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Nine ways to fix Washington's tax mess

How to eliminate unneeded tax breaks, improve the efficiency of those that boost our economy and save Washington state some serious money.
Lawmakers continue to huddle behind closed doors at the capitol.

Lawmakers continue to huddle behind closed doors at the capitol. MathTeacherGuy/Flickr

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

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

This is the third in a 3-part series on tax reform in Washington state. You may also want to read Part 1, "Olympia: So many bills, so little tax reform," and Part 2, "Olympia: Breaking up with a tax favor is so hard to do."

From Tax Incentives, Washington State Tax Structure Study, Alternatives Subcommittee Paper, April 18, 2002.

“The issue of whether tax incentives achieve their stated purpose remains an open question. There are limited means to determine who benefits from tax incentives and if they are effective in creating jobs. Washington law requires the Department of Revenue to prepare a periodic compilation of the reduction in revenues from all tax incentives and exemptions. A few other states have enacted programs that require firms to publicly disclose information on the amount of their tax savings and on the creation of jobs and goal attainment.

Studies that examine the effectiveness of tax incentives have conflicting and inclusive results. Academic studies show small, if any, impact on growth. There are studies involving interviews or surveys showing that for individual firms tax incentives are working to create jobs in the communities in which they locate.”

Let’s start with this premise: Once a tax break is enacted, it’s difficult to modify or eliminate. What's more, analyzing the effectiveness of a tax break – the benefits versus the costs – is a problematic exercise. At least this seems to be the conclusion of many economists and others who have closely studied the use of tax breaks by states to stimulate their economies.

Individual tax breaks on the books need to be carefully reviewed using an improved set of evaluation criteria, yes, but the whole idea that they are an effective way of fueling economic development and growth also requires a much closer look.

If this is true, we need to find new approaches. Here are a few suggestions in the category of personal opinion. Several will require legislative action.

1) Business incentives need to be grouped and given review priority.

Currently, the Citizen Commission puts together a 10-year plan for reviewing all tax exemptions. Health industry tax exemptions are slated to be reviewed next year under this plan.

While it’s certainly appropriate to submit health preferences to an early review — the cost of health care is a major policy issue — there are also numerous business incentives that may or may not contribute to the state’s economic condition that also should be reviewed without delay.

2) A new evaluation factor should be added for determining need among companies that receive tax credits.

House Bill 2532 tried to address this issue in the context of the high-tech R & D credit. But it got unduly complicated by involving contributions to the Opportunity Expansion Program for the purpose of increasing slots leading to degrees in high demand areas such as computer science.

The credit is clearly not needed by well-established firms with the means to invest in R & D. Several firms could be cited, but Microsoft serves as an example. At last count Microsoft had $53 billion available for investment. It should be possible to draw a line somewhere between zero and $50 billion, above which a firm is able to fund R & D without taxpayer assistance.

3) Statutory restrictions on what can be reviewed should be removed, especially the manufacturing machinery & equipment (M & E) exemption and the small business credit.

Currently, tax exemptions for small businesses and manufacturing firms that invest in machinery and equipment aren't subject to review at all. Both are used heavily, and both were the subject of bills in the last legislative session expanding the preferences.


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Comments:

Posted Fri, Oct 5, 9:59 a.m. Inappropriate

How about requiring the beneficiary companies to post a bond in the amount of the benefit state and local government are expected to receive as a result of the tax break? If the actual benefits fall short, the bonding company pays the shortfall to state and local government. If the benefits equal or exceed the projected amounts, the state reimburses the companies for the cost of the bond.

Posted Wed, Oct 10, 11:44 p.m. Inappropriate

Love it!

Posted Fri, Oct 5, 12:55 p.m. Inappropriate

I,m looking forward to former Representative Nelson's article on review and sunsetting programs on the spending side of the ledger -"How to eliminate unneeded spending, improve the efficiency of those that boost our economy and save Washington state some serious money."

wep

Posted Fri, Oct 5, 12:57 p.m. Inappropriate

Interesting concept, how about we do the same thing for Government Services, we pay taxes to agencies to perform certain tasks, they fail to meet projected goals and objectives, they are fired. They meet Goals and objectives, they get to keep their jobs.

