Politics and Taxes: Liberal Democrats Want to Close Loopholes; Moderates Prefer a Sales-Tax Increase

There’s an old saying about the dynamics of the Washington State Legislature: It’s Republicans against Democrats, the House against the Senate and everybody against Seattle.

But on Wednesday, March 10, as the regular session of the legislature was coming to a close and a special session to work out the differences between Democrats over a modest tax package seemed almost certain, the usual tension between House and Senate is being overshadowed by ideological divisions within each of the chambers. To wit, liberal Senators like the House’s revenue proposal with its emphasis on closing tax loopholes, and moderate Representatives prefer the Senate’s money package with its temporary sales-tax increase.

All the Democratic legislators of whatever political stripes stress that they made $3.2 billion in cuts last year and will slash another $600-800 million this year and that none of them are enthusiastic about raising any kind of taxes during a recession. Still, they differ on what kind of taxes to increase this year.

“I hope there is a tendency to go for the House version,” says state Senator Adam Kline, D-Seattle. “There are some of us who would really not like to see any increase in the sales tax.” Kline is a member of The Bunch, a group of progressive senators, who, he says, do not like their own chamber’s sales-tax proposal. “We had to hold our nose and vote for it,” says Kline.

The Senate’s $890 million tax package temporarily increases the state sales tax by 0.3 percent to raise $313 million. The Senate has also funded the Working Families Tax Rebate, a measure modeled on the federal Earned Income Tax Credit, that would give a rebate of the sales tax increase to the poorest one-fifth of the state’s residents–if they know to apply for it. “Experience shows that forty percent [of those eligible] would not apply for it,” claims Kline.

Supporters of the Working Families Tax Rebate believe that the state’s non-profits, including United Way, have done a good job of helping poor Washingtonians to receive the federal Earned Income Tax Credit and could do the same for the state program.

Moderate Democrats, meanwhile, are concerned that the House’s $680 million tax package relies too heavily on ending around $380 million in tax exemptions. Closing some of the exemptions “causes more problems than the revenue they bring in,” says State Senator Brian Hatfield, D-Raymond. “The folks that have been attending our Roadkill [caucus] meetings would like to see our [revenue] package rely on the sales tax.”

The Roadkill Caucus is made up of moderate Democrats–around 24 Representatives and 12 Senators, according to state Senator Chris Marr, D-Spokane.

It isn’t that Hatfield and other moderates love the sales tax. “I agree the sales tax is regressive,” he says. “But it hasn’t been raised in 27 years and this is an emergency.” Hatfield adds that it’s not only the moderate legislators who prefer a sales-tax increase, but the business community does as well. “The business lobbyists say [the sales-tax] is the one that you pass on and factor in. It is the most straightforward.”

Hatfield says that he and other border county legislators object to changing the out-of-state sales tax exemption. That exemption “keeps our border retail areas alive,” he says. He also opposes extending the sales tax to candy, gum and bottled water. “The candy and gum tax gets real confusing real quick for our grocers,” Hatfield complains. He even opposes additional taxes on private airplanes, saying that jet owners will simply relocate their wings to another state and hurt the small Washington businesses that service the aircraft.

Both liberals and moderates say there has been aggressive lobbying by business interests about closing any tax loopholes. Some of the most promising proposals that could have resulted in corporations paying more of their fair share of taxes have already been killed. The sadly deceased include taxes on investment income of non-financial firms and extending the sales taxes to janitorial services. Still alive are extending the sales tax to custom software and B&O (business and occupation) taxes to out-of-state businesses like credit card companies and banks.

Of course the option that businesses like the best is also still alive: no tax increase at all. This could happen if Governor Gregoire unilaterally refuses to extend a special session to pass a supplemental budget and instead exacts cuts by line item from the 2009-11 biennium budget passed in 2009.

Hatfield says that moderate Democrats are wondering if all the conflict over raising taxes is worth it. “Are we going to stay here for weeks and weeks arguing? Or do we just make those additional cuts? You’ve already got most people angry about raising taxes. They are probably going to be mad about the cuts too.”

economy@olympianews.org

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