By Scott Moser, CPA/PFS, MST Washington voters will have another opportunity to enact a State Income Tax this November. Before taking sides on the merits of more taxes vs. spending cuts please consider the economics of entering a state income tax regime before you vote on this issue. If Washington implements a State Income Tax system, Olympia will need an army of new workers and systems to collect the tax. Income taxes are a voluntary tax system; they require taxpayers voluntarily identify themselves as subject to the tax, calculate the amount of the tax, and then submit payment. As with our current Federal Income Tax, this type of system has inherent flaws. Many would be taxpayers simply don’t file their taxes. Others file taxes but don’t pay the taxes owed. Wealthy taxpayers employ sophisticated techniques to reduce or eliminate their income tax. Still other folks don’t understand all 50,000 (and rapidly growing) pages of the tax code! In the end, about 10%-20% of the anticipated tax revenue is never collected-- effectively shifting the tax burden to the more responsible sector of our population. Compare this result to Washington’s current property and sales tax system. The State identifies who owes the tax via property ownership or based on selected purchases. The tax is generally fixed based on property values determined by the State or a third party. The tax is collected on a regular basis or at the time of purchase and may even be paid via bank financing. If a property owner does not pay the tax a lien is placed on the property and, as a general rule, the State eventually gets this tax! Setting aside the endless debate regarding issues of fairness or allocation of the tax burden via a property or sales tax, these are effective mechanisms to collect taxes. They are cost effective, do not require additional bureaucrats to implement, generally minimize collection problems, and provide relative certainty regarding who, when and how much tax will be paid. One certainty an income tax system will provide is more government spending to setup the system and more costs to taxpayers for tax planning and preparation-- and inevitable tax examination. Next month we’ll provide some insight on recent federal legislation that will increase tax planning and preparation costs in 2011; I hope a State Income Tax is not on the list!
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