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Governor Leads a New $200 Million ‘War on Loopholes,’ but Will Anyone Follow?

'For the Kids,' Inslee Says – A No From the Senate Majority and a Mighty Polite Response From the Ds

Gov. Jay Inslee.

Gov. Jay Inslee.

OLYMPIA, Jan. 28.—It was déjà vu at the statehouse Tuesday as Gov. Jay Inslee rolled out a new tax proposal that takes a baby-step toward the state Supreme Court’s demand for a $5 billion school-funding plan. Aside from the court order, though, there really isn’t anything new about the proposal – and it appears that the governor is trying to place the age-old war on loopholes back before the Legislature once again.

Whether lawmakers will take him up on it – well, don’t hold your breath.

The Democratic governor is proposing that $200 million in business tax exemptions be whacked. All are old favorites; some of them feature popular targets. There’s the tax break for “Big Oil,” the sales-tax exemption that goes largely to Oregon residents and the trade-in tax exemption that is utilized largely by car dealers — and as is often forgotten, by their customers, too. Even the reasoning is familiar. Said the governor: “This is for the kids.”

Though the governor’s proposal was immediately cheered by progressives, it is looking like a dead duck in the largely Republican-controlled Senate. And there were a few signs that it might not even get that far. Not a single member of the House and Senate Democratic caucuses stood with Inslee at his Tuesday news conference, and a delicately worded statement from Democratic legislative leaders promised only to give the proposal due consideration. They say they are working on school-funding proposals of their own.

In a short legislative session with just six weeks left to run, it’s silly to think the Legislature would renew the tax-break debate, said Senate Ways and Means Chairman Andy Hill, R-Redmond. Especially when every proposal has been debated to death and discarded in previous sessions. “We’ve seen all of these,” he said. “They have all been effectively rejected.” Tax exemptions are one of the most difficult issues for lawmakers to deal with, he said. “You can talk about it a lot, but these are very tough to close, and it takes a while to get there.”

As if to underscore the point, even as Inslee was proposing that old exemptions be ended, Senate Democrats were pushing a new one. They used one of their “pulls” in the Senate Rules Committee Tuesday to advance a new tax-break bill to the floor. SB 5251 would enact a five-year tax B&O exemption for products manufactured in the state of Washington and developed through research at the University of Washington or Washington State University.

A Really Big Mountain

Sign of protest, from 2011.

Sign of protest, from 2011.

In proposing a new whack at tax exemptions, the Democratic governor is renewing a crusade wildly popular among his progressive base. As lawmakers were forced to make deep cuts in state programs during the late recession, labor unions and other interest groups dependent on state spending demanded that business tax breaks be slashed as well. Every two years the state grants business breaks worth $3.4 billion, a big enough target, but the devil has always been in the details. The problem is that the state tax code is an arbitrary creation in the first place, and most of the 640 exemptions and reduced tax rates are designed to make adjustments, for purposes of fairness, competitiveness or to prevent double taxation. Some are designed to provide special favors to specific industries for reasons of policy. Yet after all the agitation of the last decade, after vast amounts of legislative-staff time has been devoted to the subject, only a handful have been recommended for the ax. And those proposals that have made it as far as the Legislature usually have faltered when lawmakers consider the impacts on specific industries.

The governor’s proposal targets seven tax breaks in all. Five were proposed by Inslee last year and rejected; the other two were considered and rejected during the last big war-on-loopholes campaign of 2010. One of them in particular is no surprise: Ending the tax exemption for oil refiners is one of the three top priorities for the Environmental Priorities Coalition, the umbrella organization of 24 green groups that has made the oil industry a top target for years on end.

The only new thing about the argument is the Supreme Court order, which puts pressure on the Legislature this year to find a way to finance its McCleary decision. By the 2017-18 school year, the court wants lawmakers to sustain an additional $5 billion in biennial spending for the state’s K-12 schools. Even if lawmakers were to enact everything on the governor’s agenda, it wouldn’t get them very far. But during his news conference Tuesday, Inslee said it’s a start.

Inslee told reporters, “I’ve had some conversations with legislative leaders urging them to consider immediate action this year. And in my talks with them I have told them exactly what I have told you in the public, that if we don’t take this step this year we will be falling behind the pace we need to maintain to get to that $5 billion mark. Now, the reason it is critical is this. I liken it to climbing a mountain. If you’re going to climb a mountain and get there before it gets dark, and back, you’ve got to hit certain targets to get there on time. Like Mt. Adams, you’ve got to get to the ‘Lunch Counter,’ that’s just below the summit, by noon if you are going to make it. But we are falling behind that pace if we don’t take this action this year.”

Polite Statement From the Ds

Lack of drama: Senate Ways and Means Chair Andy Hill, R-Redmond, says the Senate deserves some credit.

Senate Ways and Means Chair Andy Hill, R-Redmond.

In his remarks to reporters, Inslee appeared to argue that if there is resistance to the proposal, it comes entirely from Republican House members and from the members of the largely Republican Senate Majority Coalition Caucus. “The other party has said they don’t want to spend another dime on our children’s education this year,” he said. “They have said no, zero, not a penny this year. That is the fundamental debate. …The unfortunate situation that I must report to you is that to date, what I have been advised by Republicans is that they intend to resist and fight putting a penny into education this year. I think that is wrong. I think we can do better than that, and we will.”

