Why Enacting HB 1239/SB 5492 Would be Good Policy for Washington State

Tax preferences and tax incentives are called tax expenditures by most other states and the US Congress – they are revenue that is not collected. Not collecting this revenue from certain taxpayers is a form of picking winners and losers and the end result is the same as if you made a direct expenditure to that same entity as a line item expenditure in the general operating budget.

HB 1239 / SB 5492 – the Tax Exemption Transparency and Accountability Act – addresses the issue of the magnitude and consequences of off budget spending in the form of tax expenditures in Washington State.  This off budget spending from the tax base creates a lack of accountability and transparency in how tax revenue is dealt with. Tax expenditures are not included in the biennial  state budget process and this creates a lack of accountability and transparency.

One big problem with the state budget process is that we are one of only 6 states according to a 2011 Center on Budget and Policy Priorities Report that do not produce a tax expenditure report every 2 years or less. Our 2012 Tax Exemption Report is based on 2011 data and is 4 years out of date. The result is that tax exemption data is not even coordinated and integrated with the budget process.

The magnitude of off budget spending in the form of tax expenditures is staggering when compared to the regular expenditures in the state budget. The dollar value of tax expenditures in our state is about the same amount as actual revenue we collect as taxes and spend directly in the state budget.

The Washington State Department of Revenue noted in their 2012 Tax Exemption Report that the 2011-2013 budget projected collecting revenue of $22.8 billion and giving out tax expenditures equal to $21.2 billion.

They projected collecting $6.5 billion in B&O taxes but exempting as tax expenditures $7.7 billion.

In other words before we have even start looking at the regular appropriations budget we have already given away half of the potential revenue we would have if we had no tax exemptions.

There is no biennial linkage of what the Joint Legislative Audit and Review Committee (JLARC) does and the budget process for reviewing tax exemptions like what the Legislature does with the regular budget. JLARC has been producing reports for 8 years of a 10 year cycle. Very few of it’s recommendations have been acted on by the State Legislature. They are presented piecemeal over a 10 year cycle in a hearing before the House and Senate. No action is required to be taken by the Legislature.

Tax expenditures  are investments made at the  discretion of the Legislature in our state just like the expenditures they make as part of the omnibus budget appropriations bill they pass every two years. But tax expenditures never get the same scrutiny regular expenditures do because they are not part of the budget process.  They should be and that’s what HB 1239/ SB 5492 does.

HB 1239 / SB 5492 requires the State Legislature  to scrutinize and review the tax expenditures every two years and determine whether they are producing the results they were intended to.  They need to be evaluated the same as other expenditures in the state budget as to whether they are meeting the state’s needs and the priorities of government and are accomplishing the purpose for which they were enacted..

Tax expenditures are an investment just as if you invested in the stock market. Legislator’s by their tax expenditure and budget actions are  investing in the state and its economy.  It makes sense for the Legislature to scrutinize its whole spending portfolio every 2 years, not just half of it. Unfortunately individual tax expenditures which represent about half of the potential base tax revenue in the state are only reviewed piecemeal once every 10 years. And even then a number of tax expenditures are exempted from review. And for 90% of tax exemptions which have no sunset provisions on them there is no requirement for the Legislature to do anything.

Would you think the State Legislature was doing it’s job in scrutinizing state spending under the budget by only looking at individual expenditures once every 10 years? We don’t pass a state budget for 10 years at a time and decide that 90% of the expenditures actually never have to be adopted again..  Why does the Legislature think it shouldn’t have to reaffirm tax expenditures every 2 years just like it does with other state spending under the budget process?

It’s time for the Washington State Legislature to step up and be responsible for examining all state spending every two years by adopting a tax expenditure budget as part of the regular biennial budget appropriations process. It needs to enact HB 1239 / SB 5492  now!


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