In June, the Washington State Supreme Court ordered the Legislature to appear on September 3rd to explain why it hasn't found the revenue to fully fund the education reforms required by its McCleary ruling, reportedly as much as $7.83 billion through 2019.
There are a variety of reasons the state has a huge education budget gap. After the 2008 recession, the Legislature cut $4 billion from K-12 and higher education spending, which helped absorb the costs of continuing tax breaks for corporations. While most states have an income tax to smooth revenue through downturns, voters rejected the creation of a progressive income tax in 2010. Then, last November, the Legislature awarded Boeing $8.7 billion in new tax breaks.
Locally, Boeing often takes a lot of flak for its tax breaks, but Microsoft has also played a central role in lobbying for tax breaks that cripple state education spending.
Microsoft's Nevada Tax Dodge
Back in 1997, Microsoft realized it could save money on its fast-growing software licensing business by successfully lobbying the Legislature to cut Washington’s royalty tax rate by 66 percent. Between 1997 and 1998, Microsoft's royalty tax bill went from $52.1 million to $22.9 million — and that was before the company's revenues really began to grow.
Shortly after, it acted to avoid the royalty tax altogether by opening an accounting office in Reno, Nevada; a state with no corporate income tax. As I reported in "Citizen Microsoft", a 2004 Seattle Weekly article, the company accounted for its software licensing sales through the new office to avoid paying taxes on them, even as the bulk of its facilities, software development and sales continued from Washington state.
Microsoft's Executive Vice President and General Counsel Brad Smith acknowledged this practice and discussed its impact on Washington tax revenues in an interview I did with him in 2004.
"Obviously the company did make a decision, I'm not remembering exactly how many years ago, to put Microsoft Licensing Incorporated in Nevada in part to recognize the lower tax rate that was in place there," he said. "And there have been times when people in state government have mentioned to us the issue of whether we might move that back to the state of Washington. The reality is that, in the scheme of things, the impact is not very significant either for the company or for the state. Either the state government or the state economy."
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