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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