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    Closing tax loopholes in Olympia could backfire

    "No loopholes" is a good political rallying cry, but the reality is more complicated. Here's a short course through Washington state's tax maze, and how closing some loopholes would pinch consumers.

    Stacks of money can be yours, without having to risk your own.

    Stacks of money can be yours, without having to risk your own.

    Protesters in Olympia spent last week bouncing “no loophole” chants off the marble walls. Despite their venting, there will be no loophole fix for Washington’s multibillion-dollar budget gap. Such broad slogans also do little to illuminate the realities of the situation.

    The state labor council’s “demand letter” sent to the governor and legislators last month sets out the complaint: “The state currently has 567 tax breaks on the books that cost taxpayers billions of dollars every year.  Instead of cutting vital services, the Legislature should be cutting the billions in wasteful corporate tax breaks.”

    Let's start by using a more neutral term, “tax preferences,” as the Legislature did when it established the Citizen Commission for Performance Measurement of Tax Preferences in 2006. The estimate of 567 tax breaks comes from the revenue department’s quadrennial report on “tax exemptions, exclusions, deductions, deferrals, differential rates, and credits.” Unfortunately, the department’s inventory fails as a good framework for exemption review.

    In 2008, the department reported an estimated potential savings for taxpayers of $98.5 billion from 567 preferences. The analysis then draws a good distinction between taxpayer savings and potential revenue collections. The department estimated that governments might realize about $14.8 billion from repeal, about 15 percent of the total.

    The department's report has led to all kinds of mischief and exaggeration. Loophole closers regularly cite the misleadingly big numbers from the report, but they primarily target a handful of things they consider “wasteful corporate tax breaks.” They also mention, presumably for rhetorical effect, eliminating tax exemptions for “elective cosmetic surgery” and “private jets” — tiny amounts. And these advocates do not mention that hardly anyone is pushing the repeal of popular sales tax exemptions for groceries and pharmaceuticals, the Business and Occupation (B&O) tax exemption for employee wages and salaries, or property tax exemptions for nonprofits.

    Underlying the agitation is the notion that Washington businesses are under taxed. In fact, Washington businesses bear among the nation’s heaviest tax burdens. The accounting firm Ernst & Young recently calculated that businesses paid Washington’s state and local governments $14.7 billion in taxes during the 2009 fiscal year. This was 51.2 percent of all taxes the governments received. The effective tax rate on business in the state (calculated as the ratio of taxes to private sector gross state product) is 5.3 percent, tied for 13th highest and significantly higher than the 4.7 percent national average.

    The business burden would be much higher were it not for tax preferences enacted to offset problems inherent in Washington’s peculiar tax system. This is especially the case with respect to preferences related to sales taxes on business-input purchases and the business and occupation (B&O) tax, which together account for nearly one half of the business tax burden.

    Indiana University economist John Mikesell says a good preference analysis begins by identifying the norm from which the preference deviates. Ideally, the benchmark normal tax base should be selected by the logic of good tax policy. Mikesell calls this the conceptual baseline approach and notes that it requires “a clear statement of what state tax policy actually is — not just an indication of how much money the state wishes to collect...”

    In Washington, it is particularly important to get the baseline right for sales taxes. General sales taxes (i.e. the retail sales and use taxes and the B&O tax) provided 69 percent of general fund-state revenue in 2009. While many liken the B&O to a corporate income tax, public-finance experts see it as a sales tax. Revenue from the B&O is equal to one-third of the amount received from the retail sales and use taxes.

    The sales tax problem to be solved stems from what analysts call “pyramiding,” multiple taxation of the same transaction. Consider a man’s shirt. The state collects sales tax (both retail sales tax and B&O) when a store sells a shirt. Should the state also collect sales tax when a shirt maker sells the shirt to the retailer? What about the shirt maker’s purchases of cloth, thread, and buttons? Although Washington provides a retail sales tax exemption for goods purchased for resale, these transactions are subject to the B&O.

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    Posted Mon, Apr 11, 7:15 a.m. Inappropriate

    The problem in Washington State is the focus on sales taxes, which is a regressive tax. Property taxes are capped, thanks to the efforts of the efforts of Tim Eyman.

