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.



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