Time for Citizens to Get Serious About Closing Tax Loopholes

The Washington Wire has printed a story entitled “Will this finally be the Year for a Loophole Initiative?” The story is about  Tax Sanity’s efforts  for tax loophole reform in Washington State –  as Eric Smith notes, year after year people say the system is broken and something needs to be done. Yet little happens. It is up to those of us that want to see change happen to work to make it happen.

Tax Sanity is currently revising a draft and will soon file an initiative to the legislature.

As the Department of Revenue notes in their 2012 Tax Exemption Study some 640 tax exemptions currently exist in Washington State. Not all these exemptions aka tax expenditures are tax loopholes in the technical but they are all off budget expenditures with little oversight as to their need or effectiveness.

The pressing issue is whether tax expenditures are fulfilling a state need like our priorities of government and if they are an effective use of tax revenue that could better be used elsewhere. Even though the state  started  a more thorough review of tax expenditures through legislation setting up the Joint legislative Audit and Review Committee and a Citizen Commission for Performance  Measurement of Tax Preferences a few years ago, the Washington State legislature for the most part has chosen to ignore their recommendations.

How serious is the issue? Well looking at the 2012 Tax Exemption Report, the state in the current biennium budget period gave out 176 tax breaks for B&O taxes totaling some $7.5 billion while collecting only $6.5 billion in revenue. The exemptions were 54% of the potential tax base.

When an exemption is given it means that a tax shift occurs so the responsibility falls on someone else. In the same 2011-2013 biennial budget,  when you add the public utility tax, retail sales/use tax and real estate excise tax to the B&O taxes referenced above, the state projected some $22.78 billion in revenues, while exempting some $21.16 billion. The exemptions as a percent of the tax base was 48.2%.  Basically for every dollar raised, a dollar was not collected.

One problem is that there is heavy scrutiny of every dollar raised as to how it is spent as part of the state budget.  Unfortunately the other dollar that was not collected but listed as a tax expenditure is off budget spending and has not been subject to rigorous evaluation as to whether it is a dollar wisely spent. When the dollars add up to  some $20  billion it is now a huge problem.

As an example of whether tax expenditures are a wise use of tax dollars take the example of a tax expenditure Microsoft took a few years ago. As Danny Westneat noted in a 2011 column in the Seattle Times entitled, “Microsoft doesn’t need our tax break”,   Microsoft got a $104.5 million dollar sales tax break from the state. At the same time, Microsoft reported that it had over $52 billion in cash and short term investments sitting in the bank. Microsoft got its tax break while the state legislature cut K-12 education and funding for our state colleges and universities. This is just one example of how state tax dollars are not being wisely used to fund our state needs.

As long as the Legislature does not assume responsibility for diligently scrutinizing the tax breaks on its books, the state is wasting revenue that could go to meeting pressing state needs like funding education instead of adding to the corporate bottom line. Only 10% of existing tax expenditures have a sunset provision – the rest continue to exist without any pressure on the legislature to repeal them even when they are clearly not needed. And the Legislature has repeatedly refused to add sunset provisions to existing tax expenditures.

And even when a sunset provision was added, it typically was for 10 years. Yet we expect our state schools and transportation system and parks and everything else to operate on a two year budget, subject to change in a supplemental budget every other year.  State lawmakers are much more sympathetic it seems to helping businesses even when there is no legislative intent given than they are to meeting the state’s highest priority according to our state constitution, which is educating our kids.

The system is broken and the Legislature, particularly under Republican lawmakers, is not able to change it.  And voters have not helped by supporting Tim Eyman’s unconstitutional voting provisions which have said a 1/3 minority in one House would trump majority votes in both houses when it came to sunsetting tax expenditures that didn’t work.  That allowed legislators to continue to pass off budget tax expenditures by a majority vote while requiring a 2/3 vote to repeal them.(I-1053, I-1185).

