A Fair Sales Tax for Health and Economic Security

The House Health and Human Services Appropriations Subcommittee passed a referendum to temporarily raise the state retail sales tax from 6.5 to 6.8 cents to generate revenue for essential health care investments. The proposal includes implementing the Working Families Tax Rebate to offset the costs of the tax increase for lower income families. This policy protects the health and well-being of lower income adults and children in Washington during the economic recession and recognizes the need for progressive tax reform in our state.

To read a statement by the Budget & Policy Center on this policy proposal, click here.

For more information on the Working Families Tax Rebate, click here.

How Much Would You Get? A Working Families Tax Rebate Calculator

Washingtonians who are eligible for the federal Earned Income Tax Credit (EITC) and have lived in the state for six months would be eligible for the Working Families Tax Rebate.

The calculator below lets you see how much the credit would be worth based on filing status, number of children, and the amount of earned income. (This assumes the credit will be equal to five percent of the EITC and is for tax year 2009.)

For example, a married couple with two kids and $20,000 in wages would receive $251 dollars. A single parent with one child would receive $152. The minimum credit for those who are eligible is $25.



* The basic requirements for EITC eligibility are 1) a valid Social Security number, 2) residence in the United States for more than half the year, 3) less than $3,100 in investment income, 4) some earned income, 5) a U.S. citizen or resident alien, 6) between ages 25 and 65 or have a qualified dependent, 7) a filing status other than married filing separately.

A Tax Cut for Lower Income Working Families

A sales tax increase from 6.5 cents per dollar to 6.8 cents has been proposed as a way to avoid making deep cuts in important health care investments. The proposal has linked the sales tax increase with a Working Families Tax Rebate, which will refund a portion of the sales tax for lower and moderate income families.

A 0.3 cent increase in the retail sales tax would cost lower income families with kids (those earning $28,000 or less) about $38 annually (see graph below). Upper income families would pay about $163 per year.


While upper income families would pay more in absolute terms, an increase in the sales tax would cost lower income families more as a share of their income. The Working Families Tax Rebate is an important tool for revenue policy because it can offset the impacts of a tax increase for families who are struggling to make ends meet during the recession.

The graph above also shows the net impact of a sales tax increase combined with a Working Families Tax Rebate. Families with kids whose income is $28,000 or less would actually see a net decrease in sales tax. The rebate would also significantly lower the cost of the sales tax increase for the next bracket of earners (those earning between $28,000 and $52,000) so that their total tax increase would be about $29 annually.

Note: Because of the structure of the federal EITC, the Working Families Tax Rebate primarily benefits families with children. Adults without children can qualify for the EITC, but they receive a much smaller credit. The source for these data is the Institute for Taxation and Economic Policy Microsimulation Model.

Working Families Tax Rebate by Legislative District

The proposal to raise the state retail sales tax by 0.3 cents includes the Working Families Rebate. This rebate will refund a portion of the sales tax to lower income working families. The total amount is estimated to equal $68.5 million. Click here (PDF) to see how your legislative district would fare.

The ten districts that would benefit the most would be:

1. 15th (Klickitat and Skamania counties, south Yakima County, and an eastern portion of Clark County) - $2.9 million
2. 14th (Yakima, Union Gap, Selah, Gleed, Naches, Tieton, Ahtanum, Cowiche, Tampico, and all of western Yakima County)- $2.4 million
3. 29th (South Tacoma, Parkland, and portions of Lakewood and University Place) - $2.3 million
4. 16th (Columbia and Walla Walla counties and of parts of Benton and Franklin Counties) - $2.2 million
5. 3rd (Spokane, extending to the North Side and South Hill) - $2.2 million
6. 13th (Kittitas County and parts of Grant and Yakima counties) - $2 million
7. 7th (Ferry, Lincoln, Pend Oreille, and Stevens counties, and parts of Okanogan and Spokane counties) - $1.9 million
8. 12th (Chelan and Douglas County and parts of Grant and Okanogan counties) - $1.9 million
9. 49th (Clark County, including Vancouver west of Interstate 205, and Hazel Dell) - $1.8 million
10. 28th (DuPont, Fircrest, University Place, Lakewood, Steilacoom, Tillicum, and West Tacoma; Anderson, Ketron and McNeil Islands) - $1.8 million
    

UPDATE: Revenue for Health Care and Tax Rebate Proposed

A new proposal to temporarily raise the state retail sales tax by 0.3 cents has been officially introduced passed the House Health and Human Services Appropriations Subcommittee. It dedicates revenue from the tax to essential health care investments and funds the Working Families Tax Rebate.

The Subcommittee amended the proposed appropriations by decreasing the amount spent on the Working Families Tax Rebate and shifting that funding to the Basic Health Plan, community mental health services, and the addition of vision and hearing services.


