Close tax loopholes?

BUDGET: Business lobby says voters have spoken, and said no; opponents say voters can change their minds

May 1, 2011 

A small showdown over tax breaks is coming soon to the state Capitol.

Washington has more than 500 exemptions and special tax rates on the books, worth billions of dollars a year, and debate so far in the Legislature has been about cutting programs to cover a $5.3 billion budget gap over the next two years.

But that tune will change slightly when Senate Democrats hold a hearing Wednesday on a handful of tax-related measures – including one to reconsider a piece of Tim Eyman’s Initiative 1053. The measure passed with a nearly 64 percent of the vote in November and requires a two-thirds vote in the House and Senate to raise taxes or cut tax “loopholes.” The latter has been a rallying cry for activists trying to avoid spending cuts to schools and health programs.

“November wasn’t the last word,’’ Senate Ways and Means Committee chairman Ed Murray, D-Seattle, said Friday, explaining that he wants voters to have a chance to reconsider the vote requirement for closing corporate tax breaks. “I think voters change their minds.”

The Association of Washington Business disagrees strongly. The state’s chamber of commerce helped pass I-1053, and AWB lobbyist Amber Carter said bringing Murray’s Senate Bill 5944 to a hearing is an assault on I-1053.

WHAT VOTERS MIGHT HAVE BEEN SAYING

Eyman was not available for comment Friday, but Carter said voters clearly knew they were voting to raise the bar on tax increases and closure of tax breaks. She added that the campaign against the business-backed I-1053 used the tax breaks in its materials.

In fact, the voter pamphlet statement by I-1053 opponents stated that the measure was financially backed by oil producer BP and “big banks” and that it “protects special interest loopholes.”

“There are still some people who don’t know what happened in November,” Senate Republican Leader Mike Hewitt of Walla Walla said. He was referring to the vote for I-1053 and also to I-1107’s repeal of a temporary sales tax on soda pop, bottled water and candy.

Hewitt also said that while Democrats often criticize tax exemptions, the majority party is still toying with bills to extend tax favoritism for others – such as motion picture producers and zoos.

Murray said he isn’t arguing whether voters misunderstood I-1053. He just wants to give them a second shot at the question in light of the budget cuts and efforts by lawmakers to reform government. Murray noted that voters overwhelmingly rejected a gas-tax increase on the ballot almost a decade ago but later accepted two separate increases in the fuels tax.

One of those tax increases was upheld in a statewide vote.

ALSO ON THE TABLE

A few other tax-break measures also are headed to hearing Wednesday. They likely include:

 • Senate Bill 5945, which worries AWB and others because it would shrink all preferential rates in the business-occupation tax by 25 percent.

 • SB 5947, which would eliminate tax exemptions for bull semen production and for heating chicken coops with certain fuels.

AWB’s Carter warned that having a hearing on tax exemptions risks breaking faith between Senate Republicans and Democrats who have taken a strongly bipartisan approach to writing a budget this year that does not rely on new taxes.

Carter also thinks Democrats may be looking for a test case on which to challenge the two-thirds vote requirement in court.

But Republican Sen. Joe Zarelli, the top GOP budget negotiator in the Senate, said it is one thing to give a hearing to bills and quite another to bring measures to a Senate floor vote or send a tax referendum to the ballot.

“I don’t think that gets in the way” of bipartisan budget talks, he said of the hearings.

“I know the Democrats feel they have to do some things for those who look to them for that kind of leadership … The bottom line is that stuff is not going anywhere,” Zarelli said. But he added: “If they were actually trying to send that to the ballot and have a floor vote – that would make things a little feisty.”

SENATE BUDGET CUTS ARE BIPARTISAN

Zarelli still is working with Murray on a budget plan that would spend less than the revenues the state takes in. On Friday, the Senate was finishing a bipartisan response, or counteroffer, to House Democrats’ latest budget proposal offer.

The debate over loopholes has been an odd one. Labor unions and community groups held a series of boisterous rallies at the Capitol in mid-April. They called attention to corporate tax breaks and asked lawmakers to blunt cuts to health and education programs by closing tax “loopholes” for banks and other special interests.

House Democrats held a hearing more than a week ago on a bill that would close tax exemptions for big banks’ first-mortgage interest earnings above $100 million a year, as well as a sales-tax break for shoppers from Oregon, Montana and other states with low sales-tax rates. The money would be used to pay for smaller public school class sizes in kindergarten through third grade.

As expected, the bill – and others targeting the out-of-state shoppers – drew criticism from business interests, including Carter. They warned the tax changes hurt businesses, especially in counties bordering Oregon, and House Democratic leaders have not said what they’ll do on the bills.

House Majority Leader Pat Sullivan, D-Covington, did not rule out action but said last week that his caucus is waiting until a budget agreement is closer to completion before taking up the tax questions. Because many tax-exemption bills earmark the new money for specific programs, lawmakers have to decide what is getting cut before voting to send anything to the ballot. (I-1053 lets tax increases go to the ballot on a simple 50 percent vote.)

For example, Sullivan said, a bill that tied a tax on banks’ mortgage interest earnings to pay for the Basic Health Plan is no longer needed, because the House and Senate both have proposals that save that subsidized insurance plan for low-income workers.

On the other hand, there are bills like one proposed by Rep. Chris Reykdal, D-Tumwater, to put a sales tax on plastic surgeries that are elective. Reykdal would use the money to cover prescription-drug co-pays for Medicaid-eligible seniors on the Medicare program, which budget cuts are likely to eliminate.

Jeff Johnson, president of the Washington State Labor Council, joined a 50-mile protest march last month to highlight the cuts that Democrats are poised to make to medical clinics and mental health programs, and he said his hope is that the Senate and House at least bring exemption bills to a vote on the floor.

Many lawmakers say they have no choice but to vote for a no-new-taxes budget, blaming I-1053. But a floor vote would force them to take a public stand, said Jeff Johnson, president of the Washington State Labor Council.

CHALLENGE TO I-1053?

A floor vote could help opponents of I-1053 who would like to legally challenge the measure’s constitutionality. Democratic Rep. Sam Hunt of Olympia told The Olympian’s editorial board last week that there is talk about finding a way to overturn the measure on constitutional grounds.

Senate Majority Leader Lisa Brown, D-Spokane, brought a legal challenge against Lt. Gov. Brad Owen a few years ago over his interpretation that a liquor tax needed a two-thirds vote, but the Supreme Court rejected it on a 9-0 vote without ever getting to the constitutional arguments, which even Owen wanted to clarify.

“You’re fighting a battle with a huge impediment,” Hunt said in the editorial board meeting, which included Rep. Chris Reykdal, D-Tumwater. “Hopefully some authority will find a way to challenge 1053’s constitutionality, because I think it’s obviously and blatantly unconstitutional. We have to get it before the court to have that challenge.”

Whatever happens, Murray said there is no way to prevent the deep spending cuts from happening this year, even if voters later agree to repeal a few tax breaks. That is because Republicans won’t provide votes to get a two-thirds majority for immediately closing tax exemptions, and the budget must balance by July 1 – while tax breaks could not be closed until after the election.

Brad Shannon: 360-753-1688
bshannon@theolympian.com
www.theolympian.com/politicsblog

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