BARGAINING FOR TAX BREAKS has become a routine part of doing business. Across the United States, state and local governments are providing an estimated $50 billion in tax subsidies to businesses.
Fearful of losing jobs, Washington, like other states, is giving away public revenue while underfunding the services necessary for a vibrant economy and a healthy democracy. In the three legislative sessions from 2004 through 2006, the Washington legislature passed at least 61 measures either granting new tax preferences or extending old ones. These new tax breaks will cost the state nearly half a billion dollars in the 2007-09 biennium.
Every state faces pressure to cut business taxes. However, Washington’s tax structure makes it especially vulnerable to requests by particular industries for tax breaks. The uniqueness of the business and occupation (B&O) tax and the relatively high sales tax rate make both taxes ripe targets for criticism. At the same time, without an income tax or a way to tax intangible wealth such as stocks and bonds, Washington has a particularly large structural deficit and no easy way to replace revenue lost to tax breaks.
Most of the tax breaks passed in the last three legislative sessions are framed as business incentives or economic development measures. Some boost industries that are declining in communities where alternative jobs are scarce, such as aluminum smelting and fruit and vegetable processing. Others target industries that state policymakers hope will expand, for example high technology and biodiesel. Others encourage beneficial investment, including truck stop operators installing equipment to reduce diesel emissions, dairy farmers treating manure, and hospitals purchasing equipment to safely lift patients. Ten measures help specific communities finance local projects. Only six of the new tax breaks are oriented primarily to individuals.
Tax breaks, in contrast to other parts of the state budget, are rarely evaluated against other public needs and usually remain entrenched through future budget negotiations. Often the full fiscal impact of new tax breaks is seen only in future biennia. Business advocates argue successfully for tax breaks during times of recession and times of economic growth, for industries that are struggling and industries that are booming.
The legislature has made progress towards accountability. Of the 61 tax breaks that have passed in Washington since January 2004, 27 include some kind of accountability measures and 24 include sunset dates. However, accountability standards vary widely.
In 2006 the legislature also passed House Bill 1069 which establishes a commission to regularly review and make recommendations on most tax preferences. However, the legislature failed to establish uniform standards for accountability and disclosure of tax breaks. It also did not pass House Bill 1096 which would have required the Department of Revenue to prepare a new accounting of tax breaks each biennium to accompany the Governor’s budget proposal.
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