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TAX POLICY, SUBSIDIES & ECONOMIC DEVELOPMENT

As we approach the 2009-2011 biennial budget we are facing the worst budget deficit we have faced in our life times. The current deficit stands at $5.2 billion and is projected to grow even larger as the recession grows over the winter.

While we have a half a billion dollars in the rainy day fund and expect to get FMAP and SCHIP dollars from the federal government for Medicaid and childrenís health programs respectively. And while we expect to receive additional federal dollars to support infrastructure projects and other economic stimulus projects, we are still in an incredible fiscal bind.

Given this fiscal crisis we need to scrub every tax incentive on the books to see whether it holds up to the scrutiny of a recession lens. Those incentives that donít stack up should be closed, the taxes on them collected and spent on stimulating the economy and providing for much needed social services and income and employment for those hard working state workers who provide these services.

For those tax incentives that remain we need to scrutinize them further and add accountability standards, such as apprenticeship utilization, prevailing wages, and health care, wherever we can.

BACKGROUND -- At the beginning of this decade, states were facing their worst financial crisis since World War II. Budget shortfalls from 2001 through fiscal year 2004 totaled approximately $250 billion. Washington state faced multi-billion dollar projected shortfalls in the 2003-05 and 2005-07 biennial budgets. So social service spending was cut to the bone and voter-mandated initiatives to lower classroom sizes and to increase teacher pay were suspended.

As the Legislature negotiates the stateís 2007-09 biennial budget, that picture has changed and the state projects a $1.9 billion surplus. This gives lawmakers an opportunity to mitigate some of the damage from recent yearsí cuts in everything from education, to transportation, to health care.

But now that the budget picture seems less bleak, state legislators must not lose sight of the fact that Washington stateís tax structure remains the most regressive in the country, with the lowest fifth of the population in terms of income paying 18% of their annual incomes in state and local taxes (6 times more than the top fifth of the population). The tax structure relies too heavily on sales and property taxes, which has led to a shrinking tax base (state revenues growing below the growth rate of the economy). Plus, Washington businesses are saddled with an unfair tax on their gross receipts (the B&O tax).

Exacerbating the problem in the past decade were an anti-tax initiative movement (passage of I-695 in 1999 drained $1.2 billion out of the general fund per biennium) and a Legislature that has put 535 tax breaks on the books (more than 170 new tax breaks since 1993) and -- despite recent good news -- you have a recipe for a structural budget gap.

These tax breaks are technically called tax expenditures, they represent taxes not collected (foregone revenue). Rather than collecting these revenues and spending them on education, health care, human services, transportation, etc., these revenues are left in the hands of consumers and businesses to spend as they please. Some of these tax expenditures make a lot of sense, e.g., sales tax exemption on food and prescription drugs. But some make no sense at all, e.g., sales tax exemption on services, and some are questionable, e.g., a high-tech research and development tax exemption that benefits rich corporations like Amgen, Microsoft and Philips.

The business community has been a great supporter of tax breaks for corporations. Those that have created or retained family wage jobs, the Washington State Labor Council has also supported.

But business interests have put up fierce resistance to any suggestion that there ought to be public disclosure of who gets these tax breaks, how much they get and whether they are actually creating family-wage jobs. Business groups have opposed community benefit agreements, which target tax breaks to businesses that agree to hire local labor, pay family wages with health care and pension benefits, pay prevailing wages and offer apprenticeship opportunities. And business groups have fought clawback measures when tax-break recipients donít hold up their end of the bargain.

Instead, their economic development mantra has largely been "give us the money, weíll take care of the rest." When they hide behind the cloak of "proprietary information," they are basically saying, "trust us." Isnít that what the fox said to the hen?

The legislature and the executive branch have far too often gone along with and/or promoted this mantra. Afraid to raise taxes, afraid to close tax breaks, and only after decades lobbying by the labor community, have they begun to include some disclosure and accountability standards into the equation.