Who benefits most by such a system are corporate interests who like that the 2/3 vote requirement was really a Tax Loophole Protection Act. It also prevented the Legislature from raising taxes on corporate and business interests  who would benefit from college educated workers. Instead Legislators cut education revenue and tuition at places like the University of Washington saw costs double for student tuition from $6000/yr to $12,000/yr over about 4 years.

Tax Sanity does not see the current system correcting itself and believes the citizens will need to do it through the initiative process.  That is why we are drafting an initiative to the legislature for 2014.  Signature will need to be collected through December of this year. A minimum of 246,372 valid signatures are needed.  So the goal will be to collect at least 300,000 to take care of invalid signatures and duplicates.

You can check out two different initiative drafts Tax Sanity is working on under the “initiative draft” tab above.  We will write more specifically on the proposed ideas we are working on as we get further feedback.



Some Facts about Federal Tax Reform

A report last year by The Hamilton Project, which is affiliated with the Brookings Institute did an informative evaluation of some of the facts that underlie any effort for reform of our national tax policy. The Report is titled A Dozen Economic Facts About Tax Reform. They emphasize the need to base our decisions on current facts and note that

Since the last major tax reform in 1986—roughly a generation ago—the number of loopholes, special preferences, and the sheer volume of the tax code have ballooned, resulting in a system widely considered to be inefficient, complex, and unfair, as well as an impediment to growth. Drawing a page from successful prior reform efforts, advocates of comprehensive tax reform generally urge that we broaden the base and lower rates.
However, the current economic context for tax reform is far more challenging than it was in 1986. Most immediately, the economy is still in the midst of a slow recovery with an unemployment rate that remains too high. Even with robust rates of job growth, it will take years to close the jobs gap.
An important role of fiscal policy in the near term is to support recovery in the labor market.But in the longer run, the United States is contending with three economic problems: a daunting outlook for budget deficits that imperils our well-being, an increasingly competitive global economy for many American workers and industries, and rising income inequality. The tax code interacts with each of these problems, and a successful tax reform effort will need to address each of them—or at least avoid making any of them worse.

They then provide detailed discussion in 12 areas:

1.  America collects lower revenues than other industrialized countries.
2.  Tax expenditures represent a large share of total government spending.
3.  The tax code subsidizes some activities and penalizes others.
4.  The tax system has become less progressive over time.
5.  Virtually all American families, even low‑income families, pay taxes.
6.  There is a limit to what tax reform can accomplish.
7.  Individuals and the economy will feel every approach to tax reform.
8.  The benefits from tax expenditures are not equally shared.
9.  Cutting individual income tax rates would modestly increase the earnings of the
typical American family while substantially increasing the federal budget deficit.
10.  Deficit-financed tax cuts do not spur economic growth in the long run.
11.  Corporate tax reform can improve U.S. competitiveness in several different ways—
but not necessarily all at once.
12  Addressing the deficit will require policy solutions equal to the size of the problem

The report makes interesting reading and is full of documented facts and tables and includes an appendix and references.

Pushing Back Against Eyman’s Latest Initiative Attacks on the People’s Legislature

Libertarian Tim Eyman supposedly filed his 51st initiative this year with the Washington Secretary of State. In a press conference held in the morning at the Washington State Secretary of State’s Office he claimed that this is the “one” he is going to collect signatures on. Then  in afternoon the Secretary of State’s Office actually recorded that he filed a second version, his initiative version #52 at 3:36 PM, one minute after he officially filed the test for version #51. Version #52 had different language, including provisions relating to beer taxes.

Because time is short before the July deadline for filing the actual signatures of an initiative to the people to get on the fall ballot, I suspect that he is still trying to entice the Beer Industry, which last year heavily funded Initiative 1185, to pony up money to underwrite his signature gathering efforts. Including language relating to beer taxes means he probably does not have funding for the version he told the press and media he was putting out to get signatures.

Below is a collection of news articles on the proposed measure he allegedly filed with the intent to collect signatures on. Tax Sanity and the Northwest Progressive Institute both were at Eyman’s  morning filing and spoke against his alleged latest measure to undercut our functioning state government by severely restricting the state’s ability to raise revenue or repeal tax loopholes that are not benefiting the public good.

