Senate Ways and Means Committee.
UPDATE, 10:40 p.m., June 28. — Senate Bill 5882 was approved by a 43-5 vote on the Senate floor Friday night, with one change — the “sausage-making” exemption for church organizations, adopted by amendment in the Senate Ways and Means Committee, was stricken. House negotiators objected, as that particular exemption was not part of the deal reached during negotiations this week. The bill then passed the House 66-25. During debate on the House floor, state Rep. Terry Nealey, R-Dayton, said the cost of the tax exemptions during the 2013-15 budget period is $11 million.
OLYMPIA, June 28.—If there was any evidence needed that the “war on loopholes” has fallen flat this year, it came Friday morning as a Senate panel passed a measure that offers business, agriculture and religious organizations some 17 tax breaks worth millions.
Among other things, it appears a full-court lobbying press by business in recent days was successful — Senate Bill 5882 incorporates a “paymaster” measure that averts a whopping tax that might have been imposed on centralized corporate payroll processing services, due to a new interpretation by the Department of Revenue. Other big news is that the measure reflects an agreement to extend a tax break for renewable energy development that was due to expire this year – now the break remains in place through 2020.
All in all, SB 5882 might be considered a routine measure – the sort of omnibus tax bill that always passes in the final hours of a legislative session after a budget agreement has been negotiated. It’s just that the final tax bill of the year puts a wrap on one of the year’s big arguments, and it might have looked mighty different. Democrats came to Olympia in January prepared to wage war on “loopholes” in the name of education and a billion-dollar-or-so mandate from the state Supreme Court to beef up spending on K-12 education. At one point three months ago Gov. Jay Inslee and the majority Dems in the House were advocating that a half-billion in tax breaks be eliminated. Twice that, if you count their proposals to extend beer taxes and continue a business-and-occupations tax surcharge on service businesses that was due to expire. But the largely Republican Majority Coalition wasn’t buying the argument, and the final deal doesn’t end a one, unless you count two tax measures aimed at correcting the effect of court rulings on telephone taxation and the Washington estate tax.
Now it is the stuff of press releases and floor speeches, statements of victory and dismay. Exactly how much Senate Bill 5882 carves out is unclear – bleary-eyed Ways and Means Committee staffers were up all night drafting the bill, and no official fiscal note has yet been released.
Difference in Philosophy
“Cut Tax Loopholes” has been a rallying cry for activists since the recession began five years ago. The Washington Community Action Network spells it out during a demonstration at the Association of Washington Business 2011 fall summit.
As it always has been in this debate that has raged since the start of recession five years ago, justice is a matter of perception. Interests dependent on state spending insist that many of the state’s 640 preferential tax rates and exemptions should be considered unjustifiable loopholes for interests that can afford to hire lobbyists. Beneficiaries argue that they are intended to mitigate inequities in the state tax code, preserve competitiveness or eliminate double taxation, or spur economic development. There are a dozen nuances, of course, and much of the argument hinges on esoteric issues of definition – what is a tax? What is an exemption? How can effectiveness be measured? Could money ever really be collected? And at what cost to the state’s economic growth?
The argument ended for the year in the Ways and Means Committee Friday morning, as the public got the first look at the tax measure. A weary Nick Federici, lead lobbyist for social-service interests and others in the state’s “revenue coalition,” urged the committee to adopt rules that would make tax-exemption performance information public. “We believe that the public ought to be able to understand who is getting exemptions, how much and why – those provisions would improve the legislation, as we are digging a little deeper hole in the budget.”
Responded Chairman Andy Hill, R-Redmond, “We don’t like to think that we are digging a hole in the budget by providing economic growth with exemptions. We are looking at getting some of that transparency language right now, and if you will notice, in all these bills, we have added intent and metrics in all of them, again trying to fall within the spirit of that as well.”
Indeed, it might be noted that nearly all of this year’s tax breaks contain expiration dates. And Amber Carter, point-person for the Association of Washington Business in this most taxing of arguments, credited lawmakers for brokering a reasonable compromise. “We appreciate your energy and enthusiasm about making sure that we have a competitive environment to grow and retain jobs, while also fixing structural deficiencies in the tax code.” She also said the Legislature ought to treat the word “loophole” as an acronym: “Lawmakers’ own oversight, production of headquartered business opportunity, lessons learned and evaluation.”
