This is the second in a three-part series on tax reform in Washington state.
The state keeps tabs on more than 600 tax breaks that have been enacted over the years. In time, and with a few significant exceptions, each of these will come up for formal review. According to the Department of Revenue’s 2012 Tax Exemption Study, 113 fall into the business incentive category. And businesses will realize approximately $1.7 billion in tax “savings” in the current biennium.
Since the Great Recession began, there has been increasing interest in using tax incentives to enhance economic development. Numerous new and expanded incentives were the subject of bills introduced in the 2011-12 Legislature. And incentives have become a topic in the race for governor between Jay Inslee and Rob McKenna. Inslee has proposed new breaks to stimulate economic growth in green jobs. And both candidates would increase the tax credit available to small businesses.
The review process is in the hands of the Joint Legislative Audit and Review Committee (JLARC) ,which is assisted by the Citizen Commission for the Performance Measurement of Tax Preferences. The Commission schedules reviews and comments when they are completed. At its Aug. 24 meeting, the Citizen Commission adopted a 10-year review schedule that lists 569 preferences with a total biennial cost of $65 billion.
A JLARC review begins with a determination of the Legislature’s public policy objective in enacting a preference. The objective is expressed in an intent statement usually found in a brief preamble to a bill. However, the Legislature hasn’t been consistent in this regard, requiring a search of other records for its intent. Statutory factors, which can be objective metrics but are most often desirable outcomes stated in general terms, are then used to determine the efficacy of a preference.
On numerous occasions the intent has been to boost economic development. As early as 1972, when the state was in the throes of a minor recession, Senate Bill 92 was enacted that established an economic assistance authority and allowed it to grant sales tax deferrals on machinery, materials , labor, and services utilized in manufacturing. The intent section, which is similar to recent statements, reads:
It is declared to be the public policy of the state of Washington to direct financial resources of this state toward the fostering of economic development through the stimulation of investment and job opportunity in order that the general welfare of the inhabitants of the state is served. The legislature further finds that reducing unemployment as soon as possible is of major concern to the economic welfare of the state. It is further declared that such economic development should be fostered through provision of investment tax deferrals, construction of public facilities, the insurance of industrial mortgages, and technical assistance; that expenditures made for these purposes as authorized in this chapter are declared to be in the public interest.
In evaluating tax preferences, JLARC determines which of the factors (set forth under RCW 43.136.055) should be included in the review of a particular preference based on the factor's relevance. Several are directed at economic goals: to encourage business retention, growth, and attraction; to promote high-wage jobs; to positively impact the state economy; and to stabilize communities. However, all are stated in subjective language and the law generally does not provide clues as to how they should be evaluated.
JLARC is also directed to consider similar and competing tax preferences adopted by other states, and identify benefits that might be gained by incorporating corresponding provisions in our policies. This reflects the belief that the state must use tax breaks to compete with other states for businesses and jobs.
Senate Bill 5044 enacted in 2011 added an economic impact analysis to the list of factors to be considered by JLARC when reviewing tax preferences. It requires a comparison of the benefits produced by a tax expenditure to the benefits of a direct program expenditure in the same amount. For example, instead of granting R & D tax breaks to high-tech companies, state funding could be increased for more slots in university STEM (science, technology, engineering, and math) programs. But the legislation requires the use of a state’s input-output model that the Citizen Commission found to be lacking for this purpose.
Like what you just read? Support high quality local journalism. Become a member of Crosscut today!