Since the state Senate has begun its bipartisan transportation “listening tour” (with impressive turnout at early stops) and is soliciting your feedback, I wanted to consider what an intelligent transportation package would look like. The Senate’s Majority Coalition Caucus has a list of ten transportation reforms it would like to see implemented before new revenue is raised, so I’ll begin by addressing those items. First on this list is a proposal to “return sales tax from transportation construction to the transportation budget.”
History of the sales tax on transportation projects
As you may know, the state levies and collects a 6.5 percent tax on the selling price of each retail sale made in Washington. This sales tax revenue goes into the state’s operating budget—which has increased 73.2 percent since the 1999-2001 biennium (outpacing inflation by 1.3x)—where it pays for everything from human services to higher education.
So what does the sales tax have to do with transportation? Even though there are 125 statutorily-named exemptions from the sales tax, (including for hog fuel, chicken bedding materials and more) there is currently no exemption for state transportation construction projects. When a state-hired contractor buys $10,000 worth of gravel for a roads project in Kelso, the seller collects an 8 percent sales tax. So the transportation budget gets charged $10,800, the road gets $10,000 worth of gravel and the Department of Revenue (DOR) collects $800 (most of which goes into the operating budget). The net result is an $800 transfer from the transportation budget to the operating budget. What’s wrong with this?
The unconstitutionality of sales tax on transportation projects
Most people, whether liberal or conservative, agree that transportation taxes should fund transportation maintenance and upgrades. In fact, this idea is so well accepted that it was enshrined in the state constitution all the way back in 1944. Article II, Section 40 requires all gas taxes and motor vehicle license fees “to be used exclusively for highway purposes.” Thus, when gas tax money ends up in the general fund by way of a sales tax on transportation projects, it is a violation of the state constitution.
This unconstitutional transfer has the effect of subsidizing other government spending with funds that are constitutionally required to be spent on transportation. Since the gas tax is the primary revenue source for the transportation budget, Olympia uses this unconstitutional transfer a backdoor way for the Legislature to force drivers to pay for things far beyond transportation infrastructure.
As an aside, this unconstitutional sales tax artificially inflates the price of transportation projects. For existing transportation projects, $305.8 million will be spent on sales tax during the next six years. Out of the $10 billion in new transportation spending that the Legislature is considering, an estimated $400 million would go to sales taxes. Exempting transportation projects from sales tax would not only conform with constitutional mandates, but it would also reduce the cost of these projects. With lawmakers trying to come up with more funding to cover the 520 replacement project, for instance, ending this tax transfer would make a big difference.
The inefficiencies of sales tax on transportation projects
Beyond its unconstitutionality, the imposition of sales tax on transportation projects also creates inefficiencies. In the original example, it might seem as if transferring the $800 sales tax revenue back into the transportation budget could address the constitutional issues. But that effort would still fall short, thanks to what economists call transaction costs.
Collecting sales taxes is a complicated business—the RCW imposing the sales tax has 158 sections and the WAC governing DOR’s administration of the system is longer than Faulkner’s As I Lay Dying. In the real world, our gravel seller must hire an attorney to advise it on the appropriate sales tax rate to collect given the location of the sale and the applicability of any exemptions. It must hire an accountant to calculate the proper withholding amount and file a return with DOR. The Department, in turn, must have an employee examine the records to verify the gravel seller remitted the correct amount of sales tax (or program a computer to do so).
When billions of dollars of materials are purchased for transportation projects, there are hundreds of millions of dollars in sales taxes to be collected. That’s a lot of accountants, lawyers and government agents to pay, just to perform what is essentially a bank transfer from one state account to another.
If this unnecessary regulatory burden were lifted, the contractor would have extra money to pay its employees or shareholders, or it could reduce its charges to the state, saving the taxpayers money. Plus there would be savings for the time DOR didn’t have to spend enforcing its Faulkner-esque sales tax rules.
Sales tax on transportation projects is inefficient and unconstitutional
In a nutshell, placing a sales tax on transportation projects is unconstitutional as well as inefficient. That is surely why exempting such projects is top on the list of reforms proposed by the Majority Coalition Caucus. The only real question is if the Governor and Frank Chopp’s House will support this smarter-government proposal, or if they’ll continue artificially inflating the cost of transportation projects so they can circumvent the state constitution by siphoning off money from transportation users to pay for more of their liberal agenda.
 Other local jurisdictions impose an additional tax on top of the state rate, so the actual sales tax rate paid by consumers ends up between 7 and 9.6 percent, depending on where in the state a sale is made.