Thus this year’s battle comes to an end, until debate inevitably is renewed in the 2014 legislative session, or in the 2014 campaign – possibly both. Progressive interests are threatening a complicated initiative-to-the-Legislature that would place an expiration date on most tax exemptions for business, and use spending limits to ratchet down the amount that could be exempted. It is a battle that never ends.
Here’s a look at who wins in this year’s tax bill:
Corporate Payroll Processors – An 11th-hour lobbying effort by business interests turned back a new interpretation by the Department of Revenue that would have imposed the state’s gross-receipts tax on internal corporate payroll operations. Payroll money is generally “passed through” and is not considered taxable when it is processed by third parties, such as payroll services offered by companies like ADP. But the state tax agency, in a review of tax regulations, decided that the exemption does not apply to corporations that provide central payroll services for affliated companies. Had its proposed “Excise Tax Advisory” gone into effect at the end of session, major corporations would have found themselves taxed twice; representatives of some corporations testified that they would have had to engage in costly reorganizations to avoid the tax. The measure clarifies the tax code to indicate that the business and occupations tax does not apply in such cases. An early fiscal note on a previous version of the bill put the cost to the state at $43 million over the next two years, though it is unclear if that money could have been collected, and the figure itself is a matter of dispute.
Renewable Energy Developers – The Legislature four years ago granted a sales tax exemption for equipment purchased for the production of renewable energy – wind, fuel cells, biomass, geothermal, landfill gas, anaerobic digesters and tidal wave power. Developers are currently exempted from 75 percent of sales taxes and the exemption is due to expire July 1. The bill extends the exemption to Jan. 1, 2020. An exemption for small solar projects, also due to expire this year, is extended to June 30, 2018. Value of the two tax breaks totals roughly $4 million over the next years.
Dairy Producers – A B&O exemption for purchasers of dairy products who use them as an ingredient in the production of other dairy products is provided through July 1, 2023.
Beekeepers – A series of tax breaks for beekeepers due to expire July 1 are extended through July 1, 2017. The state Department of Agriculture also is directed create a honeybee workgroup to study ways to encourage the honey beekeeper industry, as a way to combat “colony collapse.”
Gun Clubs – Nonprofit gun clubs get a sales-tax exemption for clay targets they purchase for resale. The exemption expires July 1, 2017.
Restaurants – A sales tax exemption is provided for flavoring products sold to restaurants that are consumed during the cooking process – wood chips, charcoal, briquettes, grapevines and other products. The exemption ends July 1, 2017.
Rural Electric Cooperatives – Non-profit financing organizations are exempted from the B&O tax on loan repayments from rural electric co-ops. The exemption expires July 1, 2017.
Investment Management Companies – Investment management companies are exempted from paying sales tax for certain standard financial data. The exemption expires July 1, 2021.
Dance Clubs – Dance clubs are exempted from paying sales tax on cover charges. B&O taxes will apply, however. The exemption expires July 1, 2017.
Solar Cell Manufacturers – A reduced B&O tax rate for solar-cell manufacturers, due to expire July 1, is extended to June 30, 2017.
Timber Companies – A sales tax exemption for companies that burn wood scraps for fuel – “hog fuel” – is extended 11 years, to June 30, 2024.
Private Aircraft Purchasers – Nonresidents who purchase large private airplanes in Washington, or who make improvements or repairs in this state, are exempted from paying sales tax through July 1, 2024. The bill also clarifies that commercial airplanes stored in-state for more than one year are subject to the aircraft excise tax, rather than the higher personal property tax.
Blood Banks – Definitions for blood-bank B&O, sales and property-tax exemptions are expanded to include companies that test or process blood for blood banks. The exemptions expire July 1, 2016.
Mint Growers – The Washington mint industry, responsible for a third of the nation’s crop, are exempted from sales taxes on propane or natural gas used in mint-oil distillation. The exemption expires July 1, 2017.
Nonprofit Lottery Operators – Prizes worth $10,000 or less are exempted from use taxes when awarded in a game of chance operated by a library or non-profit group. The exemption expires July 1, 2017.
Church Sausage-Makers – Religious groups are allowed to maintain their tax-exempt status when their property is used for a profit-making purpose less than 15 days a year. Called the “sausage-making” exemption by some lawmakers, the exemption is aimed at allowing for-profit sausage-making by church groups.
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