    There is growing evidence that tax cuts don't work, see this article: http://www.winonadailynews.com/news/local/article_2af3299c-5a85-11e0-85ba-001cc4c002e0.html

    States that have cut taxes have not grown business but rather have grown their state budget deficit. This in turn allows the GOP to demonize the public employees unions, when in fact it has been tax cutting that failed to grow business that grew the deficit.

    Washington State gave Boeing a huge B&O; tax break and what was it called by the WTO? An illegal subsidy, I'm sure that the new assembly line in South Carolina will be called that at some in the future when a complaint is filed. Corporations play states against each for tax breaks, Amazon has gone to South Carolina for sales tax break. However, new Gov. Nikki Haley, a Tea Party GOP favorite, isn't playing, and has said she won't sign the bill. Boeing went to South Carolina for the second assembly line even though they received infrastructure improvements and tax breaks from Washington State -- and the rework on the 787 is being done in Washington State by union labor (after the Boeing management demonized the unions, the unions are helping them save the 787 project).

    The analysis above is very biased, readers should expect better from Cross Cut.


    Posted Mon, Apr 11, 7:36 a.m. Inappropriate

    The analysis above is very biased because the author is a shill for a right wing think tank whose board executive committee reads like the "Who's Who" of corporate Washington, with members who work for the health insurance industry, Puget Sound Energy, timber companies, Microsoft, business associations, Boeing, a corporate law firm, and Weyerhauser. Their constantly repeated message is that corporations are entitled to public subsidies in the form of tax breaks. They insist that without these handhouts the companies they represent will move to states that give them the best tax breaks and cheap, non-union labor. Capitalism in the raw is seldom mild.

    Mud Baby

    Posted Mon, Apr 11, 7:59 a.m. Inappropriate

    If corporations don't pay taxes in Washington the only group left is the workers. Hmmmm. Maybe Microsoft could threaten to move to Mississippi, but I doubt that they could come up the same group of software engineers. Remember Seattle competes with San Fransisco and San Jose, not South Carolina. When gifting corporations incentives to stay, we should be sure to look at the real alternatives.


    Posted Mon, Apr 11, 8:06 a.m. Inappropriate

    As we close tax loopholes, don't forget these:

    indian tribes
    non-profit (yeah, right!) organizations


    Posted Mon, Apr 11, 8:35 a.m. Inappropriate

    "The state labor council’s 'demand letter' [claims] 'The state currently has 567 tax breaks on the books that cost taxpayers billions of dollars every year.' "

    Tax breaks cost the taxpayers billions? This kind of language is a perfect example of why the majority of taxpayers see these "public servant" protesters in Olympia as posturing bullies, not downtrodden workers. The spectacle in Olympia is harming the government-union complex more than they, in their arrogance, can possibly imagine.


    Posted Mon, Apr 11, 9:20 a.m. Inappropriate

    Here is Oregons experience with class warfare:

    "Big tax hike in Oregon results in substantially less revenue"

    " In 2009 the state legislature raised the tax rate to 10.8% on joint-filer income of between $250,000 and $500,000, and to 11% on income above $500,000. Only New York City’s rate is higher. Oregon’s liberal voters ratified the tax increase on individuals and another on businesses in January of this year, no doubt feeling good about their “shared sacrifice.”

    Congratulations. Instead of $180 million collected last year from the new tax, the state received $130 million. The Eugene Register-Guard newspaper reports that after the tax was raised “income tax and other revenue collections began plunging so steeply that any gains from the two measures seemed trivial.”

    One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did.



    Posted Mon, Apr 11, 9:55 a.m. Inappropriate

    It would be nice if the Washington Research Council could offer a constructive approach to the state’s continuing revenue problem instead of taking a defensive position of protecting their own.

    As someone who owned and ran my own small business in Washington for eight years, I know that complying with our state B&O; Tax system is burdensome - not because of the actual tax rates, but because of the cumbersome nature of combing through all of the loopholes. By comparison to figuring out how much I had to pay, actually writing the check was a relief.

