The Solution: Close Tax Loopholes

We're Giving Away $6.5 Billion in Tax Breaks This Year

  • comments (19)
  • Print
+ Enlarge this Image
Source: Washington State Budget & Policy Center

Yes, as Goldy points out over there on the left, Washington State has a serious revenue problem. The latest sign: On March 17, Dr. Arun Raha, the state's chief economist, raised the state's total projected revenue shortfall for the next two-year budget cycle to $5.1 billion—a dispiriting figure that's going to lead to even more people losing basic state services such as health care and tuition assistance.

That same day, Governor Chris Gregoire issued a stern warning to state legislators that they'd better develop "long-term budget solutions" this session, not just small, one-off fixes that dodge bigger problems. "This must be a year of decision, not deferral," she said.

Nice words. But we've already heard this kind of rhetoric from Gregoire this year. For example, in her January 11 State of the State speech, she called for lawmakers to "challenge the status quo" and suggested they take inspiration from the 1935 legislature, which overhauled the state's entire tax system in response to the Great Depression. Yet a tax overhaul isn't something the governor is proposing—or even supporting—this year. Not even a common-­sense tax reform that could potentially put a huge dent in the budget deficit.

The idea: get rid of huge state tax loopholes that this year alone will cost us $6.5 billion.

These tax loopholes—essentially giveaways—have been building up for years as lawmakers, during more flush times, sought to reward, bail out, or encourage certain industries. So we now have a loophole for software manufacturers like Microsoft that will cost the state $143 million this year, another loophole for airplane manufacturers like Boeing that will cost the state $104 million, and a loophole (or "special tax break," see how that works?) for struggling newspaper publishers that will cost the state $18 million.

Arguably, it's in the state's interest to keep all of the above loopholes—and many others on the list, which now runs over 560 loopholes long. "Not all special tax breaks are bad," points out Andy Nicholas, a policy analyst with the Washington State Budget & Policy Center. As an example of a good one, he points to the second-most-expensive loophole in the entire state, the loophole that keeps you from having to pay any tax on food (cost: $965 million this year).

Some loopholes, however, don't make sense anymore, if they ever did—like the special tax break given to lenders of first-time mortgages. It was initially intended to help out homegrown Washington Mutual. But now—with WaMu having imploded because of its tax-break-encouraged mortgage lending practices—this loophole is helping only big, out-of-state Wall Street banks (to the tune of $100 million this year). Two other oft-cited examples: the loopholes for cosmetic surgery ($6.25 million this year) and private jet enthusiasts ($5 million this year).

With core state services like Basic Health on the chopping block because of the $5.1 billion shortfall, a number of state legislators are trying to repeal these unnecessary tax breaks. Representative Eileen Cody (D-34) has proposed funding Basic Health by repealing the loopholes for cosmetic surgery, private jets, coal used at coal-fired plants, and first-time mortgages offered by Wall Street banks. And Representative Reuven Carlyle (D-36) has drafted a bill, being introduced first in the state senate by Jeanne Kohl-Welles (D-36), which would bring Washington's special tax breaks up for review every once in a while. "Make them all have an expiration date," Carlyle says. "The number-one problem in Washington State is that tax exemptions, tax loopholes, and tax credits are permanent."

If that's the number-one problem, the number-two problem is Tim Eyman's Initiative 1053, which passed last year and reinstitutes a two-thirds majority requirement in the state legislature for any revenue increase.

Maddeningly for those who want to repeal or otherwise fix the state's $6.5 billion tax loophole problem, messing with loopholes via legislative action has been deemed a revenue increase requiring the approval of two-thirds of both houses. "It is morally unacceptable to require a 50 percent plus one vote to create a tax exemption, but a two-thirds majority to even add an expiration date," fumes Carlyle.

Yet, morally unacceptable as it may be, that is the situation.

If, as Gregoire says, this is to be "a year of decision, not deferral," then perhaps this is something she should start shouting about. Surely there are at least a few tax loopholes that two-thirds of the legislators can be shamed into repealing this year to help fund core state services. recommended

See companion article: The Problem Isn't Runaway Spending


Comments (19) RSS

Oldest First Unregistered On Registered On Add a comment
The tax breaks aren't the "problem" in any practical sense because the state should have taken them into account when creating its revenue forecasts.

