Business Columns & Blogs

State tax report makes for interesting reading

Here is some light reading to occupy your time while waiting for summer to arrive: the Department of Revenue’s 261-page quadrennial report on “tax exemptions, deductions, deferrals, differential rates and credits for major Washington state and local taxes.”

In normal times the report provides insight into which lobbying and interest groups have been the most effective at getting some goody – sorry, “economic development incentive” – through the Legislature.

But normal times, in state budgetary terms, haven’t been spotted in these parts in years, so now the report serves as a sort of wish-book Christmas catalog for politicians looking for some way to pay for everything they’d like to promise to the voters.

The latest edition of the report, which the department is mandated to produce every four years, contains the sort of numbers that, in the aggregate, make for alluring reading for those scrounging for money. The report counts a total of 640 exemptions, but focuses only on the 452 that would likely raise revenue if removed.

How much revenue? About $29.3 billion for the 2011-2013 biennium, the report estimates. Business and occupation tax exemptions represent the largest in number and the second-largest in potential revenue estimates, with retail sales tax exemptions of various types representing the largest by revenue.

The list of exemptions includes many that are of minor economic consequence in the grand scheme – farm-equipment auction sales (enacted in 1943). But some big-ticket items are in there as well, in terms of the number of firms affected and the dollars involved in the transactions: manufacturing commercial airplanes and components (a preferential B&O rate used by 314 companies), high-tech R&D (used by about 500 firms), sales taxes on manufacturing machinery and a potentially huge item, sales tax exemptions on personal and professional services.

For purposes of full disclosure, it should be noted that newspaper publishing gets a preferential B&O tax rate, a sales-tax break on purchases of computer equipment and a sales tax exemption on sales of papers, the last one a recognition of “the practical problem of collecting sales tax on individual sales of about a nickel, the typical price of a newspaper in 1935” when that break was enacted. Also, this columnist benefits from a B&O small-business tax credit for his own ventures, a break used by about 220,000 small companies in the state, according to the report.

That’s not just a pro forma mention of the potential conflicts of interest. It’s also an important illustration of the economic and political challenges in trimming the list of those exemptions, and why claims in this campaign season that the state’s budget gap can be closed by wiping out “loopholes” should be regarded with considerable skepticism.

Economically, there’s the eternal question of whether the specific activity would be occurring here without those breaks. The report notes the objection raised by sellers of precious metals to eliminating a B&O break, although the same argument could be made in dozens of cases: “The industry argues that purchases can easily be made via mail order and the Internet and that the tax would drive purchases out of state.”

Politically every one of those breaks is on the books because someone wanted it there, whatever the supposedly meritorious reason for advocating it. The tax breaks (all right, incentives) most likely to get removed are those that involve the fewest people (not to mention, potential voters) and consequently would generate very little money.

That makes it sound as though the report is a futile exercise to compile or read. Quite the contrary. We ought to be able to see in one place what a convoluted hash we’ve made of our state tax structure, even if we’re happier to complain about it than change it.