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The Solution: Close Tax Loopholes

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

by Eli Sanders

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Source: Washington State Budget & Policy Center

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• The State's Problem Isn't Higher Spending, It's That There's Less Revenue
  by Goldy
  Mar 23, 2011

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.

See companion article: The Problem Isn't Runaway Spending