Our state needs revenue for essential social programs and its education system. With the failure of tax measures on last fall's ballot, attention has shifted to numerous tax breaks benefiting private entities that drain state funds.
Breaks — aka: preferences, privileges, incentives, subsidies, and loopholes — take several forms: exemptions, deductions, deferrals, credits, exclusions, and differential rates. They have a long history that started when Washington was still a territory. Many were enacted in the 1930s when much of the state's current tax structure was established.
Some are constitutionally protected. Sales to the federal government and sales involving out-of-state delivery are exempt. Other exemptions, such as those for food and prescription drugs and the senior citizen property tax program, were enacted via ballot measures.
A myriad of breaks, now numbering in the hundreds, have been legislatively enacted in recent decades. Most have a relatively small revenue impact, but some cause a substantial expenditure of state revenues. Many were premised on important economic goals.
Since the mid-1960s, tax incentives have been used to bolster and diversify the state's manufacturing base and create family-wage jobs. The performance of these incentives is in itself an important story, but best left for another day. As is the question whether, in addition to tax policy, there are alternative tools available to state government that would increase long-term economic development and job creation? And what is the federal government's role — can it stimulate economic development in ways that do not cause one state to expend scarce resources competing with other states?
One large tax break was not even contemplated when the sales tax code was written in 1935; personal and professional services were not included in the definition of retail sales that focused on producer goods. This reflected the small share that services (business, consumer, medical, financial, etc.) were in the state economy at that time. Services are now a major share, with a value approximately twice that of manufactured goods. The Department of Revenue estimates that services receive a $2 billion annual exemption.
And the breaks keep coming. Last year a new sales tax exemption for electric power infrastructure and equipment used in data centers located in rural counties was created. And more breaks are in the pipeline. For example, the governor's Higher Education Funding Task Force this month recommended a 50 cent tax credit for every dollar in businesses's donations to a new scholarship fund.
The Department of Revenue has summarized the history, purpose, and revenue impact of each of the gamut of breaks. Many were enacted to take the sting out of the sales and B&O taxes, the two largest sources of state revenue.
The legislature has begun an effort to get control of breaks through the bipartisan Joint Legislative Audit and Review Committee (JLARC). And in 2006, it created the Citizen Commission for Performance Measurement of Tax Preferences. The commission is tasked with assisting the committee by formulating a schedule for the systematic review of preferences, and to comment on reviews, including whether they should be continued, revoked, or modified. Individual preferences are to be reviewed at least once every ten years, starting with the oldest first.
Another supporting effort was initiated in 2010 when the Legislature created the public-private sector Task Force on Tax Preference Reform. Their report submitted to the governor and legislature last November, recommended that the Citizen Commission be given more flexibility for scheduling reviews, such as grouping preferences by type of industry or policy focus. This is important since different breaks can have common policy goals.
In the past four years the JLARC, in reviews of 95 breaks spread over 1,500 pages, has recommended that the legislature continue 62 and terminate or allow to expire 12. The committee recommended that the legislature re-examine another 21. The breaks recommended for termination or sunsetting have a total estimated annual cost of $37 million. And the commission has adopted a schedule for review of the remaining 550 breaks over the next 10 years. These have an estimated total annual cost of $36 billion.
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