Special session offers some hope of curbing tax breaks

A key legislative proposal from Seattle's Ed Murray would ask voters to restore majority rule on decisions to abolish the costly tax breaks handed out to businesses.

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State Sen. Ed Murray

A key legislative proposal from Seattle's Ed Murray would ask voters to restore majority rule on decisions to abolish the costly tax breaks handed out to businesses.

With only days remaining in the regular session, state legislators finally began to address the issue of tax breaks in a coordinated way. And they introduced a flurry of bills to reform some of them.

A contingent of a dozen senators announced several bills at a news conference and in the process expressed some unusual passion about the human impacts of the budget they had just supported. Other bills, with as many as 48 sponsors, were introduced in the House, and the Ways and Means committee held a two-hour hearing  on three of the measures.

As our legislators move ahead with the just-started special session, these are hopeful signs that some tax breaks will be eliminated or modified to allow restoration of funding, at least in part, for essential state services.

A key Senate bill is a referendum that would ask voters in November to exempt repeals of tax breaks from the super-majority vote requirement of Initiative 1053. The bill, sponsored by Seattle Democratic Sen. Ed Murray, who chairs the Ways and Means Committee, needs a simple majority vote in both houses to be placed on the November ballot.

The Murray bill would modify the Tim Eyman initiative passed by voters last November that mandates a two-thirds legislative vote for any tax increase. If Murray’s bill is approved by voters, repeal or revision of tax breaks would then require a simple majority of legislators.

A proposal by Sen. Phil Rockefeller, D-Bainbridge Island, has the largest fiscal years 2011-13 revenue impact at $338 million. It would increase preferential business and occupation (B&O) tax rates, eliminate the deduction for income earned by Wall Street banks on interest earned from mortgages, and reduce the deduction for investment income of non-financial firms.

The Rockefeller bill is tied to the Murray referendum. If it is passed in the special session, it would go into effect on passage of the referendum.

Another Senate bill, producing $49 million in the next biennium, would end the sales tax exemption for out-of-state shoppers. If adopted, it would be submitted to the voters in November.

Other Senate bills with lesser revenue impacts would improve tax-collection effectiveness and end exemptions for club membership fees and the chicken farming industry. Another, which would raise an indeterminate amount, would apply an excise tax for the first time to the value of private non-commercial airplanes.

Although Sen. Rockefeller’s bill would put the revenue in the state’s general fund for distribution by budget writers, other bills earmark the revenue to specific programs. The bill repealing the nonresident sales tax exemption directs that revenues be used for in-home care services.

The House committee heard testimony on bills that would each eliminate the nonresident sales tax exemption. One also targets the mortgage interest deduction. Revenues recovered from these tax breaks would be earmarked for K-3 class-size reduction, community mental health, and long-term care for the disabled and elderly.

Since 1965, residents of states, U.S. possessions, or Canadian provinces that impose a sales tax of less than 3 percent are exempt from Washington retail sales tax on tangible personal property. They can avoid paying the Washington state sales tax by simply showing their out-of-state driver’s license at the check-out counter.

Most of the benefit of the tax exemption now goes to Oregon residents who shop in Washington. Spokespersons for Vancouver and other southwest Washington retailers argued that the state would suffer a major loss of revenue because Oregonians would stop shopping in Washington, and as a result sales, gross income, and the tax revenue they generate would disappear.

But in response to a committee member’s question, committee staff indicated that the Department of Revenue believes that the large bulk of this shopping would continue, and that the state is expected to collect most of the current sales and B & O tax revenue. There would be an estimated reduction of 15 percent in border areas and 5.4 percent in other areas of the state.

One irony of the differences in the Washington and Oregon tax systems not mentioned at the hearing is that Washington residents who commute to work in Oregon get no break on their Oregon income tax. According to the Oregon Employment Department, an estimated 60,000 Clark and Skamania county residents work across the river in Portland. They pay at the same rate as all Oregonians. U.S. Sen. Maria Cantwell and U.S. Rep. Brian Baird tried a few years ago — unsuccessfully — to ban Oregon from imposing its income tax on Washingtonians.

It’s likely that the votes are there to put state Sen. Murray’s bill on the ballot. However, a battle over each of the individual breaks can be expected. Each has a supportive constituency that can often afford to hire lobbyists to work on their behalf to preserve the break. Last year, repeal of several of these breaks were considered by the House but did not move out of the Ways and Means Committee. And given the close partisan balance in the Senate and the conservative voting behavior of some Democrats in that body, the 25 votes needed for passage is problematic.

And where all the Republicans are on the issue remains a mystery. None of the bills carry Republican co-sponsors. Do they really put a subsidy for chicken bedding materials ahead of funding our kid’s education and health?

If they are following the lead of Sen. Joe Zarelli, R–Ridgefield, their lead person on the Senate’s “bipartisan” budget, we shouldn’t hold our breath. He has repeated numerous times for public consumption that talk of ending tax breaks is “just idle chatter.”


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About the Authors & Contributors

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Dick Nelson

Dick Nelson is a former Washington State legislator. He currently contributes to the public debate on state and local fiscal issues through research and commentary. As when he was in the legislature, he prefers the Democratic Party.