We are heading for what Gov. Gregoire calls "a brutal session" in Olympia, meaning a special session in late November to deal with the new $1.4 billion shortfall in revenue projections for the current biennium. That will be followed by the regular session, starting in January, which will be brutal-brutal.
Last time the Legislature went through the wringer, it used a bipartisan formula fashioned in the Senate by Sen. Ed Murray and his Republican counterpart, Sen. Joe Zarelli. The deal was: don't cut programs (but pare them back) in exchange for not raising taxes. This allowed Democrats to hope for restoration of programs when the economy healed. Most of the cuts came from higher education, which offset the cuts with much higher tuition.
This time around, says Sen. Murray, such a deal is not likely. Either programs will have to be terminated, which Democrats oppose, or new revenues will have to be found, which Republicans will fight. All this distinctly echoes the impasse in Congress.
The Seattle Times editorial page on Sunday takes an admirably specific swing at these issues. It looks at some revenue sources: taxing Indian gambling; extending the B&O tax to agribusinesses and bank mortgages. As for cuts: ending the Disability Lifeline and "perhaps" the Basic Health Plan. And there are several suggestions to make public employees pay more for health insurance and ending the farcical "binding arbitration" in union disputes where "arbitrators have little sense of the economically feasible and tend to give away too much."
If we do get around to tax reform and tax increases, I hope the argument does not just focus on eliminating corporate loopholes. The door-to-door warfare in this crusade is unlikely to get very far, since each favor is vehemently defended and usually has some kind of an economic argument to make, especially in a recession. Likewise, I hope we don't have the usual quixotic proposal for a graduated income tax — as sure to please liberal groups as it is sure to fail.
So what about a flat income tax? When Obama says that "billionaires should pay the same tax rate as janitors," is he kicking open the door to this idea of a flat-rate (same for everyone) tax? Democrats have long mocked this idea, and Steve Forbes even ran a notably unsuccessful presidential campaign on it.
But on the federal level, tax reform is probably the only route to increased revenues, with even Republicans saying that eliminating some loopholes might not break their no-new-taxes pledge. The formula all salute but cannot seem to get to is: broaden the tax base by eliminating loopholes, simplify the tax code, and lower the tax rate.
Since the rich are so good at gaming the present system (graduated on paper), maybe "flat would be the new fair," to use the phrase in a Wall Street Journal column by Stephen Moore. He suggests that the "grand deal" in Congress might be to sweep away all deductions and tax everything (income as well as capital gains) at 16-17 percent. Throw in an allowance of shielding from taxation the first $35,000 of income for a family of four, and you make it progressive for most of the middle class (though not for the very rich). Do the math: A family making $70,000 would pay 8.5 percent tax, while Warren Buffett would pay 17 percent.
Another push toward the flat tax approach to comprehensive tax reform is coming from Herman Cain, the former pizza executive running for the GOP nomination. Cain's 9-9-9 plan would scrap the current system, eliminate the estate tax, taxes on capital gains, and payroll taxes, replacing all this with a 9 percent personal flat tax, a 9 percent corporate flat tax, and a 9 percent national sales tax. The idea is being attacked from the right (retailers don't like the sales tax) and the left (sales taxes are regressive), but also intrigues both sides and some economists, who figure it would raise as much as 15 percent more than the current system..
In Washington state, a graduated income tax is arguably forbidden by the state constitution, which makes the path to such a tax — never mind the voters' weird resistance to the idea — the kind of thing that wins contributions but never happens. So why not go for radical simplification, removal of nearly all loopholes (Boeing and Microsoft included??), and a shielding of the first $40,000 of personal income? It may be that most folks' taxes will go down, while the revenues will go up.
It won't be ideally progressive. But it might be the formula for progress.
