Tax Exemptions Get Green Light Despite Lack of Goals and Clarity
Latest legislative report on tax preferences highlights millions in unspecified goals.
Following a legislative session in which lawmakers fell $420 million short on funding specific line items to meet the Washington State Supreme Court's McCleary mandate to fund basic K-12 education, the Joint Legislative Audit Review Committee (JLARC), a bipartisan task force of legislators that evaluates the worthiness of tax breaks, signed off on more than $500 million in expenses that are vague and unclear this month.
Tax breaks became a front-and-center topic last session when the state house Democrats attempted, but failed, to close an estimated $500 million in tax exemptions to help meet the McCleary mandate. The Republicans rejected the idea.
Why spend the full court-mandated extra $141.6 million on school buses, $597.1 million on materials, supplies, and operating costs, and $219.2 million on reduced class sizes, I guess, when you can give money away for ambiguous policy goals? (The most recent budget spends about $1 billion extra on K-12 rather than the $1.4 billion extra recommended by the court.)
Why spend the court-mandated $141.6 million on school buses, $597.1 million on materials, supplies, and operating costs, and $219.2 million on reduced class sizes, when you can give money away for ambiguous policy goals?
"The legislature did not state the public policy objective for the tax preference," the new JLARC report states, assessing one $30 million pharmaceutical industry tax break, but nonetheless going on to "infer" what the public policy objective is, and recommending that the break continue anyway.
Indeed, JLARC issued its preliminary report this month and, given the option to terminate tax breaks, kept $283.7 million in tax breaks in place despite the formal acknowledgment that they needed to "review and clarify" them. And they formally recommended that the state "continue" another $394.6 million in tax breaks despite acknowledging that they had incomplete information.
Despite this lack of clarity about specific tax exemptions, which amount to expenditures for the state, the tax breaks "will continue by default," the former JLARC chair, Sen. Jeanne Kohl-Welles (D-36, Ballard), who remains on the committee, says, unless the legislature gives JLARC more specific direction. "My frustration," Kohl-Welles continues, "is that we don't act on the committee recommendations [to review and clarify]."
Judging from last biennium's JLARC report, the lack of clear legislative intent behind tax exemptions and the lack of clear metrics to determine if the exemptions are even achieving their (unclear) goals is an ongoing problem.
At least Washington state tries to evaluate its tax preferences (as the breaks are formally known). Citing a July 2013 study by the Pew Charitable Trusts that praised Washington as one of the only places that even has an entity like JLARC in place to evaluate tax breaks at any level, Queen Anne state Rep. Reuven Carlyle (D-36), the house finance chair who's been on a mission to get tough on tax breaks for years, praised JLARC as a good start: "We've done a good job with version one, but it's completely inadequate relative to where we need to be," he says. "It's not quite a rubber stamp, but it's not the high quality, rigorous, non-political analysis the taxpayers expect."
JLARC looked at 16 tax exemptions this year—breaks on everything from health care services to diesel boat fuel to youth services to rural recovery to tree trimming services—worth $700 million total. Their preliminary findings: "Review and clarify" eight (worth $283.7 million) "continue" seven (worth $394.6 million), and "terminate" one.
That latter exemption, the only one they recommended terminating, was a $22.4 million break for dental services health care providers; JLARC reasoned ("inferred") that the break was only meant as a temporary exemption to cover health care providers who contract out dental services before they transitioned into full certified health care providers.
The next step in the JLARC process is getting public input. The Washington Budget & Policy Center, a lefty economic think thank, weighed in at this week's JLARC hearing (as did a lobbyist protesting the end of the dental service tax break) and recommended terminating one exemption that JLARC had recommended continuing, a $29.9 million B&O sales tax exemption for resellers of prescription drugs. The exemption was on JLARC's "continue" list because it is aimed at "reducing a competitive disadvantage for wholesalers operating Washington warehouses relative to out-of-state drug distributors that have no nexus to [presence in] Washington and pay no B&O tax."
"We're going to be through with the days of 'Review and Clarify,' which is just government talk for let's punt."—state house Finance Chair, Rep. Reuven Carlyle.Basically, to encourage jobs in Washington state, if a wholesale drug reseller has a warehouse or sales force here, they pay a reduced B&O rate. However, WBPC's Andrew Nicholas testified that JLARC presented no evidence that the break added any jobs to Washington state. Indeed, in a typical finding, the JLARC report itself says: "It is unclear whether in-state warehouses would be relocated if the preference were terminated."
Moreover, Nicholas questioned why prescription drug wholesalers were getting a break that wholesalers in other industries weren't getting. "What's so special about drug companies?" he asked PubliCola rhetorically. In his testimony, he added: "This tax break is not targeted at smaller firms that lack the resources and economies of scale needed to compete with large corporations. Rather, as noted in JLARC’s analysis, the bulk of this preference goes to three large multinational drug wholesalers that don’t need it."
JLARC's own report states that 85 percent of all pharmaceutical sales in Washington state go to just three global firms that get the tax break because they have warehouses here; and that of the 33 firms that benefited at all from the break, 23 don't have warehouses here.
Rep. Carlyle passed legislation earlier this year that will force the legislature to eventually come up with clearer metrics to measure whether or not a tax exemption is actually benefiting the public: "When this is all said and done, we're going to be through with the days of 'review and rlarify,' which is just government talk for 'let's punt,'" Carlyle said.