Transparency matters: States like Washington need to adopt a tax expenditure budget

Edi­tor’s Note: On Thurs­day, Jan­u­ary 18th, the Wash­ing­ton State Sen­ate Ways & Means Com­mit­tee heard tes­ti­mo­ny on an impor­tant bill that would imple­ment one of NPI’s 2018 leg­isla­tive pri­or­i­ties… a tax expen­di­ture bud­get. NPI Advi­so­ry Coun­cil Mem­ber Steve Zemke (also a found­ing mem­ber of NPI’s Board), spoke in favor dur­ing the pub­lic hear­ing, explain­ing why this leg­is­la­tion is sore­ly need­ed. The fol­low­ing are Steve’s edit­ed remarks from that pub­lic hearing. 

Madam Chair, Mem­bers of the Committee:

Thank you for this oppor­tu­ni­ty to tes­ti­fy on this legislation.

This is the fifth year this bill has been before you, and each year it picks up addi­tion­al sup­port. SB 5513 has four­teen spon­sors and its com­pan­ion bill in the HB 1500 has thir­ty-three spon­sors. This is almost one third of our state legislators.

Leg­is­la­tion to cre­ate a tax expen­di­ture bud­get is sup­port­ed by a grow­ing list of groups in our state, including:

• Wash­ing­ton State Bud­get and Pol­i­cy Center
• All in for Washington
• Wash­ing­ton State Labor Council
• League of Women Vot­ers of Washington
• Washington’s Para­mount Duty
• Wash­ing­ton State Demo­c­ra­t­ic Party
• Wash­ing­ton Edu­ca­tion Association
• SEIU 775NW
• North­west Pro­gres­sive Institute
• Wash­ing­ton Fed­er­a­tion of State Employees
• Wash­ing­ton State Coun­cil of Firefighters,
• Faith Action Network
• Puget Sound Advo­cates for Retire­ment Action

… and others.

Why are these groups sup­port­ing this leg­is­la­tion? Because they believe that a sys­tem of tax expen­di­tures that gives away more in rev­enue from the tax base than it col­lects is a bro­ken sys­tem. They believe that tax exemp­tions need trans­paren­cy and account­abil­i­ty and fair­ness. That does not exist now.

Tax exemp­tions, pref­er­ences, deduc­tions, cred­its, and defer­rals are off-bud­get expen­di­tures. They lack the trans­paren­cy and account­abil­i­ty that exists for oth­er expen­di­tures the state makes as part of the bien­ni­al bud­get process.

Accord­ing to the Depart­ment of Revenue’s pro­jec­tion in their 2016 Tax Exemp­tion Report for the 2015 to 2017 bien­ni­um, the state is antic­i­pat­ed col­lect some $7.4 bil­lion in busi­ness and occu­pa­tion tax­es but exempt from the same tax base some $11.4 bil­lion. This gap has widened since the last biennium.

Includ­ing the rest of the tax exemp­tions in their report, the Depart­ment of Rev­enue pro­ject­ed that off bud­get tax expen­di­tures would total almost $40 bil­lion while only col­lect­ing rev­enue total­ing some $32.6 billion.

Of the six hun­dred and nine­ty-four tax exemp­tions in that report, about four hun­dred and fifty are dis­cre­tionary. The Depart­ment of Rev­enue pro­ject­ed that in the 2017 to 2019 bien­ni­um that of the $54 bil­lion in pro­ject­ed tax expen­di­tures, some $30 bil­lion would fall into “poten­tial rev­enue gains”.

This leg­is­la­tion does not man­date whole­sale repeal of tax expen­di­tures. It asks for account­abil­i­ty and trans­paren­cy and bien­ni­al review, and helps the Leg­is­la­ture end exemp­tions if they do not meet the pri­or­i­ties of gov­ern­ment — as with expen­di­tures in the reg­u­lar bien­ni­al oper­at­ing bud­get or sup­ple­men­tal budget.

Con­cern about the cur­rent sys­tem includes a quick­ly dat­ed tax exemp­tion report by the Depart­ment of Rev­enue that is only updat­ed once every four years.

Most oth­er states in the coun­try update their report every two years or less. Cal­i­for­nia updates their Tax Expen­di­ture Report every year.

Com­pa­nies like Microsoft, Star­bucks, Expe­dia, Adobe and Boe­ing all must report to their stock­hold­ers every year and issue quar­ter­ly prof­it and loss state­ments. Their finan­cial state­ments are scru­ti­nized by their stockholders.

It does not make sense that Wash­ing­ton State only updates its Tax Exemp­tion Report every four years. It will next be updat­ed in 2020. It should at a min­i­mum be updat­ed every two years, just as the state bien­ni­al bud­get is..

Only sev­en­ty-three of the six hun­dred and nine­ty-four list­ed exemp­tions in the 2016 Tax Exemp­tion Report have sun­set pro­vi­sions.

This means 89% of the tax expen­di­tures have no sun­set pro­vi­sion, and nev­er require the Leg­is­la­ture to ever vote on them again. Mean­while, all expen­di­tures in the reg­u­lar oper­at­ing appro­pri­a­tions bud­get are scru­ti­nized and vot­ed on every two years with adjust­ment made in the sec­ond year of the biennium.

Also, in the tax exemp­tion report, fifty-four exemp­tions are list­ed as “unable to dis­close” the amount of rev­enue involved. Busi­ness­es and oth­er enti­ties are ben­e­fit­ing from state tax law in get­ting exemp­tions and low­er or no taxes.

The pub­lic has a right to know the val­ue of these exemp­tions. The pub­lic has a right to know that these exemp­tions are cre­at­ing jobs or pro­vid­ing valu­able ser­vices to Wash­ing­ton State cit­i­zens just as they expect expen­di­tures in the reg­u­lar bud­get appro­pri­a­tions bill to produce.

We require that account­abil­i­ty in the reg­u­lar bud­get appro­pri­a­tions process – we don’t say we’re spend­ing state rev­enue, but the pub­lic doesn’t have the right to know because the recip­i­ent doesn’t want us to know what they are get­ting.

With the cur­rent lack of account­abil­i­ty and trans­paren­cy and sound fis­cal review and eval­u­a­tion as to whether cur­rent tax expen­di­tures meet the state pri­or­i­ties of gov­ern­ment and have clear mea­sur­able objec­tives as to their effec­tive­ness in meet­ing state needs, tax­pay­ers and cit­i­zens in this state increas­ing­ly believe state gov­ern­ment and the leg­is­la­ture are not doing their job.

Please step up and vote to fix this bro­ken tax expen­di­ture sys­tem that severe­ly lacks need­ed trans­paren­cy, account­abil­i­ty and sound fis­cal man­age­ment of our total state budget.