    It’s only natural for businesses – or anyone else – to try to get themselves the best deal they can. But it’s disingenuous to claim that eliminating most of the existing tax loopholes will harm the economy or kill jobs. Anyone who's using Viagra isn't going to stop if they're asked to pay sales tax for it, and Christmas Trees aren't going to stop growing in this state if their farmers lose their B&O; exemption; the same is true of scores of other loopholes in our tax system that amount to wasteful spending to the tune of hundreds of millions of dollars a year, at least.

    Most of the loopholes in our state exist to benefit a few large businesses or special-interest groups which could afford lobbyists to help get them enacted, and serve neither the overall business climate nor the general public interest.

    It’s unfortunate that Richard Davis waited until the end of a 1,283 word essay to concede the obvious: that “the tax code should be regularly evaluated” that “...objective review of tax preferences ...may indicate that some preferences no longer make good fiscal policy sense” and that “when they don’t, they should be repealed.”

    Every aspect of our state fiscal policy should receive equal scrutiny and face an equal standard for enactment: spending cuts or spending increases, tax cuts, tax loopholes, and tax increases.

    Steve Breaux
    Washington Public Interest Research Group


    Posted Mon, Apr 11, 10:03 a.m. Inappropriate

    I lost confidence in the accuracy and credibility of this article when Davis referred to $98 BILLION in savings to taxpayers from repealing the tax loopholes. That's far larger than the state's annual budget.

    Posted Mon, Apr 11, 10:35 a.m. Inappropriate

    "The ITEP insight that taxing business inputs lands heavily on consumers is confirmed by a 50-state study presented at the 2009 annual meeting of the National Tax Association. Researchers found that when business taxes in Washington state are increased by $100 million, $52 million of this cost is shifted forward onto in-state consumers, $29 million is shifted back onto workers, $1 million is shifted back to in-state capital, and $18 million is exported."

    Steve of WASHPIRG's response? "Most of the loopholes in our state exist to benefit a few large businesses or special-interest groups which could afford lobbyists to help get them enacted, and serve neither the overall business climate nor the general public interest.

    It’s unfortunate that Richard Davis waited until the end of a 1,283 word essay to concede the obvious: that “the tax code should be regularly evaluated” that “...objective review of tax preferences ...may indicate that some preferences no longer make good fiscal policy sense” and that “when they don’t, they should be repealed.”

    What part of that study of the tax code do you not understand, Steve? And perhaps you'd like to explain which special interest group PIRG represents - pretty much all of them, isn't it?


    Posted Mon, Apr 11, 11:17 a.m. Inappropriate

    Whatever states "Boeing went to South Carolina for the second assembly line even though they received infrastructure improvements and tax breaks from Washington State -- and the rework on the 787 is being done in Washington State by union labor (after the Boeing management demonized the unions, the unions are helping them save the 787 project."

    Hate to break it to you, but the tax breaks are why Boeing still does the biz here, and the union refusing to compromise is why SC is now getting their business. Labor has followed the food dish to SC, a RTW state in hopes of brow-beating Boeing into unionizing again - that's what Haley isn't signing up for, as your somewhat incoerent post fails to mention.

    "There is growing evidence that tax cuts don't work, see this article: http://www.winonadailynews.com/news/local/article_2af3299c-5a85-11e0-85ba-001cc4c002e0.html"

    No there's not. Historical evidence contradicts you. Every time, with no exception, that the US has cut taxes the economy has grown. Harding cut taxes and revenue from 'the rich' climbed from 44.2 percent in 1921 to 78.4 percent in 1928. Under Kennedy, their portion increased from 11.6 percent to 15.1 percent. Under Reagan, from 17.6 percent to 27.5

    Lower state revenues decreased not b/c taxes were lowered but b/c we're in a depression - not a recession, a 'depression - dealing with effective 17% unemployment, and experiencing the slowest recovery we've ever had. Why? Because unemployed people don't spend money and neither do businesses getting hit with taxs/fees through Obamacare we haven't even discovered yet. The last 3 years have been one of the most economically unstable environments I've ever lived through.

    And although Labor here in Michington would love, as usual, to simply burden everyone else with the tab to support every special interest ad infitum, the fact remains that doing so will decrease our functioning tax base even further. And I'll remind you - as a nation, we already have a work force that's been reduced by 30% and is the smallest in decades. Something that '8.8 unemployment' figure doesn't note. The tax breaks Progressives and Liberals target are protecting jobs - Olympia's job is to reduce their spending and that is not their strong point.

