A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS OF ALTERNATIVE TAX POLICIES IN THE STATE OF WASHINGTON

Washington state government has been facing financial difficulty in funding public services in the state. In 1993, state government cut the budget and increased taxes to balance revenues and expenditures. In subsequent legislative sessions, initiatives have been taken to reflect changes in tax policies and to reassess the spending priorities by the government.; An empirical Computable General Equilibrium (CGE) model was developed for the state economy of Washington to evaluate the impact of alternative tax policies on the state economy. Both neoclassical and Keynesian model closures were built into the model. General equilibrium analysis takes into account the effect of a change in tax policy on prices and quantities in all markets and captures the real impact of a tax on the state economy. State shocks simulated for policy analyses were the household and business property taxes, specific gasoline tax, business and occupation tax, and a possible state personal income tax.; The model results indicated that Washington's economy would improve when taxes on businesses are reduced. For example, when a distortionary B&O tax was replaced by the less distortionary flat rate personal income tax, the state economy gained in economic efficiency. However, when full employment is assumed and thus number of households remains the same in the state, household disposable income and real household consumption declined for most Washington households. When unemployment is assumed and the laborers are absorbed from within the state, then this tax policy would bring a substantial increase in income and real consumption for Washington households especially for high income households. But, if laborers are absorbed from outside the state, then the number of households in the state increases and household income and real consumption in the state declines on per capita basis. The replacement of the B&O tax by a flat rate personal income tax may be good policy for factor owners especially capital owners, and high income households, but not for the majority of Washington residents.