If state lawmakers want to raise taxes to plug a growing shortfall, they always have options - provided they have the votes.
But political reality quickly trims the list of possibilities.
As news of the state budget shortfall landed with a $2.6 billion thud Thursday, some Democrats were willing to talk right away about tax increases. But they only mentioned the easier-to-achieve ones – closing so-called tax loopholes, raising “sin” taxes on products such as tobacco, or even placing a sales tax on candy.
The left-of-center Washington State Budget and Policy Center in Seattle suggested a sales tax increase combined with a tax credit for low-income families.
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But except for the sales tax boost, none of the ideas floated seriously so far would raise much money. And a proposal to raise the sales tax by a penny – which could raise $1 billion in a year – raises fears of dampening business activity. A smaller, 0.3-cent tax proposal last session failed even to get a House vote – even though House Bill 2377 was offered as a temporary tax that voters would approve.
House Majority Leader Lynn Kessler, a Hoquiam Democrat and tax skeptic, said Friday that she thinks the budget hole is so deep that legislative leaders and Gov. Chris Gregoire agree they need to look seriously at raising revenues.
“I think we can’t do it all in cuts. I don’t see how we do it all in cuts,” Kessler said after a meeting with top budget writers and Speaker Frank Chopp earlier in the day. Asked about taxes, she added: “I doubt you’ll see an across-the-board increase. I’m sure they will be more targeted and dedicated.”
Kessler all but ruled out a property tax increase and said the first place they plan to look is tax exemptions. Rep. Ross Hunter, D-Medina, has been looking over those options in the House Finance Committee, which he leads.
Republicans on the other side argue that any increase puts a burden on businesses and families at a time when they are struggling to survive.
It does not appear that there is any tax they would support, and Rep. Ed Orcutt of Kalama said last week that tax exemptions often have a good purpose worth keeping.
Many serve as incentives to promote business activity, for example.
“I think it’ll be very hotly debated. Obviously, Republicans will come in with wanting not to vote for any budget and not voting for any taxes. So the majority will have to govern and come up with the votes to get something done,” predicted Rep. Sam Hunt, D-Olympia, who is itching for a debate on tax reform but knows his caucus won’t go there this year. “Obviously, there will be cuts.”
Hunt expects majority Democrats to amend Initiative 960, eliminating a two-thirds vote requirement for tax increases. He also thinks they will look carefully at tax exemptions. But like other Democrats, he did not offer up any to lop.
Hunt said expanding the sales tax to include professional services is among the ideas someone might put forward. The Department of Revenue says a sales tax on professional services could raise $4 billion over two years and that a sales tax on business services could raise $743 million, but neither has ever been a popular idea.
Jerry Reilly, a lobbyist with the Eldercare Alliance, said a tax on professional services might let the state lower its 6.5-cents-per-dollar sales tax overall while still raising new revenues.
But tax opponents have killed the professional services tax idea before by asking whether it is a good idea to tax people who are getting emergency heart surgery, divorces or other costly services in times of personal crisis.
Whatever emerges, Hunt said: “I think it’s very difficult. I think any tax is very difficult.”
Recent history shows that talking about closing “loopholes” is far easier than getting it done. The state’s Joint Legislative Audit Review Committee and Citizens Commission for Performance Measurement of Tax Preferences offers yearly reports with recommendations for closing loopholes, but lawmakers act on very few.
Even Gregoire’s great pledges in the 2004 campaign to close some loopholes came to naught.
More recently, this year’s tax-exemptions report examined several years’ worth of tax breaks authorized by lawmakers, some as far back as 1911. But it actually recommends keeping most of those it reviewed, or it suggests extending them past their legal expiration dates. Examples: an aluminum smelter tax break, a utility tax break for electrolytic processing firms, and preferential rates for producers of oil and flour.
The latest report does call into question a few tax breaks. It recommends the Legislature clarify what public purpose is served by tax breaks for fraternal benefit societies, for a business tax break for kidney dialysis, hospice and nursing homes, and for taxes on ocean marine and foreign trade insurance policies.
And it says flatly that a few incentives should lapse – including a $250,000, rural-counties tax break for software development and help-desk firms. It says the incentive has generated few jobs. It similarly advises letting a $2 million tax exemption for field-burning equipment lapse and doing the same with a $2.3 million tax credit for patient-lifting devices.
But those three together would raise less than $5 million in new revenues if adopted.
That leaves another option for risk-averse lawmakers: wait for interest groups to come in the door and ask to be taxed. Nursing homes did it in 2003, only to see some of the new revenues diverted.
But nursing homes again are considering ways of levying fees on providers and using that greater state revenue to capture more federal Medicaid dollars that could be back into nursing care, according to Gregoire.
Cassie Sauer of the Washington State Hospital Association said her group is doing the same thing. It figures an “assessment” or fee for hospitals could draw $260 million in added federal aid over four years; Sauer said all of the association’s members favor the idea.
Hospitals also will show support for other taxes that stave off cuts to the medical safety net, if a coalition of labor, health-care and other groups coalesces again to push for a tax package, Sauer said.
She worried about cuts that would eliminate the Basic Health insurance-subsidy program for the working poor; reduce children’s health coverage; eliminate or further reduce General Assistance Unemployable benefits for people too disabled to work; and mean reductions for community-health clinics.
“Any revenue source that would help shore up those we would support,” Sauer said.
Everything should become clearer when lawmakers are in town for committee meetings Dec. 3-4 and Gregoire releases her budget the following week. Gregoire’s budget release has been moved up by two weeks to the week of Dec. 7, the governor’s Office of Financial Management said.
Brad Shannon: 360-753-1688