Tax ‘settlement’ not clearly in state interest

When it comes to taxes and tax breaks, the Washington Legislature is prone to bouts of amnesia.

A Senate proposal floating around in this year’s special session would grant a 50 percent tax break to national television ad and program providers.

This could reduce content providers’ future tax bill by more than $11 million every two years. But it would settle legal action threatened by networks over a tax that the state has tried to impose without much success since 2010.

Sen. John Braun, R-Centralia, sponsored Senate Bill 6665. One upside is that the legislation would give the state a $56.6 million windfall payable by June, which is about half of the back taxes that networks have been ignoring since 2010 — and it would arrive at a time budget writers are scratching around for cash.

The down side is that it would lock in a favorable future tax cost for networks that is less than half what the state Department of Revenue has said is appropriate for this commercial activity.

Affected firms include such well-known names as ABC, NBC, CBS, Disney, ESPN and Comcast.

Attorney General Bob Ferguson’s office has told lawmakers privately that the state has a 70 percent chance of winning any court case against the national content providers, according to Rep. Chris Reykdal, D-Tumwater, who sponsored similar legislation in the House a year ago that died.

Neither Ferguson nor Revenue officials have been willing to comment publicly on the strength of the state’s theoretical case.

At this point, there are more good reasons to reject the legislation than to accept it. The bill appears to be getting closer attention mainly because House and Senate lawmakers are desperate to end their budget dispute in a special session now running into its second week, and $56.6 million buys a lot of political lubricant.

But, it's a bad deal. Washington is estimated to account for 2.24 percent of national networks’ programming revenues, based on population. The settlement bill would limit networks’ future taxable share to 1.1 percent of their national ad revenues. That formula would remain even if Washington’s faster-growing population led to a much bigger share of the national ad market.

Braun has not been available to talk about his proposal, but the Senate Ways and Means Committee held a hearing on it on March 11.

Comcast lobbyist Rhonda Weaver testified that some providers of national programming and advertising prefer to litigate and that networks are negotiating tax rates in other states around the country. She argued that Washington is imposing a much higher rate on out-of-state content producers that in-state broadcasters pay.

DOR insists the networks are not acting as broadcasters, but as providers of content, and as a result are not entitled to the preferential rate given to regional broadcasters.

Drew Shirk, head of tax policy for the state Department of Revenue, said SB 6665 significantly reduces the state’s litigation risks and provides payment of taxes it otherwise might wait four more years to get — assuming it wins any lawsuits that may, or may not, get filed.

Most networks have ignored the state’s notices to pay up since 2010, according to DOR, which says audits underway will determine what tax liability the companies owe.

How did we get here? This obscure tax issue arose after lawmakers extended the business and occupation tax to the networks in 2010. Legislation passed that year applied the B&O tax to out-of-state companies that had no physical presence in the state but which did have significant financial activity, known as an “economic nexus,” in excess of $250,000 a year.

Apart from the obvious problem that the state would be knuckling under to pressure from large out-of-state interests, SB 6665 undercuts recent steps the Legislature has taken to bring accountability to tax breaks.

State law now requires rigorous, transparent tests for tax breaks. For example, legislation led to passage by Democratic Sen. Reuven Carlyle of Seattle requires that recipients of a tax break aimed at job creation must now prove they create jobs.

In this case, lawmakers appear to be acting out of desperation, giving up what may be a reasonable, long-term stream of revenue in exchange for a bit of cash that gets them out of a budget jam today.

Obviously, there is complicated math to consider here. And there’s a simple and appealing thing about grabbing cash off a table.

But to go ahead with this legislation turns state tax policy back on its head. It forfeits a long-term strategy for short-term gain.

Lawmakers should resist the urge to go for a quick and dirty deal. In this case, it’s better to fight in court for principled taxation.

This story was originally published March 19, 2016 at 11:00 AM with the headline "Tax ‘settlement’ not clearly in state interest."