    But then that's why Labor keeps putting them back, isn't it?


    Posted Mon, Apr 11, 11:29 a.m. Inappropriate

    top 3 tax break beneficiaries in the state are Microsoft at $35 million, Immunex at $19 million, and the UW at $25 million.


    Posted Mon, Apr 11, 11:35 a.m. Inappropriate

    Nice to see some lively discussion here. I've had my say in the article, but do want to step in to clear up some confusion.

    Harris Meyer says, "I lost confidence in the accuracy and credibility of this article when Davis referred to $98 BILLION in savings to taxpayers from repealing the tax loopholes."

    The number comes from the revenue department's inventory (http://dor.wa.gov/docs/reports/2008/Tax_Exemptions_2008/Tax_exemptions_2008.pdf)

    Specifically, page 4 includes this: "... aggregate state and local impact of the 567 exemptions amounts to an estimated savings for taxpayers of $98.5 billion for the 2007-09 Biennium. About 54 percent of the total or $53.5 billion is represented by exemptions from state taxes; exemptions from local government taxes amount to $45 billion." That's it. There's no inherent connection between taxpayer savings from preferences and the size of the state budget.

    Posted Mon, Apr 11, 11:51 a.m. Inappropriate

    Christine Gregoire's quid-pro-quo gambling compact with Washington's indian tribes is estimated to cost the state $140 million a year. More than the Microsoft, UW, and Immunex exemptions combined.



    Posted Mon, Apr 11, 12:08 p.m. Inappropriate

    Richard, thanks for clarifying that the $98 bil in tax breaks represents a biennial figure, which you didn't indicate in your article. But there obviously is a connection between the tax breaks and the state budget. The commission said state could realize $14.8 billion (of the $98 billion) by closing the loopholes. $14.8 billion is nearly three times the state budget deficit.

    Posted Mon, Apr 11, 1:38 p.m. Inappropriate

    A refutation of this extremely biased article:



    Posted Mon, Apr 11, 2:41 p.m. Inappropriate

    Fact check:

    The Gates Committee recommended that the “pyramiding” problem associated with professional services and other inputs to business activity taxed under the B & O tax be addressed through a revenue neutral value added tax that replaces the B & O. They termed this a “major replacement” alternative. As a lesser “incremental” alternative the Gates Committee recommended that the sales tax be extended to consumer services such as beauty shops, amusement, recreation, and cable TV, which could also see a lower B & O tax rate.

    The Gates Committee also said this about the B & O:

    The truly unique element of Washington's tax system is the B & O tax: a gross receipts tax levied on businesses. Forty-five states impose a traditional corporate net income tax, similar to the federal tax.
    Economic vitality requires Washington State to offer a tax environment that is as conducive to firms choosing or maintaining their location in the state as that provided by states offering similar amenities. Likewise, the tax system should not impede businesses from expanding their operations in the state.
    The (our) finding is that Washington's tax system places a relatively high tax burden on low profit margin firms mainly because of the B & O tax. Due to the B & O tax, low profit margin firms and firms that are new or expanding may suffer a competitive disadvantage compared to their competitors in other states.


    Organizations such as the Washington Research Council that support a climate conducive for business retention and growth in Washington State might worry less about tax breaks and more about a fundamental restructuring of business taxation. A fair and transparent business tax would not require a multitude of problematic “preferences,” about 200 at last count.

    Posted Mon, Apr 11, 3:41 p.m. Inappropriate

    You all had better be very careful how you critize the author...oh wait he is from a conservative think tank...you can say whatever your want.

    If you want to see how Crosscut treats people who would dare to question a liberal author, please see the note below from Joe Copeland on April 8th.

    We have removed a number of comments from this article because they did not meet Crosscut's expectations -- usually so very well fulfilled -- of readers using the comments for civil, respectful discussions that contribute to thoughtful dialogue and solutions of public issues. The comments on this article will now be closed.

    — Joe Copeland


    Posted Mon, Apr 11, 3:44 p.m. Inappropriate

    Here is the Link to the Crosscut "Color of Cuts" Commentary.



