Business Recruitment tax breaks still alive and well despite Washington’s budget woes

Even with a $2.4 billion budget shortfall lurking like the monster under a child’s bed, lawmakers are moving to retain business tax breaks set to expire this year and even proposing new exemptions.

By:
Paul Queary
Seattle Times

Washington’s tax structure is riddled with exemptions, credits and other breaks for everything from bull semen to prescription drugs — more than 400 in all. A handful will expire in the coming two-year budget cycle — bringing an additional $100 million into the state’s coffers, according to the state Department of Revenue.

But tax breaks die hard in Olympia. Few ever have been repealed, and they’re generally much easier to pass than to get rid of. Repealing more than one exemption at a time is particularly difficult because the supporters of different exemptions quickly add up to a big majority.

"Some of these things are sort of like nuclear waste — how do you get rid of it?" asks Rep. Jim McIntire, vice chairman of the House Finance Committee and an economics professor at the University of Washington.

Influential lawmakers already have filed bills to reinstate the expiring breaks.

The two biggest incentives on the block are aimed at fostering high-tech business: a business-and-occupation tax credit and a sales-tax exemption.

Advocates for the breaks — both enacted by lawmakers in 1994 — call them crucial for attracting the kind of high-wage jobs that drove the state’s economic boom in the 1990s.

"We can’t turn around and cut off our nose to spite our face," said Rep. Jeff Morris, D-Anacortes, chairman of the House Technology, Telecommunications and Energy Committee and sponsor of a bill to reinstate the breaks. Similar bills also are moving in the Senate.

The sales-tax exemption benefits about 60 companies, the department figures. The business-and-occupation tax credit goes to about 500. The state is barred from releasing a list of those companies because their tax records are confidential.

But reinstating the tax breaks must compete with key government services such as education and health care for the poor, McIntire said. With big cuts likely, that’s a tough argument to make this year.

"Is this the first $75 million that I would buy?" McIntire said. "I’m not sure that it is."

Looming over the entire debate is whether it’s a good idea to give such breaks at all. Last year, the Washington State Tax Structure Study Committee recommended a periodic review of all tax breaks to make sure they’re accomplishing the purpose they were designed for. McIntire, who served on the committee, is sponsoring a bill to create a citizens commission for that purpose

"The big danger is that government revenues will die a death by a thousand cuts," said Hugh Switzer, a University of Washington law professor and the vice chairman of the tax-study committee. "Every time an individual or a group comes to the Legislature and asks for a tax exemption, the Legislature should think to itself, do we want to appropriate general-fund cash to this particular industry or community group?"

Pro-business conservatives tend to look at the issue differently. From their perspective, every dollar that doesn’t come into the government’s coffers is potentially helping generate economic growth in the private sector.

"If we don’t re-enact them, will there be an expansion that won’t happen?" asks Senate Ways and Means Chairman Dino Rossi, R-Sammamish. "Or will the expansion happen in another state?"

Politicians from both parties agree that Washington’s tax structure — without exemptions — tends to discourage investments to start or expand businesses. The sales tax can add as much as 9 percent to the cost of expansion, and the business-and-occupation tax applies even to new companies that are losing money because of research and development spending.

That has lawmakers proposing dozens of new tax breaks this year. Morris, for example, proposes a tax credit for high-tech corporations that establish headquarters in Washington.

One question is how to measure whether the tax breaks actually create jobs or simply give money to companies that were planning to hire people anyway. The Department of Revenue figures that companies which got the tax breaks due to expire have created jobs — but it’s not clear that the incentives were responsible for those jobs.

"The difference between corporate welfare and an actual tax incentive is whether you can prove that it works," said Morris, whose proposal would require more proof that employees were using the breaks as lawmakers intended.

"If you don’t ask this question, you don’t know whether it’s better to give $80 million in tax credits or $80 million to the University of Washington."

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