The $484 million appropriated in the bill is divided as follows:

• $105 $69 million for the Working Families Tax Rebate, which refunds a portion of the state sales tax to lower income working households.

• $167 $187 million for the Basic Health Plan, a program that provides affordable health insurance to lower income Washingtonians.

• $77 million for long-term care and nursing homes, including adult day health programs.

• $75 million to provide funding for hospitals.

• $24 $28 million for community mental health services.

• $13 million for children's health.

• $19 million for Healthy Options, a managed-care health program.

• $10 million for core public health services.

• NEW - $5 million for vision and hearing services

*Appropriations are only made for the 2009-11 biennium, but the temporary sales tax increase is scheduled through December 2012.

Updated Estimates on Revenue from Sales Tax Increase

House Bill 2377 proposes a referendum raising the state sales tax by 0.3 cents with the following stated intent:

An unprecedented shortfall in state general fund revenues has threatened the state's ability to fund vital health services and has harmed working families. For this reason, the legislature is asking the voters to approve temporary tax increases in order to fund health care and to support working families during this time of revenue shortfalls.

As the graph below shows, the referendum would raise an estimated $1.1 billion dollars over three years. $486 million will be available for the 2009-11 biennium. Most of the revenue raised will pay for health care including the Basic Health Plan. Twenty-two percent will be refunded to lower income working families.


Note: The bill does not specifically appropriate funds for the 2011-13 biennium.

Working Families Rebate would Benefit Families with Children

About 97 percent of the total Working Families Tax Rebate that was proposed today would flow to working families with children.



*The percentages don't sum to 100 percent because of rounding.

Sales Tax Increase Would Be Offset on Federal Return

There’s growing discussion about a state sales tax increase to pay for essential health care investments. Being April 15th, I wanted to point out that for some Washingtonians, an increase in the state sales tax will be partially offset when they file their federal tax return. How? Congress just made the sales tax deduction permanent. The size of that deduction will rise if voters approve an increase in the state sales tax rate.

Of course, that only helps people who itemize their deductions (mostly homeowners and higher income households). This emphasizes the importance of including funding for the Working Families Tax Rebate (WFTR) in any tax increase proposal. The WFTR will refund a portion of the state sales tax to lower income working families (more info here).

Speaking of the WFTR, it's also timely to mention that one of the advantages of the idea is that it piggybacks on the federal tax return process. That means that the IRS will be doing a significant share of the administration. It also means that the application process will be simple and straightforward. More on that here.

Working Families Tax Rebate Administration Would be Straightforward and Efficient

The Working Families Tax Rebate (WFTR) was signed into law last year. The state budget included modest funding to allow the Department of Revenue (DOR) to begin developing the necessary infrastructure. Once the rebate is fully funded and implemented, it will refund a portion of the state retail sales tax to as many as 370,000 Washington households.

But how will it work? One of the great things about the rebate is how straightforward and efficient the administration will be.

It will build on the federal Earned Income Tax Credit (EITC), so that everyone who is eligible for the federal credit will also be eligible for the state rebate. The benefit of building on the EITC is that the IRS does a significant portion of the administration and enforcement. They will annually send a database to DOR which will contain a list of all Washington households who received the EITC and are therefore eligible for the state rebate. The database will also include the amount of EITC received by each family. The state rebate will simply be calculated as a straight percentage of the federal credit.

The Department of Revenue still has a significant role to play, of course. Last summer, I was part of an advisory group that met with DOR staff to discuss how applications for the rebate could be collected. Their work has been put on hold because of the budget crisis, but the direction they were taking was encouraging. They were developing a web-based application that would allow people to easily apply for the WFTR. It promises to be very user-friendly and accessible. The screenshot below is an example of the kind of thing the DOR was working on before the program was put on hold. It's the first of only four steps the applicant will have to follow. It’s not by any means a final version, but it gives an idea of how the application would work.


The next step for DOR would be to match the state database with the IRS data, which would already be vetted and audited. If the two match, the applicant is eligible and the DOR can process the payment.

There will need to be an outreach effort to ensure that families are aware of the rebate. This effort would build on existing programs. There is already an organized joint campaign by the state government, philanthropy, and community organizations such as the United Way to ensure that eligible people apply for the federal EITC. Those outreach materials (such as this video featuring the Governor) could easily notify people about the Working Families Tax Rebate as well. Paid and volunteer tax preparers could process WFTR applications alongside federal tax returns.

While the program would be relatively simple to administer, the benefits would be significant to households and communities across the state.