Cameron

Posted Fri, Oct 5, 1:19 p.m. Inappropriate

Never create the tax in the first place and there is no need for a special tax break for a special interest. Give all levels of government as little as legally possible. Get government out of as much private activity as possible. Reduce the percentage of gov't spending as a percentage of the total economic pie to as low as possible. Simple solutions.

animalal

Posted Tue, Oct 9, 7:07 a.m. Inappropriate

This is great work, but how do you aim to get busy people on board to support this and other great solutions? This is really long, and voters are strapped for time. Further, what should I compare this to? Third, if it turns out to be viable how do I voice support so leaders implement it?

Americans want alternatives -- like this -- to the bad news, ranting, and blaming while their lives and kids’ futures don’t improve. Crosscut could use a technology to help people use this kind of great idea.

@10 (www.at10us.com) aims to establish an alternative to the either/or politics of today by changing the political conversation to one that demands solutions.

It makes it easy for people to participate, facilitates the development of viable solutions, and holds leaders accountable for implementing the ones people like – and it avoids spam at all costs.

People pick the issues they want to solve like excessive waits at the doctor’s office, food scares, or skyrocketing energy bills. @10 invites people, especially experts, to solve the most voted-for problems.

Solvers --like the author -- provide detailed action plans via a 10-question template, but use a limited number of words to answer the questions. This weeds out rants, petitions, and polls and makes it easy to compare solutions.

Once solutions are complete, people compare and pick the ones they like from a simple, multiple-choice survey. @10 promotes the most popular strategies to its audience, an array of media channels, and politicians. Since the solutions are detailed and have popular support, leaders will be more likely to do something.

Crosscut could integrate the most popular local solutions into regional strategies, and provide a user-generated, credible agenda to form the basis for meaningful political discussion.

We need an alternative to move from the current zero-sum game to a more productive one. The reality is that to have influence, you need to reach more people, and people don't have time for long articles today. You don't have to like @10, but great ideas like this will never get out without being easier to get through for a slightly broader audience. It's a trade-off I think high-minded media needs to make.

ejcarrig

Posted Tue, Oct 9, 10:36 a.m. Inappropriate

There are two important considerations here, one that is well developed in this dialogue, and the other not visible to anyone who doesn't own or run a business.

Business bears almost all the cost and complexity of tax compliance, and that complexity, cost and legal risk grows dramatically when businesses do business in many jurisdictions.

Through legislation and enforcement, government has made business the government's unpaid tax collector.

Business collects and pays over ALL taxes (excepting income tax for a few self-employed individuals). This includes employment taxes, B&O; taxes (here in Washington), sales and excise taxes in every jursdiction where a company does business, and corporate income taxes (depending on the business location).

It's significant and costly, especially for small businesses and particularly for small businesses that do business in many states.

There are four kinds of tax cost for business:

1. Sales or excise (use) taxes. These are usually collected from the end customer and paid over to the government. The business pays the administrative cost.

2. Assorted permits and fees. These are separate administrative and cost entities and include business licenses, industry-specific permits and licenses, and costs like Seattle's office space square footage tax.

3. Taxes on the business' financial operations. These are the B&O; taxes, income taxes, and the like.

4. Costs of tax compliance and risk mitigation. These are the administrative people, accountants, and tax attorneys who manage all the various obligations to all the various jurisdictions.

So in thinking how to use government laws and regulations to help or encourage business to be more successful, making tax compliance simpler, faster, and a lot more consistent across the country will free more time for business owners to focus on growing their businesses.

And that will grow tax revenue.

Posted Wed, Oct 10, 11:46 p.m. Inappropriate

Very helpful and grows my understanding. Thank you.

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