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.

Governor Jay Inslee is looking at getting rid of $1 billion in tax loopholes as part of his effort to close the budget deficit. In an article posted on the OPB (Oregon Public Broadcasting ) website Austin Jenkins notes that:

… Democratic Governor Jay Inslee is expected to announce soon a list of tax “loopholes” – as he calls them – he wants to eliminate to fund schools. But closing tax exemptions is easier said than done.

As a candidate for governor, Jay Inslee ruled out a general tax increase. But often said he was open to closing “unproductive” tax breaks …

Senator David Frockt, speaking at a Town Hall type meeting at the North Seattle Community College earlier today that Governor Inslee has already visited both the House and Senate Democratic Caucuses and told them he he will be trying to close $1 billion in tax loopholes and that he will be pressing them hard to do so. If Governor Inslee is successful it will be a significant reversal in what the Legislature has been doing in recent years, which is to keep adding new tax expenditures.

Currently the State has some 640 tax exemptions on the books. Only 65 of those have sunset clauses. This is another battle going on. A bill to require sunset provisions on all new tax exemptions has passed out of the Senate after Senator Rodney Tom used a striker amendment to present a more watered down version of the original bill. The original bill proposed a 5 year sunset provision and Tom removed the specific language to say only that it needed a sunset provision.

It seems Senator Tom is more concerned about protecting special interests rather than the working families and citizens of this state from loopholes to benefit a few. The Legislature needs to add sunset provisions to all tax existing tax exemptions to insure they are not “exemptions for life” but that the need and impacts of the exemptions are periodically reviewed and the Legislature has to vote to renew them. That is what Tax Sanity is proposing in it’s initiative to reform tax loopholes.

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