More importantly, it defeats the purpose of offering companies a tax incentive to move to/remain in the state if Olympia can just say "whoops, we gave you too good of a deal and now we need our money back".

I certainly agree that it is a good idea to implement sunset clauses for social engineering by taxation, but complaining retroactively about it doesn't help our current situation.
Posted by Sean P. on March 23, 2011 at 2:36 PM · Report this
It is always easy to make a "close the loophole" argument if you don't have to deal with WA's tax system. Or to always be trying to make the case for a "progressive income tax" (please--can we just ash can that idea for about ten years?)

WA's ax code, like every other state and the federal government is impossibly complex. The so called "loophole for software manufacturers like Microsoft that will cost the state $143 million this year" is used by hundreds of small companies to hire scientists and engineers, buy equipment, build labs, develop new products and on and on.

Does the author realize that other states and BC and Alberta are literally throwing money at the state's high-tech, biotech, video game and other industries regularly? The "loopholes" are actually a B&O credit for R&D where the average amount taken is under $50K per year.

The sales tax deferral for R&D facilities is indeed "expensive" at about $120 million a year. But how many people realize that WA is one of only few (maybe even the only) state that taxes construction labor as well as materials, driving up the cost of construction by the sales tax amount (10% in King County).

No doubt Microsoft takes advantage of these but the real beneficiaries are small businesses that make up a good chunk of what makes Seattle and the region a great place to be.
Posted by someotherguy on March 23, 2011 at 5:07 PM · Report this
The problem with the left is that they make the moral argument that tax exemptions, i.e. NOT taxing something, is a "giveaway". It's NOT a giveaway to allow me or my business to keep money that I earn! ALL the money isn't YOURS, and you don't get to ALLOW me to KEEP some of it. The state has chosen NOT to tax food, and in the eyes of the lefties, that's not a "loophole". The state has also chosen not to tax the income banks (not just Wall Street Banks, but homegrown local banks like First Mutual Savings of Renton where I have my mortgage) make on income earned from 1st mortgages. It encourages local institutions to lend at competitive rates. Hardly a "loophole". Are there some exemptions that could go away, sure -- have the policy argument, make it justified. But don't claim that not taxing something is a "loophole" or a "giveaway". It's not your money! It's mine.
Posted by HMRBEAR on March 23, 2011 at 9:35 PM · Report this
Offering preferential tax treatment to one particular segment of the business community or one particular kind of business activity is indeed a give-away, and should be accounted for.

When a business offers preferential treatment to some clients or customers via discounts and coupons, they have to carry that as a liability on their balance sheet - so why shouldn't the revenue the state loses to tax preferences and exemptions get the same consideration?

If discounts a business gives brings more customers in the door and results in a net increase in revenue, they keep it. If not, they discontinue it.

The state should do the same thing - address every tax exemption to see if they've resulted in a net gain in revenue, and dump them if they haven't.

Steve Breaux
Washington Public Interest Research Group
Posted by WashPIRG - Breaux on March 24, 2011 at 9:50 AM · Report this
What nobody mentions is the explosive growth of state government spending during the current governor's tenure.

Our revenue problem wouldn't be such an issue if we didn't have such a raging spending problem.
Posted by Baconfat on March 24, 2011 at 10:25 AM · Report this

What you aren't mentioning is the fact that population growth has also been extraordinary. If you also factor in inflation the growth of the budget isn't as explosive as you would proport.
Posted by andre on March 24, 2011 at 11:08 AM · Report this

