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.

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