Budget Cuts Hurt Working Families

With unemployment expected to rise to record levels, opportunities to achieve economic security through employment are diminishing. Families who are struggling during these difficult times need state investments in health, education, and economic security more than ever. The proposed budget cuts in the Governor's and Legislature's budgets will come as a double-hit to working families who may no longer have market-based resources to rely on. Two examples are health care and education:

• Health Care - Job loss is often accompanied by loss of health insurance. And during recessions, employers may eliminate coverage in order to save costs. Losing health insurance could have a devastating impact on the health and finances of working families. The proposed state budget cuts would remove access to affordable health insurance for many Washingtonians. For example, Basic Health, a state-funded health insurance program that provides coverage to lower income families is facing cuts that would eliminate coverage for 40,000 people.

• Education -Rising unemployment often increases the demand for workforce training and higher education. These programs have long term benefits for workers and the economy. Even one year of higher education can increase an individual’s lifetime salary and help workers meet the needs of employers when the economy recovers. But the proposed deep cuts to funding for community colleges and public universities will reverse this trend by reducing access to higher education for students and workers in the state.
  

Maintaining Our Priorities
Deep budget cuts are not the only solution to our state's fiscal problems. Washington lawmakers should consider raising revenue to avoid dismantling our important public infrastructures and use the Working Families Tax Rebate to offset the disproportionate impact a regressive tax increase would have on lower income families.

Working Families Tax Rebate: Benefits by Legislative District

Last Friday the Budget & Policy Center released a paper on the benefits of the Working Families Tax Rebate for economic and fiscal recovery in Washington State.

The Working Families Tax Rebate will refund a portion of the state retail sales tax to the 350,000 Washington households that qualify for the federal Earned Income Tax Credit. Statewide, 12 percent of households were eligible for the EITC in 2006 and would have therefore been eligible for the WFTR. The map below shows the share of tax filers who would have been eligible for the WFTR by legislative district. The districts with the highest percentages of eligible Washingtonians live in rural and small metropolitan areas. For example, one in four tax filers in the Yakima area would have been eligible for the WFTR. In general, all communities in Washington would benefit.


Click on map for larger version.

Working Families Tax Rebate: A Tool for Economic and Fiscal Recovery

The Budget & Policy Center is releasing a new policy brief today on the Working Families Tax Rebate. The paper details the need for revenue increases to address the state's historic budget deficit and the importance of implementing the Working Families Tax Rebate.

The Working Families Tax Rebate is an effective tool the state can use as part of a strategy for economic and fiscal recovery. It builds on the highly successful federal Earned Income Tax Credit, which lifts millions of people out of poverty nationwide each year. Washington lawmakers should consider raising revenue to avoid deep budget cuts that will harm the state and use the Working Families Tax Rebate to offset the disproportionate impact a regressive tax increase would have on lower income families.

To read the full report, please click here.

The State of Washington's Children

Washington Kids Count, a project of the UW's Human Services Policy Center, is releasing the new edition of The State of Washington's Children.

This year's report focuses on poverty. A particularly notable finding is that rising unemployment rates could increase the number of children living in poverty by 37,000. That assumes that the unemployment rate reaches 9 percent, a likely scenario according to the most current state projections.

The authors point out that state government can help mitigate the impact of child poverty by improving work supports and sustaining critical benefits, a timely reminder as we await the legislature's budget proposals. In a KPLU radio piece on the report, lead author Lori Pfingst points out the importance of the Working Families Rebate as a tool to help lift families with children out of poverty.

The report is currently being pre-released to legislators and reporters. If you'd like to see an early copy, contact Lori Pfingst at 206-616-1506 or pfingst@u.washington.edu.

TNT Asks: What To Do About the State Budget?

News last week of the dramatic increase in our state budget deficit - from roughly six to eight billion dollars - has prompted many to wonder how exactly we are going to get out of this mess. In a timely editorial, the Tacoma News Tribune has compiled the views of nine diverse movers and shakers on what should be done to fix the budget.

From the TNT: Earlier this month, we invited 24 current and former state officials, policy analysts and interest group representatives to suggest what lawmakers would do if they’re really serious about leveraging the economic crisis to make hard choices.

Remy Trupin, Executive Director of the Budget & Policy Center, is one of the nine. His written comments call for a balanced approach:

Economists recognize the vital role that spending must play in reviving our state’s staggered economy. If Olympia ignores this reality, it would do more than violate our shared values. It would have an anti-stimulative effect that will deepen and prolong the economic crisis we face.

A reasonable approach would combine surgical cuts with carefully calibrated revenue increases, Remy says. The goal is to protect critical public services without exacerbating the unfairness of our current state tax structure. For example, a temporary increase in the state sales tax or in sin taxes could be combined with a sales tax rebate to lower income working families. The Legislature passed the Working Families Rebate in 2008. If fully funded, it could fully offset the increase in taxes for lower income families

Remy is not alone in his thinking. A group of 30 state economists and public policy experts have joined the Budget & Policy Center in signing a letter calling for consideration of revenue increases by the Governor and state Legislature to address the growing budget crisis.