Editor's Note: There are a lot of ideas on how to "fix" taxes, though many conflict with each other and most fail. From around the world, here is one of several current prescriptions.
Soon after Wells Fargo Securities moved its Portland (Ore.) office to Vancouver, Wash., Marty Forsmann decided it was time to leave the city where she had spent most of her adult life and follow her employer just across the Columbia River.
Forsmann, a sales manager, traded in her Portland house for a two-bedroom condominium in Vancouver, ditching a state with one of the highest income tax rates in the country for one that has rejected the tax. "I got between a 9 and 10 percent increase in income because I no longer paid taxes," she says. Forsmann, 58, says the 2004 move has allowed her to sock more money into her 401(k) ahead of her June retirement.
Washington, one of nine U.S. states that doesn't tax wages, imposes a 6.5 percent sales tax, along with local levies. Oregon, one of five states with no sales tax, has one of the highest income tax rates, especially for high earners: 10.8 percent for taxable income exceeding $125,000 a year and 11 percent for income greater than $250,000. "Oregon and Washington are mirror images of each other, but they are both unstable because they are missing a major component of what would be the best-case tax structure," says Remy Trupin, executive director of the Washington State Budget and Policy Center in Seattle.
The variation has made Vancouver a desirable place to live, allowing residents to work in Washington without paying taxes on their income while taking advantage of tax-free shopping along the northern Oregon border. "We call ourselves a tax haven in Vancouver," says David Knode, principal managing broker for Coldwell Banker Seal, a real estate firm there. "I see people primarily wanting to move over here because there's no income tax, property taxes are lower, and the housing prices are lower."
The disparities come at a cost for both states. Washington is facing a $5.1 billion budget shortfall, and the state's localities lose an estimated $50 million in sales tax revenue annually to cross-border shopping, according to the Washington State Revenue Dept. Oregon, which is grappling with a $3.5 billion budget gap, lost more tax filers—7,652—to Washington than to any other state in 2008, according to the most recent data from the Oregon Revenue Dept.
The easiest way to stop the two states from bleeding each other would be for both to adopt the same—or at least a similar—tax structure. Yet multiple efforts to do just that have fallen flat.
In November, Washington voters rejected a proposal spearheaded by Bill Gates Sr., the father of Microsoft's co-founder, to impose an income tax on those earning more than $200,000 a year. Critics said approving the tax for high earners would open the door to expanding it to other income brackets.
Meanwhile, Oregonians have rejected nine ballot measures proposing a sales tax. "Adding a sales tax in Oregon—they view that as a nonstarter as much as we do the income tax," says Bart Phillips, president of the Columbia River Economic Development Council in Vancouver. This is how it is in a democracy, says Douglas L. Lindholm, president of the Council On State Taxation, a trade association based in Washington, D.C., that represents more than 600 corporations engaged in interstate commerce. States are proud to be "laboratories," he says, "and tax policy is certainly a part of that."
The bottom line: Shortfalls in Oregon and Washington are aggravated by differences in their tax structures.