State government has created a recipe for fiscal paralysis on the revenue side of the equation. Lawmakers have proven willing to subject the spending side of the fiscal equation to the "Priorities of Government" model until health and human services are cut to the bone, but are unwilling to subject the revenue side of the equation to the same model.

All together, the stateís existing 535 tax breaks represent 130% of our biennial budget. That is close to $30 billion in tax expenditures. While most of this either could not or would not be collected, there are billions of dollars that could be collected and better spent on building our stateís educational, social, health care and physical infrastructure.

This is a better way to a stronger economic climate.

LABORíS POSITION -- Washington state has a handful of economic development programs housed in the Department of Community Trade and Economic Development, and tax policy (revenues collected and revenues not collected) to help encourage economic growth. The underlying premise for these tools ought to be what gives the best social rate of return to taxpayers in the state of Washington.

For example, is it better to give a particular targeted tax break or is it better to spend that money on health care? And if it is better to give the targeted tax break than what is the quid pro quo to taxpayers of Washington?

After several years of WSLC-supported efforts to create accountability, the 2006 Legislature finally approved legislation to conduct "performance audits" of tax breaks to help determine whether they are achieving their objectives. Although the WSLC would have preferred such reviews happen more frequently than the 10-year intervals outlined in the legislation, itís a start. Perhaps more disturbing was the number of tax exemptions excluded from scrutiny, including breaks for manufacturing equipment and construction, research and development, and testing.

In the 2007 legislative session the WSLC is urging legislators to pass a bill to require a tax expenditure report alongside the budget, so that the cost of tax preferences are weighed fairly and directly against public investments we could make in high priority areas like education, health care and public transit; approve a new surcharge on the enormous profits of big oil companies and use the funds to relieve the financial strain of high energy costs on public goods and services and invest in clean energy alternatives; and assure that changes to the property tax both provide a sufficient local tax base (which a 1% cap would not) and make the tax fairer for lower-income homeowners.

But in the medium and long run, to get a real handle on our structural budget gap, organized labor supports far more substantive tax reform in Washington state. The Washington State Labor Council supports a reformed tax system that is fair, stable, transparent and sufficient to pay for the public investments needed to create opportunity and security for all state residents.

RECENT LEGISLATIVE HISTORY

1989 -- The Washington State Compact was first introduced (and again introduced in 1991 and 1993), which would, in various forms, have required businesses that apply for public assistance like grants, loans, development subsidies and tax deferrals to agree to some social and economic standards including basic health care coverage for employees and wage levels no less than the stateís average wage. All failed.

1996 -- SB 6479, the Corporate Welfare Reform bill, would have required establishing job creation/maintenance, wage and benefits standards for businesses that receive tax breaks and incentives. Passed Senate, amended in House to set up an advisory committee to establish "goals" (but not enforce them), but was never voted upon.

1997-- Legislators were vilified for creating a funding package for a new Seattle Seahawks stadium, but unnoticed tax breaks include $20 million for soda pop manufacturers, $6.5 million for warehouse and grain operators, and $1.1 million for coin-operated car washes.

2000 -- SB 6541 would have required the Department of Community, Trade and Economic Development to publish an annual report listing subsidies, tax cuts, or other incentives offered to private business by state and local governments. It died without a hearing.

2003 -- HB 1869, in its original form, would have subjected tax expenditures to review by a legislative committee. Gutted and passed the House.

2004 -- HB 2762 provided mandatory disclosure and accountability standards for tax expenditures; HB 2654 required a tax expenditure report as part of the biennial budget process; and HB 2930 set a cap on tax expenditures. All three bills received hearings, but were not voted upon.

2005-06 -- HB 1069 requires tax breaks to undergo "performance audits" to see whether they are achieving their objectives. In 2005, it passed the House, but not the Senate; but in 2006 it passed both houses, and was signed into law.

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