Eyman’s main thrust in publicly  proposed measure is to set up a statewide push poll paid for by taxpayers on passing a constitutional amendment to allow a 1/3 minority of legislators in one house of the legislature to trump any vote by a majority of Legislators in both houses when it comes to passing revenue to meet state needs like funding our schools.  It is of course phrased in the reverse language of requiring a 2/3 vote of both Houses to pass a revenue measure. But the result would be setting up an undemocratic process that the framers of both the US Constitution and the Washington State Constitution looked at and rejected.

As noted in a New  York Times article on the filibuster issue entitled Tyranny of the minority where 41 votes trump the will of 59 votes:

The Framers wrote a Constitution that protected minorities in many ways, but they insisted on majority rule in Congress. As Alexander Hamilton explained in “The Federalist”: “If the majority, in order that something may be done, must conform to the views of the minority, the smaller number will overrule the greater. Hence, tedious delays; continual negotiation and intrigue; contemptible compromises of the public good.”

Unfortunately this rule by the minority corrupts the democratic process. Under the 2/3 vote requirement for example a tax expenditure aka loophole can be enacted by a majority vote but it would take a 2/3 vote to repeal it. The proposed 2/3 voting amendment is actually a tax loophole protection amendment.

Here are some of the press articles on Eyman’s filing.

New Eyman initiative could make transportation projects grind to a halt, kirotv.com, April 24, 2013

New Eyman initiative would amend state constitution, KING5.com, April 24, 2013

Progressives meet Eyman push with their own initiative, John Stang, Crosscut, April 25, 2013

Tim Eyman files a ‘Superbowl’ anti-tax initiative, Jonathan Kaminsky, April 24, 2013

Thursday’s Jolt: Challenging Eyman, Josh Feit, Pubicola, April 25, 2013


Eyman’s Proposed Initiative Continues his Libertarian Attack on State Government

Tim Eyman’s latest proposed initiative continues his right wing libertarian approach to try to shut down state government.  He is proposing to limit tax increases to one year and push for repeated votes at tax payer expense for  minority rule that would let a 1/3 minority of Legislators run our state government by taking over the Legislature.  It is a recipe for disaster.

Our current problem in the legislature is not one of over taxation but of out of control tax expenditures given by Legislators to special interests. The state has a spending problem – giving away tax exemptions instead of collecting revenue.  See http://dor.wa.gov/docs/reports/2012/Exemption_study_2012/Intro_and_Summary_of_findings.pdf

Take B&O taxes listed in the 2012 State Tax Exemption Report -on B&O taxes on business – the state gave out 176 tax breaks totaling some $7.5 billion while collecting only $6.5 billion in revenue. The exemptions were 54% of the potential tax base.

The 2012 Tax Exemption Study also stated that in the 2011 – 2013 budget some $21 billion was collected in B&O taxes and sales/use taxes.  At the same time some $20 billion in these same taxes was not collected and was essentially an expenditure of state funds to support those that got the exemption.

The state currently has some 640 tax exemptions in place. Under a 2/3 Constitution Amendment tax expenditures could be put in place by a majority vote but would require a 2/3 vote to repeal.

A 2/3 vote constitutional amendment would lock in all these exemptions that are forcing higher taxes on those that pay and don’t get an exemption.  It is a recipe for disaster.

Eyman’s  anti-tax hysteria  borders on the ludicrous. It serves no purpose but to push a radical philosophy exposed by those like Grover Norquist and Tea Party fanatics to shut down government.  It is irresponsible and harmful to the state government and Washington State’s residents. It would prevent significant tax reform and benefit special interests and corporations while hurting those who need state help. It would prevent adequate funding of education and other essential state services.

People need to say NO to Eyman’s  continued anti-tax monologue. Enough is enough.

also posted on www.MajorityRules.org

Tax Expenditures Need to Become Part of the State Budget

Tax expenditures are basically off budget spending. As one Washington State Legislator recently said, they are “gifts” of public money. They don’t have to be scrutinized the same as other state expenditures are when the biennial state budget is proposed and adopted. They don’t have to justify their existence year after year as other basic state spending does like for K-12 education or support for state colleges and universities. They don’t have to abide by provisions to balance the budget or not exceed state spending limits.

