Tax Breaks to Continue Despite "No Conclusive Evidence" of Success

By Afternoon Jolt January 16, 2012

The Joint Legislative Audit Review Committee (JLARC)—the committee that reviews tax breaks—gave its report on 25 (of the nearly 600) tax breaks to  the state house ways and means committee this afternoon.

And while the JLARC formally re-recommended what it already recommended in its report late last year—terminating one tax break, letting two others expire, asking the legislature to review and clarify the intent on eight tax breaks, and continuing 14—their findings were somewhat random, as puzzled committee members, who repeatedly interrupted to ask what the findings were based on, made clear today.[pullquote]"We are literally giving away millions of dollars with no questions asked."—Social Services Lobbyist Nick Federici [/pullquote]

The report often lapses into guesswork recommendations like this: "Continue: Because the preference is meeting its implied public policy objective" or "Review and clarify: Because the public policy objective and intended beneficiaries are unclear."

For example, at today's hearing, JLARC staffer Dana Lynn recommended continuing a sales tax exemption on "sales of goods to certain nonresidents," telling legislators that the "preference appears to be achieving [the] ... objective, as qualified nonresidents are purchasing goods in Washington." But then she added: "However, it is unclear how many such sales would have occurred absent the preference."

Committee member Seattle Rep. Mary Lou Dickerson (D-36, Ballard), quickly jumped in, raising the obvious question: "What's your logic? How do you know it's working if you don't know how many sales would have occurred otherwise?"

Lynn acknowledged the conundrum and pointed out that JLARC's citizen review commission didn't support JLARC's recommendation "because there is ambiguity regarding [the] legislature's public policy objective..."

And so it went, all afternoon, with Lynn and her colleagues recommending the extension of most exemptions even as they said they needed to be reviewed: "Evidence not available to determine" ... "Legislature provided no performance goals to assess..." ... "we did not have any data" ... "we really didn't have any evaluation criteria..." "no conclusive evidence..." "the public policy objective is unclear."

Indeed, the JLARC's authority is legislatively granted and the legislature has never instructed the committee to conduct an actual return on investment analysis. The JLARC only looks at whether tax exemptions meet "legislative intent"---an unhelpful metric because the legislature typically fails to say what the specific policy goals of tax exemptions are.

Liberals who have been asking the legislature to repeal the controversial tax deduction on first mortgages for big banks, certainly would have been frustrated by today's findings as well. JLARC simply asked legislators to review the bank break (rather than terminate it), despite "No conclusive evidence that the deduction increased loan availability or decreased loan costs in Washington," which is what they guessed the purpose was. Sigh. "Public policy objective not stated."

Social services advocate Nick Federici, who testified after the JLARC committee's presentation, seconded Rep. Dickerson: "We are literally giving away millions of dollars with no questions asked. We need to know the intent of the exemption. We need clear and meaningful goals, like jobs created and retained. Who benefits and are they in Washington State?"

Perfect timing. Rep. Reuven Carlyle (D-36), who complains that "the default in Olympia is that the exemption will continue almost regardless of the facts on the ground," is introducing a bill tomorrow that would wipe the slate clean and phase out nearly 300 sales and business and occupation tax exemptions (worth about $5.5 billion) that currently have no end dates, forcing the legislature into a debate over whether they're working.[pullquote]"We have a public and moral responsibility to look at both sides of the ledger.”—Rep. Reuven Carlyle[/pullquote]

Carlyle's proposal, co-sponsored by the Democratic house majority leader Rep. Pat Sullivan (D-47) along with Republican Rep. Glenn Anderson (R-5), would repeal a batch of exemptions for nonprofits and state and local government transactions in 2015, and ultimately eliminate all the unlimited exemptions by 2021. (Other groups of exemptions slated for repeal in Carlyle's phased proposal are farm and agricultural business breaks, tax exemptions related to household purchases, and exemptions for health care and low-income households.)

Carlyle stresses that he's not uniformly against tax breaks —"some of them may work"—but says he wants to sunset them, see the analysis on their return on investment, and then have the legislature vote to reauthorize the ones that actually work. His legislation would give reactivated exemptions a 10-year shelf life.

Carlyle has been flirting with this legislation for a year now, but with Sullivan's support, and with Republicans at the table, the legislation is more likely to get a fair hearing, particularly in a session when long-term budget reform has some cachet.

"This is not a partisan, it's math," Carlyle says. "We have a public and moral responsibility to look at both sides of the ledger.”

The bill would require a two-thirds vote to repeal tax breaks, because repealing tax breaks is seen as raising taxes. But Carlyle reasons that since tax breaks are de facto budget line items, restoring them should only require a simple majority vote and their worthiness should also ultimately be decided by a simple majority.

"The fiduciary and philosophical question is whether the legislature is going to analyze and oversee our taxes with the same intellectual rigor we dedicate to spending. Our state’s 567 or so tax exemptions were effectively locked in perpetuity with the passage of [Tim Eyman's two-thirds tax vote requirement] I-1053. I do not believe voters who supported I-1053 believe that tax exemptions should be paralyzed in place for decades to come without any further review."

Thus his plan to sunset them now and force them to be part of the regular democratic process. "This is not a fast play for revenue, this is a larger, long-term solution," Carlyle says. "I want to push back against the idea that exemptions are locked in perpetuity."
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