S-2124

AN ACT Relating to studying Washington's tax structure; and creating a new section.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. (1) Washington's tax system is one of the most unique systems in the nation. The state relies primarily on the sales tax, the business and occupation (B&O) tax, and the property tax. (a) The state relies most heavily on one of the highest sales taxes in the nation. The sales tax is a large and efficient revenue producer. It is relatively popular because it is paid in small increments. Since the sales tax is based on consumption, however, the tax is volatile and unstable during economic downturns and can cause large budget deficits.

(b) Washington is the only state in the nation that levies a B&O tax on gross income. Since the B&O tax is not based on profit, tax collections are very stable. However, the B&O tax favors established, profitable firms at the expense of start-up firms and firms with low‑profit margins.

(c) The property tax is the oldest revenue source in the state, having been established before statehood. Property taxes are a very stable source of revenue. While Washington's property taxes are only slightly above average for the states, the tax is perceived as high by the taxpayers. In addition, the tax is complex and the administrative costs are high.

Washington's tax system has remained relatively unchanged since 1935. Since that time, the state has grown in population and emphasis from a more agrarian society to a more industrial, technology-based society. It is the intent of the legislature to study the current tax system in the state of Washington to determine how well it functions and how it can be changed to better serve the citizens of the state in the twenty-first century.

(2) The department of revenue shall create a committee on taxation to study the elasticity, equity, and adequacy of the state's tax system. The committee on taxation shall consist of eleven members. The committee shall include six academic scholars appointed by the department of revenue from the fields of economics, taxation, business administration, public administration, public policy, and other relevant disciplines as determined by the department. In making the appointments, the department shall consult with the majority and minority leaders in the senate, the co-speakers in the house of representatives, the chair of the ways and means committee in the senate, and the co-chairs of the finance committee in the house of representatives. The governor and the chairs of the majority and minority caucuses in each house of the legislature shall each appoint one member to the committee. These appointments may be legislative members.

(3) The members of the committee shall elect a chair. The committee may elect a chair from among their membership or may elect a nonvoting chair who is not a member of the committee. Members of the committee shall serve without compensation but shall be reimbursed for travel expenses under RCW 43.03.050 and 43.03.060.

(4) The purpose of the study is to determine how well the current tax system functions and how it might be changed to better serve the citizens of the state in the twenty-first century. In reviewing options for changes to the tax system to better serve the citizens of the state, the committee shall develop multiple alternatives to the existing tax system. To the extent possible, the alternatives shall be designed to increase the harmony between the tax system of this state and the surrounding states, encourage commerce and business creation, and encourage home ownership. In developing alternatives, the committee shall examine and consider the effects of tax incentives, including exemptions, deferrals, and credits. The alternatives shall range from incremental improvements in the current tax structure to complete replacement of the tax structure. In conducting the study, the committee shall examine the tax structures of other states and review previous studies regarding tax reform in this state, including the study conducted by the 1982 Tax Advisory Council and the study conducted by Governor Gardner's Committee on Washington's Financial Future in 1988. In developing alternatives, the committee shall be guided by the following criteria:

(a) Administrative simplicity: A tax system should neither be excessively expensive for the state to administer nor impose undue recordkeeping and reporting requirements on taxpayers.

(b) Economic neutrality: A tax system should be designed to minimize distortions in economic decision making.

(d) Stability: The revenue of a tax system should not fluctuate dramatically with the condition of the economy.

(e) Transparency: A tax system should be designed so that the costs of government are clear to citizens.

(5) While the committee may consider all possibilities, most of the alternatives presented by the committee to the legislature shall be revenue neutral and contain no income tax.

(6) The department of revenue shall create an advisory group to include, but not be limited to, representatives of business, state agencies, local governments, labor, taxpayers, and other advocacy groups. The group shall provide advice and assistance to the committee on taxation.

(7) The department of revenue shall provide staff to the committee for the purpose of the study.

(8) The committee shall present a final report of the findings of the study and the alternatives developed by the committee to the ways and means committee in the senate and the finance committee in the house of representatives by November 30, 2002.