TAX POLICY IS a hot topic.
Demands for federal and state tax reforms reverberate across the political landscape without reaching agreement on what changes should be made.
Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, advocated “tax fairness and sustainability” reforms, when he spoke to the Washington State Coalition for the Homeless annual conference.
As an employee of Serenity House of Clallam County, I attended the May 12-14 event in Spokane.
Various elements of Gardner’s message echoed calls for reform I’ve been hearing for decades from conservative Republicans, pragmatic Democrats and frustrated Independents, alike.
Gardner provided an interesting counter-observation to the common perception that some 47 percent of U.S. residents — notably low-income people who may require substantial government social services — pay no taxes.
“Actually, it’s zero percent who pay no taxes,” he said, citing sales, gas and utility taxes.
Considering all types of taxes levied, “we’re all taxpayers,” he said — even those who don’t make enough to owe federal income taxes.
That is especially true in the nine states, including Washington, that don’t levy state income taxes, relying instead on more “regressive” taxes.
Regressive taxes, in effect, levy the highest rates on the lowest-income people and the lowest rates on those with the highest incomes.
For example, with no state income tax, Washington’s total state tax burden on residents who make less than $20,000 annually equals 17.3 percent of their income, compared with only 2.8 percent from those making $537,000 or more, according to the Institute on Taxation and Economic Policy’s 2009 Distributional Analysis of the Tax Systems in All 50 States.
“Washington state has far and away the most unfair tax system in the nation,” Gardner said.
“It’s balanced on the backs of the poor and the homeless — it pushes poor people into poverty with little regard for impacts,” he said.
He endorsed “a progressive income tax” but didn’t say whether it should be added to or replace the present conglomeration of sales, property and business and occupation taxes.
Currently, sales taxes produce more than 40 percent of Washington state tax revenues. Property taxes generate about 20 percent.
The remainder comes from business and occupation taxes, targeted taxes on items such as gasoline, cigarettes and liquor, and various non-tax fees.
“Sales and property taxes are inherently unfair,” he said.
“Income is the only tax you can design to be fair,” he said, but he also sounded an alarm about design flaws in the federal income tax code.
Federal housing dollars are allocated “mostly through the tax code” in the form of income tax deductions for interest paid on home mortgages, Gardner said.
In effect, people wealthy enough to purchase homes receive $4 in tax subsidies from deducting interest payments, for every $1 appropriated for federal housing programs for low-income and affordable housing, he said.
The deduction is intended to encourage home ownership, but ownership isn’t a reasonable goal for everyone.
To my observation, the mortgage interest deduction has another dark side:
It encourages people to stay in debt, rather than paying off their mortgages.
Home mortgages potentially place the debtors’ housing at risk, particularly for retired people whose financial stability may be deeply undercut by recessionary impacts on investment values and revenues.
If expensive health complications arise, people who retired on what they thought were comfortable incomes can potentially find it difficult or impossible to meet large mortgage payments.
The interest deduction also enables borrowers to buy more house than they need, contributing to an unsustainable market in oversized custom homes that may be difficult to sell due to special features that do not appeal to a wide segment of potential buyers.
As tax codes grow ever more complicated, meaningful tax reform remains illusive.
Meanwhile, as Gardner said, “It’s remarkably easy to turn hard facts into squishy data.”
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Martha Ireland was a Clallam County commissioner from 1996 through 1999 and is the secretary of the Republican Women of Clallam County, among other community endeavors.
She and her husband, Dale, live on their Carlsborg-area farm.
Her column appears Fridays.
E-mail her at irelands@olypen.com.
