Vote on special tax exemptions every 2 years

March 3, 2010 | John Burbank

ShareFrom the Everett Herald:

It is not just the cherry trees blossoming in Olympia. Our legislators are shaking off the winter doldrums. They know that public structures like education for our kids and basic health care are good things, necessary elements of a modern democracy and a vibrant economy. And they realize that cutting services further would be the most backward thing to do in a recession.

The trick is to figure out how to fund them in the middle of this Great Recession. But it’s not that easy.

Our legislators are hemmed in by lobbyists who protect the special tax loopholes they have weaseled into the tax code over the past 30 years.

One way to skirt the attack of the lobbyists is to increase the sales tax, pushing it over 10 percent in some counties. This makes for easy money and little opposition in Olympia, because there are no corporate lobbyists looking after the interest of the people. That is what legislators are elected to do, but sometimes their vision gets a little cloudy when lobbyists control the conversation.

Of course, what looks like an easy path when you are in Olympia turns out to be rather shortsighted when it comes to electoral survival. It’s hard to run a successful campaign based on increasing the sales tax because it’s an “upside-down” tax that hits low-income and middle-class people the hardest.

Some legislators are exploring another pathway, trying to use the opportunity to bring some equity into our tax system. They realize that not all taxes and tax loopholes are the same. So the House Democrats are proposing to cinch up some corporate exemptions. Some of these are a little complicated to explain (blame the lobbyists who designed them for that), but bringing them to light is worthwhile.

For example, the major corporate banks that gambled the economy into its tailspin have all been excused for decades from paying taxes on any interest they earn off of home mortgages. So they sell us bad mortgages, and the interest they get is tax-free. And if they foreclose on the house and sell it, they don’t have to pay the real estate excise tax like the rest of us do when we sell our homes. If House Democrats have their way, those two loopholes will be gone, promoting both better mortgage practices and bringing in $74 million for public services next year.

Another weird loophole excuses non-financial businesses from paying any taxes on interest, dividends or capital gains. That creates a perverse incentive to gamble in the stock market, rather than build plants and buy equipment — because while goods and services produced are taxed, investment income is not. Closing that loophole will save taxpayers $58 million next year.

While House Democrats are zeroing in on a few really bad tax loopholes, the Senate is also getting into the action with a proposal to shine some light on all tax loopholes, exemptions, credits and outright giveaways across the board. This effort, led by Sen. Phil Rockefeller, D-Bainbridge Island, rightly proposes that tax preferences be regularly and openly reviewed, so legislators (and voters) can better examine the money that would otherwise be spent on important public structures. Just as the budget is constructed and voted on every two years in order to determine how we spend our taxes on education, health care, parks and transportation, so too should there be an affirmative vote to maintain or suspend tax loopholes.

This would create a whole new dynamic in Olympia. Instead of getting a tax loophole passed into law and then passively making sure nothing happens to it, lobbyists would have to actively defend these exemptions and try to prove their positive impact on public life. Those would be interesting public hearings, with lobbyists bending over backward to show how good their special exceptions are for the state as a whole.

Rockefeller’s bill has a way to go before it becomes law, and I am sure the lobbying community will pull out the stops to prevent its passage. But passing the bill would be a step toward ensuring everyone pays their fair share, including those who have the resources to get special treatment in Olympia. Special tax exemptions that don’t create public value or serve the public’s interest just increase this recession’s misery.

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Posted in Column, Tax and Budget

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