    Posted Mon, Apr 11, 3:51 p.m. Inappropriate

    Yes, Cameron. Joe Copeland, clearly, crossed a line with that. Crosscut is not the place for an intellectually honest discussion of issues. Disgusting.


    Posted Mon, Apr 11, 3:52 p.m. Inappropriate

    By the way, Cameron, do as I have done and spread that story throughout every forum you visit. Joe should be put out of business.


    Posted Mon, Apr 11, 8:47 p.m. Inappropriate

    I share in some of the dissatisfaction in how this exemption debate has played out. Some of the more egregious loopholes are targeted for discussion, but lacking is appropriate context or any real effort to forge a long term solution to the many problems that hobble Washington's tax system. Although, I would note that this article pooh-poohs the significance of repealing certain exemptions such as the cosmetic surgery exemption without any meaningful comment on the merit of the proposal. If an exemption on cosmetic surgery should be maintained, why?

    The problem in failing to address the larger issues head-on is bipartisan. If labor's targeting of certain exemptions is nothing more than a revenue grab, then the business community's and anti-tax warriors' single-minded opposition to any tax increase is an equally unconstructive contribution to the debate.

    In 2009, the Oregon Legislature passed a law that creates an automatic sunsetting and review of exemptions. Similar efforts have been made in Washington, and although lip service has been paid to the enterprise, I haven't seen much evidence of support from the business community. Microsoft, for instance, which has advocated for a strong commitment to public education and key transportation projects such as the 520 bridge--and indeed depends on these priorities--has a clear interest in ensuring that the state is able to fund these things. Amazon and Google must certainly realize that when Boeing benefits from a tax break of dubious value, they must pay more to make up the difference.

    Posted Mon, Apr 11, 11:21 p.m. Inappropriate

    Here's the problem for WA State...we put on a party...and nobody came!

    The new census shows that state population grew 13% between 2000-2010; however tax revenues grew 50%!

    We went from a state that was highly regarded for its fiscal solvency to bankrupt, crooked, imperial government that has disconnected so far from the citizens that it actually goes on record saying people cannot vote on the issues that concern them! Someone looking from the outside in, would be shocked (well, if the rest of the world weren't such a mess as well).

    Not only has the state not grown, and the economy probably shrunk a bit since 2007, but the allocations are all wrong. The biggest growing places are the suburbs, exurbs and eastern areas -- yet were dumping $2 billion plus into a 1 mile tunnel in stagnant downtown Seattle!

    Not only is spending out of control, but our priorities are terrible!

    Yet the highest leaders refuse to acknowledge these obvious truths and even worse, seem unyielding to popular questioning!

    And they say the Tea Party is extreme...


    Posted Tue, Apr 12, 11:51 a.m. Inappropriate

    These below are SEIU's own suggestions and estimates on the matter: Total $313 million. That's a number that won't come close fixing the state budget, especially going forward, and its irresponsible for the proponents of ending loopholes to rhetorically suggest that all we have do to fix our state's budget is end loopholes. We needed larger answers than that.

    • Wall Street banks: $100 million per year
    • Elective cosmetic surgery: $8 million per year
    • Private jets: $5 million per year
    • Coal: $11 million per year
    • Out-of-state shoppers: $44 million per year
    • Fertilizer: $40 million per year
    • Consumer services: $100 million per year.
    • Film & video production equipment: $2 million a year
    • Display items for trade shows: $2 million a year
    • Christmas tree production: $500,000 a year
    • Fish tax exemption for tuna, mackerel and jack: $340,000 a year
    • Sales tax exemption for bedding materials for chickens: $180,000 a year


    Posted Tue, Apr 12, 3:47 p.m. Inappropriate

    I'd like to point out that $313 million a year in recaptured tax loopholes would pay for nearly three years of the Basic Health Plan.

    Posted Sun, Apr 17, 7:14 p.m. Inappropriate

    Blue Light,

    If Crosscut is "not the place for an intellectually honest discussion of issues" then go read and post somewhere else that you think is. Problem solved.

    For ALL concerned.


    Posted Wed, Apr 20, 2:54 p.m. Inappropriate

    This is why the system is so messed up: every tax loophole has a Richard Davis, or someone like him, attached to it to explain why consumers will suffer if this particular loophole is closed. It's his job.


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