The Silent Majority

State legislators miss opportunity to make the case to close tax loopholes.

Their silence spoke volumes.

On Thursday, Jan. 21, when legislators had the chance to ask tough questions or engage in flights of fiery rhetoric about tax loopholes, they mostly kept quiet. Some even complained that certain loopholes were being made to look bad.

It was not an encouraging meeting for those who are hoping that the Washington State Legislature will finally get serious about closing tax loopholes in order to help with the state’s $2.6 billion budget deficit. If left unchecked, the budget deficit will do serious damage to tens of thousands of working and middle-class Washingtonians.

The occasion in question on Thursday was the joint meeting of the state House Finance and state Senate Ways and Means Committees in Olympia to hear an overview of 2009′s review of tax preferences by the Joint Legislative Audit & Review Committee (JLARC–pronounced “jay lark”). These legislative committees are the place where tax loopholes are created and destroyed. Since 1935, when the state’s tax code was created, there’s been a whole lot of water diverted from the state’s revenue stream.

The first thing to learn from JLARC is that there are now 580 tax loopholes in the state. In 2008, when there were a mere 567, Marilyn Watkins, Policy Director of the liberal Economic Opportunity Institute, estimated in her report, Everybody Else Gets One, the loopholes cost state government around $25 billion biannually, although half of that could not be collected for constitutional reasons. In 2007-09, state government actually only collected $27.7 billion in general-fund revenues. So, in theory, there’s some real money in loopholes. (For more detail see The $700 million question. )

The legislators heard from two groups at Jan. 21′s meeting. There are three staff members of JLARC who are systemically evaluating each of the state’s 580 loopholes. They really study these things in detail. Unfortunately, they are given very narrow guidelines for evaluating these tax breaks: legislative intent. That means: Is the loophole doing what the lawmakers wanted when they originally passed it? The staff doesn’t get to comment on whether a particular loophole is a good idea or an outrageous giveaway to wealthy corporations. Given this mandate, the staff is not very aggressive. In its first three years of work, JLARC staff has reviewed 75 tax loopholes and only recommended that eight of them be eliminated (staff did recommend that 20 others be modified or reexamined).

The other group testifying at Thursday’s meeting was the Citizen Commission for Performance Measurement of Tax Preferences (trust state government to come up with snappy, interesting titles for things). This seven-member commission has a slightly broader mandate than JLARC’s legislative staff. They can comment more generally on tax loopholes under consideration by JLARC. In practice, they don’t say all that much either. This is partially a function of the commission’s makeup–both Republican and Democratic legislators nominate commission members. So, the commission currently includes strange bedfellows like Stephen Miller, an activist in the Washington Education Association, who says, “I’m not interested in corporate welfare,” and Paul Guppy, Vice President for Research at the conservative Washington Policy Center.

The big kahuna discussed at Jan. 21′s committee meeting was the tax break for investment income of businesses not engaged in banking, loan or like activities. Here’s how the loophole works: When a nonfinancial business–like a big law firm or manufacturer–has extra money lying around, it can invest the dough and earn interest or dividends on it. At the end of the year, the business can deduct that income from its gross receipts and lower its tax bills. It’s a $310 million loophole, according to JLARC staff. Both the JLARC staff and the commission were pretty pointed in evaluating the loophole.

JLARC staff said that if the loophole was closed, the state could collect taxes not only from corporations but also from wealthy individuals who have more than $28,000 a year in unearned interest and dividend income. This argument relies on the fact that the state’s Business and Occupation Tax is so broad that it would capture the investment activities of individuals. JLARC’s report reads, “Individuals with large investments portfolios reported over $20 billion in investment income in Washington in 2005.” The commission piped up and urged the legislature to consider whether investment income should be taxed in some fashion.

This gave legislators a great opening to talk about taxing the rich and big corporations on unearned income. Yet no legislators asked any questions or probed more deeply.

Reports on other promising loopholes came and went and no one even reached up for the low hanging fruit.

Finally at the end of the meeting, state Senator Karen Keiser (D-Des Moines) lamented the fact that while JLARC staff and commission members had done fine work, very little had come of it. In its first three years of work, JLARC staff has recommended terminating, modifying or reexamining 28 loopholes. Keiser could only recall one tax loophole that had been closed in that time.

Since the legislature seems to lack the political will to close loopholes, Keiser suggested it might be time to create an “automatic sunset” for tax breaks. “Affirmative action is virtually impossible,” she noted.

Let’s hope that this year’s frightening budget deficit will break that political gridlock and tax loopholes will be closed. Otherwise there will be greater economic hardship for the disabled, the poor, the homeless, the uninsured and the students of Washington state.

economy [a] olympianews.org

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