But Inslee’s proposal seemed only to get a polite thank-you from Democratic legislative leaders, who are being asked by the governor to persuade their members to take a tax vote in an election year – on a proposal that appears to have no chance of passing the Senate. House Majority Leader Pat Sullivan, D-Covington, and Senate Minority Leader Sharon Nelson, D-Maury Island, issued a joint statement: “This discussion shouldn’t be about the Supreme Court; it’s about our children, and making sure they get the best education that we can provide them. We look forward to discussing the specifics of Gov. Inslee’s plan with our own caucuses. While there may be some disagreements over details, there is no debate about the ultimate goal.”

Republican Hill was a bit more blunt. Lawmakers spent half of last year debating taxes, because they had to, and they aren’t eager to do it again. Though the Supreme Court gave lawmakers an April 30 deadline to come up with a long-term financing plan, not even the court is ordering them to raise taxes this year. “I just think that given everything we did last year, and the fact that we have to have 147 legislators and the governor come to an agreement, it doesn’t make sense this year.”

And House Minority Floor Leader J.T. Wilcox, R-Yelm, notes something odd about the whole announcement. Inslee made it on what may have been the very worst day for news media coverage — the same day as a gun-control hearing in the state House that drew enormous crowds, and the same day as the president’s State of the Union address. Everyone knew Inslee was going to propose that the Legislature whack the oil exemption, the one the environmental groups are targeting, because he had said as much in speeches. But no one seemed to be expecting a full-scale reopening of the loophole war. Maybe he didn’t want a lot of attention for it, Wilcox surmises, and was aiming the announcement at his base. “I kind of wonder if they’ll actually file a bill. I am really looking forward to the hearing.”

As with anything at the statehouse, there is a faint aroma of politics about it all. Only two-thirds of Inslee’s spending plan is aimed at satisfying the demands of the Supreme Court. That’s the $130 million that would be spent on school equipment and supplies. The other $74 million would be spent to give teachers a 1.3 percent cost-of-living adjustment, their first such increase since the onset of the late recession. Voters “want to have high-quality teachers in the classroom,” Inslee said. “This is for the kids. This is aimed at the kids, to give them what they need.”

But also, perhaps, the Washington Education Association. Inslee was roasted by the teachers’ union in December when he proposed a skinny supplemental budget and declared teacher pay hikes were a job for 2015. But that can’t be the only issue. Democrats in House and Senate have already signed on near-unanimously to teacher-COLA bills that do the job cleanly, implying they’re looking for a rather smaller fight.

The Hit List

Favorite target: Phillips refinery at Cherry Point, near Bellingham.

Favorite target: Phillips refinery at Cherry Point, near Bellingham.

Whatever the chances for the proposal, business interests are not amused. Kris Johnson, the newly installed president of the Association of Washington Business, said Inslee’s proposals “increase burdens on Washington employers and put them at a competitive disadvantage while doing little to address the long-term funding needs of Washington’s schools. “This might look good, but it won’t get you where you need to go.”

Take the tax on bottled water – which voters resoundingly repealed in November 2010, shortly after passage. During the months it was in effect, one bottled-water manufacturer said he saw sales drop 10 percent, Johnson said. The state estimates it would reap $24 million the first year. Asks Johnson, “With two-thirds of Washington counties struggling with unemployment rates above the national average, do we really want policies that increase consumer prices and make it harder for employers to maintain and create jobs?”

Then there’s the oil industry. Under Inslee’s proposal, the state would tax gases emitted during the refining process that are consumed moments later elsewhere in the same plant. That’s worth $32 million the first year. The argument advanced by Inslee and other critics is that refiners are taking advantage of a tax break that was originally enacted in the ‘40s for the wood-products industry. On the other hand, the oil industry assumed the tax break in its bottom line when it started building plants in this state in the ‘50s. No other state save Alabama imposes a similar tax. Refiners battled the repeal effort all last session; now the fight starts anew. “This is something with no market value,” said Frank Holmes of the Western States Petroleum Association, “and to tax something with no market value doesn’t seem right.”

A similar sense of here-we-go-again is settling over the state’s car dealers. Session after session they have battled efforts to eliminate the trade-in tax exemption, which was approved by voters under a car-dealer-backed initiative in 1984. Under current law, people who trade in a product when purchasing something else don’t have to pay sales tax on the difference. That’s because they presumably paid sales tax already on their original purchase. The consumer tax break is a big driver of sales in the car biz – by itself one of the big engines of the state economy. Inslee’s proposal would limit the tax exemption to the first $10,000 of sales, meaning more-expensive cars would cost hundreds or thousands more. But while it makes cars more expensive, it also gives the state a cool $45 million the first year. Think of it this way, says Vicki Giles Fabre, executive director of the Washington Auto Dealers Association – most buyers finance. “So you are asking a customer to take on more personal debt, essentially to finance the state education budget.”

Truckers would be hit by an extension of the public utility tax to the in-state portion of interstate shipments. That’s worth $34 million the first year.

Stores in border counties would be hit by a sharp limitation on the sales-tax exemption for certain out-of-state residents. The exemption is granted to residents of Oregon and other states with low or no sales tax, when they flash a driver’s license at the cash register – because, presumably, they could stay at home and shop. Inslee’s proposal would make the process more restrictive and cumbersome, requiring them to mail refund requests to the state, refunding only applications for $25 or more, and returning only an amount equal to the state portion of sales tax. The state would reap $30 million the first year.

Purchasers of janitorial services would pay sales tax. That’s worth $20 million the first year.

Resellers of prescription drugs that operate warehouses would lose a special lower business and occupations tax rate. That would raise $16 million.

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