Callaghan: Washington’s in uncommon pickle

By Peter Callaghan, Columbian Syndicated Columnist

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photoPeter Callaghan covers the state Legislature for The News Tribune in Tacoma. Blog: thenewstribune.com/politics; or Twitter: @CallaghanPeter. Reach him at peter.callaghan@thenewstribune.com.

There are 147 legislators in Olympia this week — and maybe next week — and not a one really wants to be there. But can they take solace in the misery-loves-company aphorism? Are lawmakers from the other 49 states sharing the pain? Apparently not. Since the Great Recession turned legislating into a seemingly continuous set of crises, Washington is alone this time.

That’s because tax collections in most other states are up. Some even have unexpected surpluses. “Overall state tax revenues in the April-June quarter of 2011 increased by 10.8 percent from the same quarter of the previous year,” stated an October report on state revenue by the Rockefeller Institute at the State University of New York at Albany. “This represents substantial improvements from the 3 percent average decline of a year ago and the 9.9 percent decline of two years ago.”

“The states are doing OK but the general economy is not doing OK,” said Lucy Dadayan, the report’s co-author. “Washington is one of the very few states showing declining tax revenue.”

All states are still below pre-recession peaks and are taking longer to get back to that point than in previous downturns. The institute’s first look at the July-through-August period showed continued growth but at a slowing rate. The report, however, showed differences in the major state tax sources: income taxes and sales taxes. Personal income tax collections were up 16 percent and corporate income tax collections were up 19.1 percent. Sales tax collections were up, but by just 2.9 percent. And even that increase was spotty, as the Far West and Mid-Atlantic regions both showed declines.

“The decline in sales tax in the Far West region is exclusively attributable to Washington where collections fell 27.1 percent,” Rockefeller reported. While the average increase in collections among the states is 10.8 percent, a state would have to have both tax sources to be average. Many states do, but Washington does not; it is one of a handful of states with neither a personal nor corporate income tax.

Devil’s in the details

Now before you fire up your Gmail for an anti-income-tax broadside, this isn’t a call for a change in Washington’s tax structure. Given the attitudes toward that tax and the difficulty in creating it here, it isn’t really in the cards. And regardless of tax systems, nearly every state sucked air during the recession. The income tax was more volatile at the recession’s low point, declining by as much as 28 percent in one quarter.

Instead this is a look at how different tax systems respond at different stages of recessions. As the economy slowly recovered, jobs increased slightly and wages stopped falling. Income taxes tapped into that relative stability.

Sales taxes, however, require not just income but a desire to spend it. The sales tax “was hit far harder during and after the last recession than in previous recessions,” the Rockefeller report stated. And it’s recovering more slowly than the income tax. Even at that, of the 45 states with a sales tax, 37 have seen growth in collections. By exempting necessities like groceries and prescription drugs (and bottled water and candy), Washington is more reliant on discretionary purchases than others.

The way different taxes respond to the economy also helps explain the seemingly sudden decline in local government budgets, with both Tacoma and Seattle facing cuts and tax hikes after weathering the recession pretty well. “The trends are now shifting due in part to the lagged impact of falling housing prices on property tax collections,” the report stated.

The report ended with ominous news for the states: “In recent months, growth in tax revenues has been significantly and unsustainably stronger than growth in the economy”

So Washington might not be so lonely for long.