Article by Erik Smith. Published on Monday, February 15, 2010 EST.

Business Interests Denounce Dem Plan to End Tax Exemptions – Hits Ports, Shippers, Aviation, Border Towns and Tax Planners

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Feb. 14.—Democrats have finally rolled out their plan to close tax loopholes, and the howling from business can be heard from the state Capitol to Walla Walla.

            Democrats hope to raise $350 million by ending special tax breaks for business, part of their plan to dig themselves out of a budget hole now estimated at $2.8 billion.

            But a packed hearing on the proposal Saturday in the state House demonstrated that they will face stiff opposition from some of the state’s largest businesses and lobbying organizations. House Bill 3176 eliminates 14 tax exemptions granted to business by state law. Among other things, it would:

n                  Impose a tax on trucks and trains carrying goods between Washington ports and the East,

n                  Dramatically increase taxes on private aircraft,

n                  End sales-tax exemptions for Montanans, Alaskans and Oregonians who do their shopping in this state,

n                  And give the state Department of Revenue authority to reject what it sees as business tax dodges.

            The loophole attack is a central element in the budget-writing strategy of the majority Democrats in the state Legislature this year. The state offers some $3.2 billion in tax breaks to business, usually with some sort of economic goal in mind. But every dollar lawmakers can save this year by closing a loophole is a dollar that won’t have to be raised in taxes. That idea has appeal to lawmakers who have to find some way to close this year’s gap. “I think the Legislature ought to reserve the right over time to look at tax exemptions that made sense for economic development at the time they were passed,” said House Finance Chairman Ross Hunter, D-Medina.

But lawmakers were reminded Saturday that one person’s loophole is another’s vital economic-development tool. Business interests came to the hearing in force – some 300 people signed up to testify on the loophole bill alone. They argued that ending tax exemptions is just another way to raise taxes, and they said the plan would stifle economic recovery at a time when the state needs it the most.

            Most of the proposals, safe to say, are ones that haven’t gotten much attention so far – but they’ll bring out a full-court press of lobbyists in the final weeks of the 2010 legislative session.

            Dot Foods Only a Small Element

            Most attention has gone to a single proposal – a plan to deep-six a Supreme Court decision last year that handed the state a $154 million bill. The decision in the Dot Foods case, prompted by a lawsuit from an Illinois food wholesaler, applies to all out-of-state wholesalers doing business in Washington through “sellers’ representatives.” The court ruled that the state had implemented an obscure tax break too narrowly. The state can’t avoid paying $59 million in refunds. But if the state ends the exemption by July 1, it can avoid losing another $95 million in tax revenue over the next year.

            That may be the only idea in the bill that enjoys clear bipartisan support. Democrats and Republicans have been talking about closing the loophole since last fall.

            But even that isn’t simple. There was a reason for the original tax break, which aimed to reduce the burden on salespeople for organizations like Mary Kay Cosmetics. Mark Johnson, speaking for the Direct Sellers’ Association, urged lawmakers to retain the original idea, which would cost only a few millions.

            “This will cost jobs, B & O and sales tax,” he said. “There are over 388,000 direct sellers in the state of Washington, 355,000 of which are women. They are trying to make ends meet by selling things part-time and making a little extra income in these tough economic times.”

            He said lawmakers certainly can find a way to take the break away from Dot, but leave it for Mary Kay.

            Watch Out, Walla Walla!

            The plan has huge impacts for business in Spokane, Walla Walla and Vancouver. Right now residents of Oregon, Montana, Alaska and other states and provinces without sales taxes can shop without penalty in Washington. That out-of-state business is a major factor in cities that lie along Washington’s borders. Johnson told the committee about a business in Walla Walla that gets 25 percent of its traffic from Oregon residents. By ending the sales tax exemption, Democrats hope to raise $41.5 million. But they are assuming out-of-state shoppers would continue spending in Washington, where costs would suddenly be dramatically higher.

            Taxing World Trade

            One reason forecasters think economic recovery will be faster here than in other states is an expected quick rebound in world trade. Ports in Seattle and Tacoma provide the second-biggest terminal for international shipments on the American west coast, behind Los Angeles. From Puget Sound, goods are whisked by truck and train to points east, and back again. Those interstate shipments are currently exempted from Washington utility taxes, as a way of stimulating lucrative port traffic. Port officials and representatives of transportation companies said they are dumbfounded that the new proposal puts Washington ports at a disadvantage. The plan would impose the utility tax on the portion of long-haul interstate shipping that takes place in Washington state, raising $15 million a year.

            Shippers can always go somewhere else, said Seattle port commissioner Bill Bryant. “If we don’t nurture our competitiveness the way the British Columbians are and the way they are in the Southeast, if we allow that to happen, then we will find ourselves possibly without cargo, without revenue, or without jobs.”

            Not the American Way

            A simple change in the law would have big implications for any business that manages its affairs to pay as little tax as possible. The state Department of Revenue would be allowed to disregard transactions in which the only goal is to avoid state taxation. More ominously, as far as business interests are concerned, the state Department of Revenue would be allowed to decide which businesses are trying to evade taxation.

            The change would raise $13 million, but business interests say it’s not the American way. Business has a right to structure its own affairs as long as it obeys the law, said Mike Bernard of Bellevue. If there’s a dispute – that’s what courts are for. “You’re basically telling me what I do, which is state and local tax consulting, is somehow evil and shouldn’t be done. First of all, tax planning is legal, ethical, and responsible, and this bill, in its avoidance provision, would severely limit the ability to do that,” he said.

            Hold Your Jets!

            The general aviation industry, hard-hit by the recession, would be hit with a 1,400 percent tax increase, lawmakers were told. The plan replaces a special aircraft excise tax with a tax based on aircraft value, to generate $6.3 million. That’s one more nail in the coffin of private-plane ownership and the charter-flight business, said aviation representatives. Already many planes have been grounded because of the economic downturn, and if Washington raises taxes, many operators may just move their planes out of state.

            “The real punchline today is jobs,” said John Dobson of the Washington Pilots Association. “The state has lost 35 percent of its revenue derived from aviation. Our projections indicate that this excise tax will not add any revenue. In fact, this will cost another 15 percent, and that means fewer aircraft and fewer aviation-related jobs in the state.”

            Just the Start

            Other key elements of the Democratic loophole proposal would raise business and occupations taxes for gold-coin and bullion dealers, and require banks to pay real estate excise taxes when foreclosing on property. Curiously, one of the biggest proposals received no testimony at all at Saturday’s hearing. That would extend the state B&O tax to a larger number of out-of-state companies doing business in Washington, raising $73 million.

            Those firms will get another chance. Hunter said he plans additional hearings on the measure before it emerges from committee.       

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