The $700 million question: Will state officials get serious about closing tax loopholes?

January 21, 2010 | Alex Stone

From Real Change News

Last week, Gov. Chris Gregoire announced her keenly awaited proposal to close tax loopholes in order to help shrink the state’s $2.6 billion deficit. Education, health and human-services advocates hoped for a big number, but they were disappointed. In fact, Gregoire’s plan fell about $2.584 billion short.

After months of careful evaluation, the overnor only wants to cut $15.7 million in tax incentives, though she did offer $89.4 million in other new revenues. On Mon., Jan. 11, after Gregoire introduced her budget to the Senate’s Ways and Means Committee, a perplexed state Sen. Debbie Regala (D-Tacoma) asked why the governor hadn’t suggested closing more loopholes to deal with the state’s disastrous revenue situation. Gregoire replied, “It sounds simple but I found it difficult to do.”

Marilyn Watkins, Policy Director of the Economic Opportunity Institute, says she’s found that the state’s lawmakers have created 567 loopholes worth around $53 billion in state tax breaks since 1935, when the state’s basic tax structure was created. Watkins says at least $26.5 billion of these tax breaks could not be collected in any case because of constitutional issues — like the property-tax exemption for churches. In addition, Watkins argues that of the remaining $26.5 billion in tax loopholes, there are some — like the sales tax exemptions for food and prescription drugs — that actually improve the fairness of our state’s tax system.

In response to the state’s budget crisis, Watkins released, on Jan. 14, an action plan that contained suggestions for $700 million of new revenue that could be found by closing loopholes — or as Watkins calls them, “tax preferences.” Watkins asserts that repealing these tax preferences would not hurt the economic recovery.

Watkins favors closing the Business and Occupation (B&O) tax deduction for investment earnings of non-financial firms — in layman’s terms, businesses other than banks — one that she claims would be worth $296 million this year. She also sees other tax loopholes — the sales tax exemptions on stockbrokers ($45 million), custom software ($70 million) and detective and security services ($62 million) — as fair game. “This is not the time to make any more cuts,” to social service or other programs, says Watkins. “We need to seriously raise new revenue.”

But state Sen. Rodney Tom (D-Bellevue), one of the vice-chairs of the Ways and Means Committee, says the minute he mentions a tax preference that should be repealed, “I’ll have high priced lobbyists knocking on all the [legislative] members’ doors,” he says.

Tom and other legislative leaders promise that this year will be different, however. State House Speaker Frank Chopp says, “The first line of approach [to the budget deficit] is to look at tax loopholes — enough to make a big dent in the budget.” Chopp says that the House leadership has identified up to six loopholes to consider closing this year, but he would not specify which ones are under scrutiny.

The Economic Opportunity Institute’s Watkins believes that tax preferences will not be repealed unless there is “a lot of agitation” from the general public. Watkins says, “It will take a lot of citizen effort to shore up the legislators and the governor.”

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Posted in State Economy, Tax and Budget

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