Report: Sales Tax Increase Would Cut Jobs, Income in Washington State

Published September 1, 2004

State of Washington voters will rule in November on a ballot initiative that would raise the state’s sales tax to increase school funding. Initiative 884, a referendum to create a “trust fund” for education in the state, is on the ballot for the November election. If the measure is approved by voters, the state sales tax rate will increase from 6.5 to 7.5 percent.

Among the results would be a loss of both jobs and income, according to a July 2004 report from the Washington Policy Center (WPC) in Seattle.

Policy analyst Melissa Lambert Milewski, author of the study, used an economic model devised by the Beacon Hill Institute at Suffolk University. She estimates the tax increase would result in “approximately 10,000 fewer jobs in the state, with the retail sector showing the largest decline.”

“[Our] new study analyzes the intent and the effects Initiative 884 would have if passed by voters,” wrote Paul Guppy, WPC’s vice president of research, in a June 30 news release. “Initiative 884 would create a trust fund for education, annually raising about $1 billion more for preschool education, kindergarten through 12th grade, and higher education. Of the $1 billion in additional annual funding, $500 million would go to K-12 education, $400 million would go to higher education, and $100 million would go to preschool education.”

“An initiative of this magnitude deserves serious study,” said WPC President Daniel Mead Smith. “The purpose of our research is to help explain to the voters what Initiative 884 will and won’t do if it is passed. We also take a look at how the increase in the sales tax rate would impact our state’s economy.”

Higher, More Regressive Taxes Ahead

According to the Milewski study, “the state sales tax in Washington would become the highest in the nation, and would total almost 10 percent in many cities when combined with local sales taxes.”

Milewski writes, “In many cities in Snohomish County the combined sales tax would rise to 9.9 percent under Initiative 884. In many cities of King and Pierce Counties, including Seattle, the combined sales tax would rise to 9.8 percent.

“The sales tax increase would have the largest impact on Washington residents with the lowest incomes,” the study notes. “The state’s poorest citizens would pay an additional 0.8 percent of their income in taxes, while citizens in the highest income levels would pay 0.3 percent more.”

The study also notes that, based on the economic model, “the increase of the sales tax would also decrease disposable income in Washington by $931 million statewide.”

While lowering personal income in the state, the sales tax increase also would make housing more expensive, according to the Building Industry Association of Washington. In a May 21 statement, the group noted, “the increase in sales tax would have a devastating impact on affordable housing, since Washington State is one of only six states in the nation to levy a sales tax on the labor and materials that go into the construction of a new home. … [A]n additional Real Estate Excise Tax is levied based on the total selling price of the home.”

Education Spending Grows Faster than Enrollment

The tax increase initiative is sponsored by the League of Education Voters and supported by Governor Gary Locke (D).

“Voters in Washington have said time and again they want education to be the top priority, and they want to be sure our kids are getting the funding they need to succeed. I-884 dedicates resources where they are needed most and will do the most good,” claims a League statement.

But according to Milewski, “Spending on K-12 education and higher education in Washington has almost doubled in real terms between 1980 and 2000. State and local spending on K-12 education increased by 94 percent in inflation-adjusted dollars from $3.96 billion in 1980, $5.37 billion in 1990, and $7.67 billion in 2000. Yet while spending almost doubled during this time, the number of K-12 public students increased by only 32 percent.”

“The intent of the sponsors of Initiative 884 is to improve education by allocating additional monetary resources to current programs,” noted Clyde Ballard, chairman of the League of Freedom Voters. “The initiative creates an Education Trust Fund … but there is no guarantee that these new taxes will be spent on education.”

“Backers of the measure promise taxpayers the expenditures would be targeted, accountable, and efficient,” wrote Lynn Harsh and Marcia Richards of the Evergreen Freedom Foundation in May. “Unfortunately, they are wrong. Even if they could guarantee the money would be used for the programs proponents advertise, the programs themselves have shown little or no promise of increased academic achievement, which is the point of the initiative.”

John Skorburg ([email protected]) is managing editor of Budget & Tax News.

For more information …

The July 2004 Washington Policy Center report, “A Citizen’s Guide to the $1 Billion Education Initiative,” by Melissa Lambert Milewski, along with a two-page policy note, are available at the WPC Web site at