Washington took an incremental step today toward what will hopefully be broader tax reform in 2009 by joining 21 other states in the Streamlined Sales Tax Agreement.

By one estimate, the new sales tax agreement will help capture $49 million in tax revenues for state and local governments that formerly went uncollected. That sounds like a lot, but it’s really small potatoes when you’re talking about a $30 billion dollar state budget, and local budgets to boot.

Next year, state leaders will face the challenge of closing a projected funding gap of over $2 billion while avoiding huge cuts to state education, transportation and health services. All this with a tax system that falls most heavily on low- and moderate-income residents and smaller businesses.

Is there a magic answer? No. But there are a number of good choices available to legislators that will help close the funding gap without asking more from those already paying more than their fair share.

For example: the sales tax exemption for personal and professional services (ranging from barbers and cable TV to lawyers and doctors) is worth over $5 billion per biennium – the single largest tax break that results in real revenue loss to Washington.

Collecting a sales tax on services differs a great deal from service to service, so different types of services should be considered separately. But it’s worth noting that the exemption for blue collar repair and construction services was lifted in 1941, permanently adding them to the tax base. It’s fair for other services to pay their share.

Other possibilities:

• A 3% tax on high incomes with a $100,000 per individual/$200,000 per household exemption (in other words, the first $100K/$200K is tax-free), paired with 50% cut in state property tax: $2.06 billion in revenue gain, $1.5 billion lost – net $556 million in new revenue.
• A 3% tax on high incomes (same scenario as above), paired with state sales tax cut from 6.5% to 6.0%: $2.06 billion in revenue gain, $1.3 billion lost, for a net of $760 million.

Both of the latter options cut taxes for the vast majority of taxpayers, and marginally increase taxes on high incomes (i.e. those benefiting most from our current economic structures). It’s an equitable way to ensure a measure of personal opportunity and economic security for the next generation.