When Jay Inslee and Rob McKenna explain how they would pay for their agendas as governor, they point to the state’s hundreds of tax breaks – but don’t say which ones they would cancel.
The lack of specifics is a sign of how difficult it will be for the winner to take on the special tax treatment that is so regularly vilified in Olympia.
Gov. Chris Gregoire scoffed Wednesday at the idea that her successor would be able to keep the state’s promises to schools simply by closing tax loopholes.
“Oh, that was really successful this legislative session,” Gregoire said sarcastically. “I gave them a list as long as the room, and what did they get me? Remember how many they got me? Yeah: one.”
Lawmakers managed to narrow exactly one exemption, requiring big banks to pay taxes on earnings from home-mortgage interest. Even that came as part of a law Gregoire signed Wednesday that adds or extends other breaks, benefiting newspapers, port businesses, server farms and actual farms.
Throw in a break they revived for film and television production, and lawmakers actually increased the total revenue lost to tax breaks rather than decreasing it.
Gregoire blamed the voter-imposed rules that require two-thirds supermajorities to raise taxes. She supports a lawsuit that is seeking to have a judge declare those rules unconstitutional.
Yet even in 2010, when majority Democrats suspended the supermajority mandate, they had a mixed record. Opponents defeated proposals targeting tax breaks for private airplanes, software, out-of-state shoppers and even gold bullion.
Lawmakers did take steps that year to increase out-of-state companies’ tax burden, and they axed small tax breaks for corporate board members and farming equipment. But mostly, they turned to raising tax rates on businesses and creating or adding to “sin” taxes on beer, pop, candy and the like. Voters ended up overturning much of the latter tax hike.
AVOIDING TAX HIKES
Closing tax exemptions is the sole method for increasing taxes that either candidate for governor endorses.
But Gregoire said her successor would need to adopt bigger, broader increases in revenue to pay for schools.
The state Supreme Court ruled in January the Legislature has shortchanged basic education, and is watching to see if it will follow through on laws calling for more funding. The price tag, Gregoire says, is about $1 billion over the two years starting in July 2013.
Republican Attorney General McKenna predicts economic growth will drive increases in state revenue that can be funneled toward education.
Similarly, Democratic former U.S. Rep. Inslee says his proposals to create job growth should be seen as his solution. “When jobs are created, revenue’s going to increase,” he said.
Both candidates also say they would free up money by delivering government services more efficiently.
But they also call for new programs that would cost money, including new tax breaks.
Inslee calls for giving small businesses a tax credit for adding workers to their payroll, a program he says he would cap at $8 million. He also wants to provide a tax credit for start-up, research-based firms and extend existing tax credits for research and manufacturing.
McKenna wants to go farther and exempt more than 118,000 small businesses from the state business-and-occupation tax, at a cost of more than $250 million a year once it’s fully phased in.
“We can fund that in significant part by looking at the tax preferences and exemptions that exist today and decide what’s still worthwhile and what we don’t need, and then we can of course use economic growth to fund some of that as well,” McKenna told reporters at a Tuesday press conference.
Pressed for specifics, he said only that he would look first at any loophole favoring an out-of-state firm over one here.
McKenna said Washington’s system for reviewing tax breaks is one of the best in the country and government regulations should get similar scrutiny. If lawmakers haven’t pared down breaks, he said, it’s partly because many are justified. Some offset an unfair B&O tax structure, he said.
Auditors review tax breaks for compliance with lawmakers’ original intent. Inslee says the process needs work. Reports gather dust, he said. He wants to require the Legislature to take a vote to “either re-up or non-re-up” each break, with exceptions for a few, including some that benefit the aerospace industry.
Similarly, some of his fellow Democrats in the Legislature have pushed for placing sunset dates on all tax breaks.
“Doing systematic expiration dates is a good way to get lawmakers to look at them seriously and consider their cost against other public priorities,” said Andy Nicholas of the left-leaning Washington State Budget and Policy Center.
McKenna opposes that idea. “Given the hundreds and hundreds of preferences that have been created over time, that would create chaos,” he said.
He pointed to a sales-tax exemption for food as one that shouldn’t be threatened. Nicholas said even that break could use scrutiny, if only to decide which foods might not merit their special tax treatment.
Inslee said many of the state’s tax breaks will no doubt pass muster and be renewed. But when pressed about which ones might need to go, he, like his opponent, demurred.
“I’m not going to nominate specific ones,” Inslee said, “because that’s unwise for many reasons until we’ve had a full review.”
Jordan Schrader: 360-786-1826 firstname.lastname@example.org/politics