Citizen taxpayers are being deceived in the corporate and special interest manipulation of the legislative process. Tax exemptions that benefit special interests are lumped together by free market conservatives and the right wing as raising taxes on the middle class. Yet most of these exemptions benefit the corporate bottom line, not the common good.

Take as an example the latest Washington State Tax Exemption report dated 2012. When an exemption is given it means that a tax shift occurs so the responsibility falls on someone else. In the 2011-2013 biennial budget, some $21 billion was collected in B&O taxes and sales and use taxes. At the same time some $20 billion in tax expenditures were made by exempting from collection certain businesses and special interests from having to pay these same taxes.

Specifically on B&O taxes on business – the state gave out 176 tax breaks  totaling some $7.5 billion while collecting only $6.5 billion in revenue. The exemptions were 54% of the potential tax base. Tell me how you can run a state fairly and tax fairly when you’ve giving out more revenue in exemptions than you take in as revenue to support educating our kids and everything else we deem as priorities. It’s time to reform our broken tax expenditure system in this state.

By some measures Washington state does a better job of reporting on tax loopholes and evaluating them than most other states. But even this has had minimal impact on repealing tax expenditures that are of dubious value.  Under RCW 43.136 tax expenditures are being evaluated over a 10 year cycle by the Joint Legislative Audit and Review Committee (JLARC) and the Citizen Commission for Performance Measurement of Tax Preferences. Reports are being published and posted on line. You can see the reports here on our website by going to our tax expenditures link.

One problem is that the Legislature is not required to act on the recommendations that JLARC and the Citizen Commission comes up with. The recommendations are written up in a report and presented to the Legislature  in a hearing but almost all of the recommendations to date have been ignored.
In addition the legislation mandating the review of tax exemptions has loopholes itself. Read the language for yourself from RCW 43.136.045.

The commission must omit from the schedule tax preferences that are required by constitutional law, sales and use tax exemptions for machinery and equipment for manufacturing, research and development, or testing, the small business credit for the business and occupation tax, sales and use tax exemptions for food and prescription drugs, property tax relief for retired persons, and property tax valuations based on current use, and may omit any tax preference that the commission determines is a critical part of the structure of the tax system.”

The phrase ” …may omit any tax preference that the commission determines is a critical part of the structure of the tax system.” is a pretty powerful omission and explains why, among others, tax expenditures given to Boeing have not been reviewed.  The review process is a broken system in a number of ways and the only way it can be changed it seems is to put tax expenditures into the state operating budget and force them to compete with all other expenditures of state revenue.

The state budget process needs to go back to the priorities of government model used by Governor Gary Locke and use it to evaluate both revenue expenditures and tax expenditures giving a high, medium or low priority as to how the expenditures are meeting prioritized state needs. The Governor’s proposed budget uses the priorities of government model but the State Legislature is not required to do the same when it finalizes it’s budget.

These changes are not something the Legislature is  likely to do without strong public pressure.  Legislators are dependent on special interest contributions to get elected and anyone that proposes to cut the lucrative expenditures that go to special interests in the form of tax expenditures are going to lose support from moneyed interests that like things as they are.

This is why we believe that it will require a citizens initiative to put the issue before the voters. Voters have had to do this in a number of areas in the past, like when voters required disclosure public disclosure of campaign contributions and required polluters to clean up their toxic waste and raised the minimum wage and indexed it to inflation. The Legislature has shown that it is not up to the task of significant tax loophole reform and it will be up to the citizens and voters to do it.

What is a Tax Expenditure?

It is becoming more common these days to define a tax exemption, subsidy, loophole or exclusion as a tax expenditure. That can seem a little confusing until you understand what is happening. Catherine Rampell in an article entitled Tax Breaks: A Primer  explains it pretty well.

