Lost Revenue, Lost Opportunities: Tax Exemptions in Washington State

Washington state’s tax code includes over 500 tax exemptions, deductions, credits, and other breaks worth an estimated $64.7 billion during the 2003-05 biennium. Some of these tax breaks benefit everyone in the state, while others benefit selected industries or even a single company. Because of federal laws and administrative issues, the Washington Department of Revenue (DOR) estimates that only about one-fifth of that total, or $13.6 billion, could be collected if all of the tax exemptions were repealed.

While the state legislature was grappling with sizable budget deficits and cutting government services in 2002 and 2003, it also granted 43 new tax exemptions, mostly in the form of business incentives. These new tax breaks eliminated $214 million in public revenues for the 2003-05 biennium. In 2004, the legislature added or extended 12 more business tax breaks at a cost to state and local governments of $98 million for the remainder of the current biennium and $291 million for the 2005-07 biennium.

The proliferation and high cost of tax breaks in the face of severe cuts in education, health, and other basic government services have aroused considerable controversy. Budget analysts predict that when Washington’s legislators return to Olympia in 2005 they will be forced to grapple with budget shortfalls yet again. Although both common wisdom and the pleadings of corporate lobbyists suggest that tax breaks for businesses are the only way to keep and attract jobs, a recent economic analysis concludes that state economies would grow faster and produce more new jobs if states invested more in transportation, education, and public safety instead of giving more tax cuts.

Evaluating tax breaks side-by-side with the need for lower class size in public schools, children’s health programs, access to college, transportation improvements, and other investments in our future has to be part of the solution to Washington’s long-term budget problems. This paper provides background information on tax exemptions in Washington state and discusses major issues to consider in moving toward more balanced and fair tax policies.

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