Setting a Low Bar: The Tax Exemptions Gregoire Won’t Touch

On Wednesday, February 17, Governor Christine Gregoire released her $605 million tax package to help close the state’s $2.8 billion budget deficit. Her proposal was meant to help get the Democrats back on track after a week of chaotic debates over repealing I-960, at a time when the legislature has just 3 weeks left in its legislative session to pass a budget.

Gregoire’s proposal continues her minimalist, incremental approach to tax issues. Her tax package, which reiterates many of her “book 2″ proposals from a month ago, is meant to tread lightly on raising revenue without having an “all-cuts budget.” But as a result, her proposal doesn’t do much of anything to make Washington’s regressive tax system any fairer. If the economic crisis has presented her with an opportunity for change, Gregoire is certainly not taking advantage of it.

Here are the details:

The biggest part of Gregoire’s new tax package comes from $345 million in new sin taxes.  A new tax on bottled water would bring in $134 million. New taxes on tobacco products would produce $88 million. Soda pop drinkers would chip in $93 million and sales taxes on candy and gum would raise $28 million.

Such so-called “sin taxes” rely upon public health arguments to make tax increases palatable. They provide a disincentive to developing addictions or supposedly unhealthy or socially harmful habits, and do not tax people on the necessaries of life.

But in Gregoire’s proposed budget, sin taxes also serve to protect another vice: tax loopholes for special interests. Gregoire only closes $102 million in what could broadly be described as tax loopholes. That’s just a fraction of the 300 loopholes whose closing could net the state a cool $12 billion.

The biggest loophole Gregoire goes after is $73 million in tax avoidance by out-of-state businesses that do work in Washington but don’t have offices or equipment here–like law firms, architectural companies and engineering groups. Each tax exemption has a constituency ready to do battle to protect them, making out-of-state businesses seem like an easy target.

But other than that, Gregoire doesn’t push to close many other loopholes. She wants to clean up $16 million in new tax gaps opened up by court decisions; end four tax exemptions worth $11 million total (on gold bullion sales, soda-pop syrup, livestock nutrient management and board of directors’ fees); and clean up $11 million in other unspecified “tax avoidance transactions.”

Here’s some of what Gregoire left off the table:

• The $200 million loophole for unearned income (dividends and interest) from non-financial businesses.
• Stockbrokers and their clients, who aren’t paying $45 million in sales taxes on their trading.
• Corporations who save $33 million in sales tax on their janitorial services when the rest of us pay sales tax on auto repair or plumbers

Will corporations still get $70 million in tax breaks on their purchases of custom software while ordinary Washingtonians struggle with the worst economy since the Great Depression? It sure looks that way.

The governor did tweak her book 2 budget in one important way: she endorsed a bill put forward by Rep. Timm Ormsby and Sen. Ed Murray that will levy a special tax on Big Oil. The bill would increase the hazardous substance tax (oil, pesticides and the like), and has support from a broad alliance of labor, environmental, education, health care and human-services advocates. Gregoire writes, “The hazardous substance tax rate has not been revised in more than 20 years even though pollution levels and the cost of cleanup have risen dramatically.” The tax would raise $148 million for the general fund that pays for health, education, human services and general government–and $66 million more to help clean up Puget Sound.

The linchpin to Gregoire’s revised budget, which is meant to offer a “balance” between raising revenue and cutting essential programs, involves $454 million in wishful thinking. Last year, the Democrats relied heavily upon a federal bailout (largely in the form of stimulus dollars) to offset its deep budget cuts. This year, Gregoire is trying a similar approach with health care funding. But political gridlock in the federal government has made this strategy more risky.

Last year, the U.S. Congress increased federal funding of Medicaid– the combined federal and state program to pay for poor people’s health care– in the stimulus bill. In December, the U.S. House of Representatives passed a $154 billion jobs bill that would continue that extra federal Medicaid funding– $454 million of which would end up in Washington state’s coffers. President Obama also included the Medicaid money in his budget proposal for this year. The U.S. Senate is another matter, however. Last week, U.S. Senate Majority Leader Harry Reid, D-Nevada, proposed a much smaller $15 billion jobs bill that contained a lot of tax cuts. The resulting brouhaha means the Medicaid money won’t be arriving anytime soon.

As a result of treading lightly on closing tax exemptions and raising new revenue, Gregoire’s latest budget proposal includes $967 million in cuts–mostly to human services. This is on top of $3.3 billion in cuts that the governor and legislature made last year.  Gregoire doesn’t spell out which programs are now slated to be eliminated, but the implications– including kicking thousands of families off welfare– could have a profound effect on those who are suffering the worst of our economic downturn.

Gregoire’s tax proposals received little direct criticism from the state House of Representatives. Rep. Kelli Linville, D-Bellingham, chair of the Ways and Means Committee, says, “We’re about the same on the balance sheet. It’s not like we are miles apart. ”

But Linville’s main difference with Gregoire is also likely to become the main battle line within the Democratic Party over how far to go with raising taxes. Linville would like to see a temporary increase in the sales tax across the board. “I would prefer a different revenue package. The option that is being circulated in the House is a small increase in the sales tax. It seems the most sustainable.”

The sales tax would raise $1 billion in additional revenue, which if accompanied by the governor’s proposals would get the legislature remarkably close to passing a no cuts budget. That is a major reason why the Rebuilding Our Economic Future Coalition, which staged a rally of almost 6,000 people in Olympia on President’s Day to “stop the cuts”, is getting behind the sales tax idea.

On its face, this general sales tax increase, known as House Bill 3183, deepens the regressive nature of the state’s tax system, through which low-income people in Washington already pay three to four times more of their income to the state than wealthy Washingtonians do. Washington state already has the most regressive tax system in the country, and this would make it worse.

Democrats who are getting behind the sales tax increase are banking on the fact that it can be mitigated by the Working Families Tax Rebate. The rebate was passed last year and modeled on the federal Earned Income Tax Credit. It would provide low-income people with a rebate from the state to offset the extra sales taxes they would pay because of a sales tax increase. The liberal Washington Budget and Policy Center has run the numbers and claims that the bottom two-fifths of the state’s population would benefit from the Working Families Tax Rebate. The challenge is that low-income people need to be able to know that the rebate exists and know how to claim it. And that the legislature needs to fully fund the rebate– something it has yet to do.

But while corporate interests tend to line up against closing tax loopholes, it tends to be progressives within the Democratic Party who are most critical of sales tax increases– even with the Working Families Rebate. “I hate that one,” says Rep. Bob Hasegawa, D-Seattle. Hasegawa worries about the middle one-fifth of the state that would pay the new sales taxes, wouldn’t get the rebate and end up “getting their butts kicked.”

Hasegawa has a different approach to the sales tax. “There is enough money to be recaptured from businesses who are getting special tax breaks. Let’s make the wealthy and the corporations pay their fair share.” He names two companies that he’d like to begin with: Boeing and Microsoft.

But the governor and most of Hasegawa’s colleagues aren’t listening.

economy [at] olympianews.org

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