… “loopholes and subsidies” are formally called tax expenditures. The name comes from the fact that they are arithmetically equivalent to spending government money.

Here’s how: Charging a company one dollar less in taxes is effectively the same as giving a company one dollar; both leave the government with one dollar less, and the company with one dollar more. But politically, calling the subsidy a “tax break” sounds a lot better than calling it a “spending” gift.

The significance of this dollar wise this is best illustrated in budget terms here in Washington State by the following taken from the State’s 2012 Tax Exemption Study. Specific exemptions for B&O taxes for the 2011 -2013 biennium totaled some $20 billion while the actual revenue collected from these taxes equaled almost the same at $21 billion. Just getting rid of a few of these exemptions could easily bridge the approximately $1.3 billion shortfall now projected for our state the next two years. Continue reading

Need to Update RCW’s to Conform to Washington Supreme Court Decision on I-1053 and I-1185

The following letter was sent today to Washington State Attorney General Bob Ferguson:

Dear Attorney General Ferguson:

 I am wondering what the procedure is to have the RCW’s changed when the Washington State Supreme Court renders a decision declaring a law or part of a law unconstitutional. The Court has ruled that an initiative filed must conform to the current version of a law or it is not valid. Continue reading

Washington State Supreme Court Decision Will Make Tax Exemption Reform Easier

The Washington State Supreme Court  ruled on February 28, 2013 that Tim Eyman’s Initiative 1053 was unconstitutional. The ruling is a huge win for Washington State taxpayers because it throws out the supermajority vote requirement  to close any tax loophole that Eyman had put in the initiative. Tax exemptions are hard enough to close as it is without giving a minority of legislators the ability to trump a decision by a majority of legislators.

Voters last year passed Initiative 1185 which was pretty much a clone of I-1053.  Because  Initiative 1276 – the Txpayers Fiscal Reform Act we filed was based on current law at the time,  we put in provisions repealing parts of I-1185 dealing with the supermajority votes.  The RCW or Revised Code of Washington will now reflect the decision of the Washington State Supreme Court and we will be refiling our initiative deleting the parts relating to I-1053 and I-1185 that were ruled unconstitutional by the Supreme Court. This should make the initiative much easier to get support for because it narrows the scope of the initiative by not having to deal with the subject of supermajority votes.

The decision of the Washington State Supreme Court was the opinion they wrote in League of Education Voters vs the State of Washington. You can read by clicking on the link.



Senator Bernie Sanders – Budget Must Close Loopholes

Not funny how the Republicans refuse to close corporate tax loopholes.  Tax loopholes that don’t provide a benefit to taxpayers and working families, but which only add to the corporate profit sheet, are corporate welfare. As Sanders notes, corporate profit is at an all time high, while corporate taxes are  near a record low.

Corporations and the wealthy need to pay their fair share to keep the American economy going by helping to insure that Federal dollars are used to create jobs and provide basic human services, not further pad the pocketbooks of wealthy individuals and corporations. Congress needs to close tax loopholes as part of any plan to reduce budget deficits. Tax loopholes are expenditures of tax revenue that would otherwise be available to fund public services.

Here is the press release today from Senator Bernie Sanders of Vermont. Continue reading

Initiative Filed for Tax Loophole Reform

Taxpayers Fiscal Reform Act – 2013

Changes are needed in the ability of the Washington State Legislature to fund basic services like education and healthcare. The current state budget problems are made more difficult by the lack of flexibility of the Legislature to make decisions by a majority vote as directed by the Washington State Constitution and by a tax expenditure/exemption process that is shielded from legislative oversight by virtue of not being part of the normal budget process.

Many people are frustrated by the current stalemate in the legislative process and want more choices than just throwing up their hands and suffering more cuts in state services and more costs to working families. More options are needed for the voters than just saying we have no real choices.

One option is now moving forward. It would reform our broken tax exemption process. Initiative 1276 – the Washington State Taxpayers Fiscal Reform Act has been filed with the Secretary of State and assigned a ballot title.

Here is the official ballot title and summary: Continue reading