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    State tax breaks for businesses need scrutiny now

    Businesses argue that changes would be a disaster. But should we continue business subsidies when we will be forced into brutal cuts in health and social services that will hurt needy individuals?

    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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    Posted Wed, Feb 2, 5:59 a.m. Inappropriate

    An excellent summary. Total state and local "tax expenditures"--i.e., breaks for favored companies and industries---now amount to three times the size of the state's biennial budget. Elimination of only a few would close the state's budget gap imnmediately. President Obama has proposed
    a review of these breaks at federal level, with an eye to reforms such as those enacted in 1986, with leadership of Sen. Bill Bradley, but which
    have long since been superceded by billions in new breaks. I have written about this subject often. Nothing will happen, however, until or unless
    the guv and legislators undergo spine transplants.

    Posted Wed, Feb 2, 6:54 a.m. Inappropriate

    Famous last words "They wouldn't leave just becasue we remove their tax break".

    If you can live with the consequences, go ahead.


    Posted Wed, Feb 2, 7:11 a.m. Inappropriate

    Our state's priorities are clearly out of place when unemployed workers need to justify their claims with greater scrutiny than businesses who receive a tax break or subsidy for "job creation."

    An unemployed worker needs to provide proof that they're looking for a job, or engaging in worker retraining or other professional development activity, for every unemployment check they receive.

    Meanwhile, there's no formal system in place to track the effectiveness - or even the underlying need - for businesses receiving tax breaks and subsidies.

    Many subsidies serve no public interest whatsoever, existing only because some special interest could afford to hire a lobbyist and push for them in Olympia and because too many legislators are too timid to take a principled stand for an "tax increase."

    How can we cut health-care for kids while still providing a sales-tax exemption for vanity procedures like unnecessary plastic surgery and botox?

    Yes, there are MANY tax breaks we can survive the consequences of eliminating.

    A reasonable start would be a temporary elimination of all tax breaks and subsidies while they undergo a rigorous review of need and effectiveness - after all, any business that can't survive for a year without a subsidy is a business that doesn't have any business being in business.

    Steve Breaux
    Washington Public Interest Research Group (WashPIRG)


    Posted Wed, Feb 2, 8:38 a.m. Inappropriate

    I totally agree with Mr. Nelson's point of view. All state programs that have a revenue impact need to be subjected to critical scrutiny to determine if they are of sufficient priority to be continued.

    The burden of the current financial difficulties cannot in all fairness be placed just on the backs of the poor.

    So far, the wealthy of our state have managed to escape making sacrifices. The coffers of big businesses are flush with cash and our billionaires get to live in and benefit from a state with no income tax. What a wonderful world for them!

    Meanwhile the poor are suffering the stress of wondering if their lifelines are going to be severed. Is this the kind of society we want to live in? One of greed, injustice, and no compassion.

    If so, I fear for the future of this once great state and country.

    Posted Wed, Feb 2, 8:39 a.m. Inappropriate

    A thought experiment illustrates the fuzzy distinction between tax expenditures and real expenditures. Imagine if the Defense Department announced that they were eliminating their entire funding for acquisition of equipment. Instead, the federal government would provide a tax credit to any company that donates equipment to the military. Tremendous savings on the budget, since the Pentagon is so expensive, but of course this system would be functionally identical to the current system.

    Posted Wed, Feb 2, 10:14 a.m. Inappropriate

    The author posits that "...Best left for another day... 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?" However, if the state is to foster a more hostile business environment by raising taxes on businesses, it had best have other economic development tools ready. Otherwise, it's a sure thing that some businesses will either flee the state, grow more slowly or shut down completely.

    Remember, it's not just the big businesses' shareholders that benefit from lower taxes. Their employees, communities and the smaller businesses serving those employees and communities (gas stations, coffee stands, dentists), as well as the suppliers to and employees of those small businesses, also benefit from the economic activity. This is how business creates wealth in an economy. Every dollar that the state takes away in the form of taxes is a dollar removed from that wealth-creation cycle.


    Posted Wed, Feb 2, 10:41 a.m. Inappropriate

    Beware the word 'need' in any economic discussion; it got one an "F" if used in any way in beginning economics classes back in Texas in the early 1970's. There are tax inequities that somehow supercede common law and common sense but the best tax system is one with the lowest rates across the board and rates and taxes that apply to everyone.


    Posted Wed, Feb 2, 11:36 a.m. Inappropriate

    Anotherview asks (above) if we want to live in a society of "greed, injustice and no compassion," perhaps not recognizing that such a realm is the ultimate expression of capitalism, the core principle of which is the elevation of infinite greed to maximum virtue.

    Indeed -- precisely as the implicitly genocidal savagery of the staggering cutbacks in education, transportation, medical, police, fire and safety-net funds -- the society in which we now live is already one of "greed, injustice and no compassion."

    Hence the New Paradigm of U.S. governance at every level: absolute power and unlimited profit for the capitalist elite, total subjugation and deadly poverty for all the rest of us.

    This is the same New Paradigm – whether blatantly advocated by Republicans or cunningly hidden behind the Democrats' Big Lies of "hope" and "change we can believe in" – that enables us to predict with absolute accuracy our unspeakably wretched future, a New Dark Age of malevolent selfishness in which:

    (1)-No tax loophole that benefits the barons of Big Business or the banksters of Wall Street will ever be closed;

    (2)-An infinity of such tax loopholes will be newly created regardless of which party is in power;

    (3)-The relentless war against lower-income people -- and ultimately against all of us who are not part of the capitalist elite -- will continue without mercy.

    Such is the infinitely vicious and now-inescapable bottom-line reality of capitalism.

