In a year Gov. Jay Inslee and other Democrats took aim at so-called tax “loopholes” to help raise money for public schools, the state Senate and House are about to leave Olympia having approved several new or extended tax breaks, while agreeing to close only two.
In a late budget-related development, the Republican-steered Senate demanded and won agreement from the Democrat-controlled House to pass a bill that extends, clarifies or creates 16 tax breaks.
The tax exemptions cover everything from sales of solar energy equipment to the customizing of large jet interiors; businesses’ internal payroll preparation; cover charges for dance bands performing in bars; taxes on beekeepers’ feed and services; blood testing by blood banks; sales of clay targets used by nonprofit gun clubs; propane used in mint oil manufacture; waste wood used as fuel by pulp mills, and some dairy product transactions.
Several of the exemptions, such as those on the sales of solar power equipment and honeybee services, were scheduled to expire Monday, the first day of the new budget year.
“This is a gentle reminder that the institutional, political bureaucracy has a passionate love affair with tax exemptions,” House Finance Committee Chairman Reuven Carlyle, D-Seattle, said Friday with a touch of disappointment.
Carlyle tried to close numerous breaks this year, including an extracted fuel exemption used by oil refiners who were never intended to get the break when it was first written into law in 1949.
But the Republican-steered Senate refused to go along. Amid final budget negotiations this week, the Senate demanded passage of the package of tax breaks worth $13.3 million over the next two years before it would agree to close a telephone-tax loophole inadvertently created by court rulings.
Closing the telecom tax break gives the state $85 million in net revenue over two years and avoids a potential $1.1 billion claim by telecom firms — including mobile phone and Internet services — that could have received refunds over the next four years as a result of court decisions, Carlyle said.
Along with a bill passed two weeks ago to fix the estate tax after a state Supreme Court ruling blew a hole in it, closure of the two accidental tax breaks will preserve about $245 million in net revenue for the state budget. Lawmakers sent that $33.5 billion spending plan to Gov. Jay Inslee on Friday night for signing over the weekend.
Sen. Andy Hill, the Redmond Republican and chief Senate budget writer, defended the tax breaks. He said many of the measures are just clarifications of existing tax laws — such as the mesquite wood-chip flavoring agents used by restaurants in some barbecued dishes or the propane fuel used by mint oil makers.
Hill said others will spur economic development, bring jobs and encourage taxable activity in places such as Moses Lake — activity that is worth more than, say, the $2 million, two-year cost of a tax break for customizing airplane interiors..
“Right now we collect zero dollars from this type of business. We believe that if we start getting this type of work coming to Washington state, we could see a net increase in tax revenue to the state and jobs created,” Hill said late Friday before the Senate voted 43-5 to pass his package, known as Senate Bill 5882. “So, that could very easily erase that $13 million (tax loss) very quickly in terms of increased tax revenue.’’
As part of the House deal with the Senate, lawmakers also are enacting tougher standards for new tax exemptions.
Carlyle has worked since the session began in January toward requiring that all new exemptions meet several criteria, including that they have a certain expiration date, that the reason for the exemption is spelled out clearly, that firms taking exemptions must disclose data that lets the state see whether goals are met, and that the state has a way to measure success.
“The broader category is real accountability,” Carlyle explained. “In terms of a tax exemption the question is, does the damn thing work for the taxpayer? … Is there a return on investment for the public? When we make a tax-policy decision, we want to begin to turn this ship in a direction of financial rigor.’’
Carlyle’s push for accountability had led him to squelch all requests for extending tax breaks this year except two — one for hog fuel, or waste wood, used by mills around the state to generate heat or power, and one for beekeepers, whose hives have been devastated by a costly condition known as colony collapse disorder.
“The other ones, I think it’s fair to say they range from the good, the bad and the particularly ugly,’’ Carlyle said of Hill’s package of requests.
Carlyle had little choice in the matter, but the compromise with the Senate did give him a policy win: In what appears to be a first for Washington, the hog fuel break has a “claw back” provision that says any business taking the tax break must repay two years of taxes if it closes its plant, relocates to another state or takes the operation off shore.
Hill said he agrees with Carlyle that accountability is good, and he noted that the Senate had backed its own accountability earlier in the year to require regular reviews of tax breaks. Hill also said that the Senate took a hard look at the claw back provision, concluding that it works in this instance where some pulp companies had already left the state.