Washington’s tax structure is nation’s 16th least volatile, and revenues are holding up better during the recession (so far) than in many other states

By: Emily Makings
9:21 am
October 20, 2020

The Puget Sound Business Journal (PSBJ) reported last week on an event with former Washington governors Gregoire, Locke, and Evans. According to the PSBJ,  

All three governors said the state should create a more fair, progressive tax system that provides stability in recessions. Washington’s current tax system, relying heavily on sales taxes, has proven to be volatile during the pandemic and other economic slowdowns. Locke said a state income tax could be a better solution.

On the contrary, Washington’s tax system is less volatile than most other states. Pew reported last week that for the fiscal years 2000–2019, Washington’s tax revenue ranked the 16th least volatile in the country.

This revenue stability is a favorable point in Washington’s credit rating. In an Oct. 7, 2020 credit rating report, S&P noted that Washington’s high rating in part reflected its “Sales tax-based revenue structure that has demonstrated less sensitivity to economic cycles compared with income tax-reliant states.”

Pew notes that its analysis doesn’t include 2020, when “General sales tax revenue—usually one of the most stable tax streams for states—also steeply declined as restaurants, bars, retail stores, and other businesses were shuttered and as consumer spending fell sharply.” However, the Economic and Revenue Forecast Council noted in September that retail trade activity in Washington has ended up being “stronger” than had been expected in the June revenue forecast.

The Tax Foundation looked at state tax collections for FY 2020 (as reported by the U.S. Census Bureau last month): “State tax collections declined 5.5 percent in FY 2020 according to new Census data, though actual losses are likely to be significantly lower after accounting for the shifting of income tax collections into the current fiscal year due to delayed tax filing deadlines.” Compared to FY 2019, general sales tax collections declined by the smallest amount (-0.3 percent) of all tax sources. (Property taxes increased by 2.0 percent.)

The Tax Foundation found that Washington’s state tax revenues declined 3.4 percent in FY 2020—the 22nd smallest change (including the 10 states whose revenues increased).

Similarly, Lucy Dadayan of the Urban Institute reported last week that preliminary data on state tax collections through August indicate that total state tax collections for the period of March–August 2020 are down 6.4 percent compared to the same period last year. Washington is one of just eight states that reported that tax collections actually increased for this period from 2019 to 2020. (The map is from Dadayan’s report.)

Dadayan notes, “Revenue declines can be even steeper in the months ahead.” Indeed, it is too early to definitively say how this recession will affect tax revenues in Washington, or how Washington’s tax structure will hold up compared to those of other states. But it is definitely premature—and contrary to the current evidence—to suggest that Washington would be doing comparatively better with a different tax structure.

Categories: Tax Policy.