Everyone should pay thier fair share. Why should one business have an unfair advantage (ie not pay taxes) when another business does?
Posted by andre on March 24, 2011 at 11:11 AM · Report this
HMRBEAR doesn't use any government services like law enforcement, emergency medical services, the courts, the banking system, or public streets, highways, education, water supply, churches, telephones, internet or toilets. He lives in complete isolation in the woods, surviving on venison and wild mushrooms. He does not have to pay the prize of civilization because he is not civilized. His post was translated from smoke signals by the new Google iSmoke service.
Posted by jkoteen on March 24, 2011 at 11:35 AM · Report this
Sure Ok 9
I see alot of back and forth on how one thing is a break and another is not. Can you see the system of were the breaks come in....? It comes simply in a way to shut up the populace while allowing the real loop hole to happen. The breaks are in no way fairly distributed. Of course not. You have to pay for fairness. I hear the left this the right that. Break yourselves up and conquer nothing. What do you really want for your city....? Easier said then done I know but the issue here is budget but really its humanity verse corporation. Our lives could be better if we were not feeding the already fat cats.
Posted by Sure Ok on March 24, 2011 at 3:46 PM · Report this
It would be a good idea to evaluate the real economic benefit that these take breaks provide. The breaks that provide a net positive economic impact (either jobs or production) are justifiable (possibly). The ones that do not meet this test need to go. We have a serious lag in tax-base revenue atm. It is time to sharpen the pencils and seriously examine what tax policies have value and which do not.
Posted by At Large on March 25, 2011 at 11:44 AM · Report this
1> Basic Health is not a core government service. Education, transportation, public safety / courts and the management of public lands are core government services.

2> How many hints does Boeing need to give us? They've made it clear for years and years that our State is not friendly enough to their business. That they can build jets elsewhere for lower costs. So sure, let's take away their tax "loopholes" and see how many billions of dollars in lost wages and benefits we can accrue.

3> The only plant burning coal in Washington state has recently announced their decision to stop burning coal. So there goes that tax idea.

4> Tim Eyman's tax limiting initiatives have passed with overwhelming numbers every time they have been brought to the voters. That ought to tell the Stranger staff and other socialists that the majority of this State doesn't believe their crazy ideas.
Posted by David in Shoreline on March 25, 2011 at 12:01 PM · Report this
Another misleading article...
Tax revenue can increase without 2/3 vote. But tax rates cannot increase without 2/3 vote.. quit misleading.

And when did health care become a constitutionally required expenditure......

Sure some loopholes should not exist and I agree they should all come up for review on a regular basis (maybe 5 years).
Posted by Duhh! on March 26, 2011 at 9:43 AM · Report this
Treat this shitty state - Nazington - as if it were a sovereign nation.Then compare it to Finland.Morally,Finland dwarfs the fuck out of the Evergreen States in spades!(as relates to how it treats its own citizens--universal health care;"free" university education;a pension system;proportional representation,etc.)
Posted by 5th Columnist on March 26, 2011 at 5:11 PM · Report this
auntie jim 14
Thank you, this has been my pet peeve for years!
The chicken shits in the legislature and the governor should go ahead and get rid of all the loop holes except food from the grocery store. The Eyeman initiative is unenforceable, they can just arrogate.
Posted by auntie jim on March 27, 2011 at 10:25 PM · Report this
Washington purports a consumption-based tax system. This means taxes are structured (hopefully) so that, you pay for what you use.
You do not have to pay for just being in the state, but owning property that uses police or fire pay taxes.
Hence the loophole for food (groceries) vs. food prepped and served, even if there are wages and other taxes on those businesses.
Loopholes for new technology make sense, but having both an expiration (or renew) date of every 5 years...and listing who approved it to promote transparency would be a good start.
Posted by Nuclear Marc on March 28, 2011 at 1:45 PM · Report this
"More importantly, it defeats the purpose of offering companies a tax incentive to move to/remain in the state if Olympia can just say "whoops, we gave you too good of a deal and now we need our money back".

Posted by Sean P"

Funny I've been seeing companies tell employees that for the last 10 years. "That pension you contributed for the last 20 years? Sorry, it's too expensive. We're converting it to a 401k. What, we lost your 401k speculating in hedge funds? Sorry, we'll have to cut your social security benefits because the profits we were expecting from shipping jobs to China and gambling on hedge funds never appeared."
Posted by Cynickal on March 28, 2011 at 2:53 PM · Report this
@16: I'm just going to take a stab in the dark here and guess that you've never heard of ERISA and have no idea how a 401(k) plan works. You could have at least brought out an example of a company shifting its operations to another state as soon as its temporary tax credit expired.
Posted by Sean P. on March 28, 2011 at 9:09 PM · Report this
Ahem, Once again, wilth heartfelt feeling:

Tax the corrupt pampered class already, and let'em rot in their taxpayer-funded Santorum-stained Huggies!!!
Posted by auntie grizelda on March 30, 2011 at 4:42 PM · Report this
Posted by KittenKoder on October 28, 2011 at 10:46 PM · Report this

Add a comment

Most Commented in News