

Another problem with the current tax structure is its lack of exportability, or the inability of the state to get non-residents to support its tax bills. When taxes like property tax are used to drive revenue, these can be federalized as write-offs on federal tax returns. You can't do this with sales taxes, so you lose revenue that could be deducted and kept in state. Some of the studies proposals would generate over a billion dollars in federal tax deductions.

You also face erosion of the tax base. When taxes fall on tangible goods, consumers shift away from goods and towards services. It can also be avoided by buying out of state, through the internet, or mail order. Virtually no one pays the 'use tax' that's supposed to be levied on goods brought into the state.

Additionally, Business & Operations taxes are non-neutral, which is to say that they distort business behavior. Because products are taxed at every level, the cumulative tax can be very high. This creates a system where the final tax depends on how many different firms were involved in getting the product to market, which favors vertically integrated business organizations.

The B&O tax ends up being hidden from consumers at market. It's passed silently along in the sale price, with no transparency for the buyer. To be fair, people should be aware of what taxes they're paying.

The panel studied alternate tax structures, but as Mr. Gates said, there's "nothing new in the world of taxation."

One proposal was to eliminate the pyramiding of tax caused by the current B&O structure, replacing it with a value-added tax, or VAT. VAT would only be applied to the amount of market value added to a product's worth by the firm in question, minus the cost of the goods that went into its manufacture. [Basically, a gadget assembled by one firm gets taxed the same amount whether the widgets that make it up came from one firm, or 100 firms.] They estimate that a 2.2% VAT would eliminate the B&O tax, as well as the current systemic favoritism shown to vertically integrated companies.

A flat rate personal income tax of 2.6% could reduce sales and use tax from 6.5% to 3.5%. A 6.7% personal income tax would replace all sales and use, as well as property taxes, giving an almost flat tax burden. They went on to detail some additional graduated tax possibilities which would have a progressive tax burden profile, and greatly reduce, but not eliminate these other taxes.

It was pointed out, however, that it likely wasn't a good idea to entirely replace sales and use or property taxes with personal income taxes. These sources of revenue are very volatile, and a too heavy reliance on them has been a cause of problems in other states as unemployment goes up and wages decline.

Mr. Gates said that in his opinion, while there is no groundswell for a state income tax, it's only a matter of time before it injures the state. It already hurts merchants along the state borders, and deters business from coming here. He also went on to say that Washington state is far from providing an appropriate level of government services. Households, though, aren't likely to want to change.

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Yet having a wealthy and accomplished man whose son is the richest person on the planet spend an hour of his time to suggest that the poor are footing the bill with potentially disastrous results doesn't really make much of an impact on everybody. I was planning to recount a couple of boneheaded audience questions whose premises were factually challenged, but the following experience summed it all up perfectly.

As I was leaving, a kindly older gentleman was heading out the same way I was. Down three elevators (from the very high floor to the sky lobby, sky lobby to main lobby, main lobby to parking), and through the adjoining halls we went. Being polite, he struck up a conversation which went roughly as follows, stage cues in brackets:

Him: Very interesting, very controversial topics. [We enter first elevator]

Me: Yes, and so much public misinformation about it, too. [We walk towards second elevator] I wonder, what did you think about it? [We enter second elevator]

Him: Well, if we let these legislators get their hands on it, they'll add income tax to everything else and we'll all be paying more taxes. We really need to keep a lid on this.

Me: [!!!wtf!!!] That's a very interesting opinion.

Him: ... [Kindly gentleman turns into forward facing statue. We head towards the third elevator and to the garage in silence]

It's always a shame when you think you're talking to a 'we', and the person turns out to be a 'them.' Very discomfiting.

Posted by natasha at October 31, 2003 12:29 AM | TrackBack