    Posted Wed, Feb 2, 11:40 a.m. Inappropriate

    CORRECTION: my second paragraph above should read:

    Indeed -- precisely as proven by the implicitly genocidal savagery of the staggering cutbacks in education, transportation, medical, police, fire and safety-net funds -- the society in which we now live is already one of "greed, injustice and no compassion."

    Posted Wed, Feb 2, 12:16 p.m. Inappropriate

    interesting, you mean like the massive tax breaks, as in no taxes, for "non profits" like Group Health and the UW? they both rake in millions but pay no taxes.


    Posted Wed, Feb 2, 12:18 p.m. Inappropriate

    you could tax virtually everything at 90% and it won't fix the budget problem in the end. the pension schemes are infinately expanding budget bombs that will overwhelm all taxes and spending cuts.


    Posted Wed, Feb 2, 1:15 p.m. Inappropriate

    For those interested in this issue, there is a good article in this (Wednesday) morning's New York Times business section by David Leonhardt.
    One aspect of tax expenditures, not receiving enough attention, is that they distort the nature of economic activity wherever they are applied.
    Companies or sectors getting preferences get advantages over those which do not. If tax expenditures were scrubbed, across the board, and tax rates lowered, there would be greater overall economic growth. The public revenue base would grow. The most efficient enterprises would prosper;
    those artificially sustained by subsidy might or might not. People who argue the loudest for free enterprise---many of them receiving tax subsidies---would find themselves having to practice it.

    Posted Wed, Feb 2, 1:47 p.m. Inappropriate

    Ted_Van_Dyk writes: "People who argue the loudest for free enterprise---many of them receiving tax subsidies---would find themselves having to practice it."

    And that's what separates true capitalists from influence peddlers and rent seekers. A lower tax schedule without artificial incentives, applied equally to all businesses, would be the best and fairest solution.


    Posted Wed, Feb 2, 3:24 p.m. Inappropriate

    What troubles me most about these "tax expenditure" arguments is the basic assumption that a particular tax should apply to all transactions and any time it does not there is a tax expenditure. For example, the retail sales tax was not originally designed to tax services or to tax real or intangible property. The retail sales tax is a tax designed to tax sales of tangible personal property at the place of sale.

    In time, this tax was extended to certain services, such as construction, installation, etc. to which the tax was easily applied and over the years additional services, such as amusement services, telecommunication services and intangible property, such as software licenses were ultimately made subject to retail sales tax.

    Is a transaction exempt from a tax that was never designed to tax that transaction originally? Has there been an expenditure of taxpayer dollars because a transaction that was never subject to a tax remains not subject to a tax? Now I agree that there are numerous cases where an exemption, deduction or credit has been enacted that does represent a reduction in the taxes that would otherwise be paid by a business or individual. But why do we automatically assume that their original tax obligation was appropriate in the first place.

    How much in taxes does Microsoft pay to Washington? No one pays any attention to this question or ever even asks. Without that information how can we possibly know that their tax burden is too high or too low in comparison to the burden borne by others? Instead, we deem any credit, exemption or deduction that Microsoft receives to be a tax expenditure, so that we can shift the argument to why we "give" to Microsoft when needier persons go without.

    It is ridiculously naive to assume credits, exemptions and deductions or the inability of a tax to apply to a transaction is somehow equivalent to spending tax dollars on the person or company engaging in that transaction.

    As an individual in Washington, you pay no B&O; tax on your wages, you pay no sales tax on any rent that you pay for real property or interest that you pay on your mortgage, you pay no retail sales tax on food that you purchase, you pay no retail sales tax on insurance that you buy or on medical or dental services that you consume. It is not fair or reasonable to tax these transactions, but it is somehow abundantly clear that Microsoft should pay retail sales tax on research and development equipment?

    Exemptions, credits and deductions are simply components, elements or characteristics of a tax system that are used to determine the final amount of taxes owed. They are not expenditures.

    We need legitimate dialog about designing a tax system that assigns appropriate tax burdens amongst its citizens and businesses, we also need to determine how much government should spend; but I do not believe that focusing on exclusively on reductions in a company's tax burden makes any sense unless you first establish the baseline of what their total tax burden should be in the first place. Only after we have determined what tax burden a company has borne and compared it with their "fair" share can we determine whether the credits, exemptions or deductions have merit.

    Posted Wed, Feb 2, 8:35 p.m. Inappropriate

    The Washington State revenue system is a huge pile of post-it notes, most of which read "Taxes not owed by XXX". The pile has been accumulating for decades, and no one has looked at those post-it notes until very recently. For every break, someone has to pay more. That's constantly pointed out by conservatives who complain about services offered to people who aren't taxed because they're too poor. Only now are we hearing about taxes not paid by corporations because they're too powerful. Dbreneman and others, if you think that out-of-state banks or other financial insitutions will close down their branches in Washington State if they have their tax break taken away, or law firms will shut their doors because their tax breaks are taken away, then you're a lot more gullible than you seem. Beaky, look at the data Nelson mentions. Most of the deficit now would not exist if those tax breaks didn't exist. Unfortunately, it will probably take a referendum, a public vote, and a year or so before income begins to show, and by then a lot more people will be hurting because Microsoft, etc. have been protected for most of their corporate lives.


    Posted Fri, Apr 8, 7:56 a.m. Inappropriate

    I am really late to the party, but I found this article excellent because you provided some good links to the raw data. While I realize this article was intended to address taxation, I am also interested in the spending side of the equation. Specifically, I am wondering what would be the expected growth in state spending on social services as a function of population growth and how would that curve compare to the actual growth in state spending? I was looking at the growth in state spending here:


    and spending appears to be growing much faster than I would expect based on population growth. If anyone is reading this and has some links discussing an analysis like this, please let me know.



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