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Rep. Carlyle Takes Another Swing at Tax Incentive Disclosure Law

Under a proposal from House Finance Chairman Reuven Carlyle, D-Seattle, any publicly held business claiming a tax exemption in Washington state worth more than $10,000 better be prepared to tell the public how much they’re claiming.

It’s a tricky prospect for many businesses concerned about disclosing proprietary information about their operations, such as data that people could use to discern salary and benefit levels, but Carlyle argues is sorely needed so the public can understand just how large the tax burden is on corporations seeking and relying on exemptions.

Rep. Reuven Carlyle, D-36

House Finance Chair Reuven Carlyle, D-Seattle

Carlyle is a one-man wrecking ball when it comes to the state’s system of tax exemptions, and this is his second swing at the disclosure legislation. He introduced it last year, navigated it through the House, but saw it fail in the Senate. His current bill, HB 2134, is set for an 8 a.m. hearing before his Finance Committee Friday morning.

His point: Washington has about 650 tax exemptions on its books, some dating back decades, some very new, and the Legislature and the public needs better tools to gauge their effectiveness.

A Republican counter-point: If the legislation is the first step to a systematic overhaul of the use of tax incentives, as Carlyle has often said is his intention, and begins targeting some for elimination, is it a tax “break” if it only keeps rates on a competitive scale with other states?

Some of the preferences are well-publicized, such as the $8.7 billion in tax incentives Boeing and other aerospace firms secured in 2013, for example, or the retails sales tax exemptions on food and food ingredients. Others are far more obscure: the state can exempt taxing the sale of electricity to a “chlor-alkali electrolytic processing business or a sodium chlorate electrolytic processing business.”

Carlyle’s proposal wants to sweep all of them into a new phase of disclosure, increasing reporting standards companies have with the Department of Revenue, including the value of the preferences, streamlining the reporting surveys, and finally offering up some of the information for the public via request, or on the department’s website.

Carlyle did not return a phone call seeking comment Thursday, but leadership among the House and Senate Democratic caucuses said they’ll support it. Gov. Jay Inslee said he hadn’t had a chance to review it.

“We do need accountability and transparency to see if they’re creating living wage jobs,” said Senate Minority Leader Sharon Nelson, D-Maury Island.

But Amber Carter, a lobbyist with the Association of Washington Business who works on tax and fiscal policy, said the proposal raises privacy and competitiveness issues. The reporting under Carlyle’s bill would be more specific than the aggregate data that’s required to be reported to the Department of Revenue currently.

“The bill increases the amount of data that would be required,” Carter said. “Which raises concerns both on the regulatory burden and on privacy. The bill calls for very granular levels of data, which is very concerning for the business community.”

Moreover, Carter said the state implemented significant reforms of new tax incentives in the 2013 legislative session, when the Legislature passed bills that put expiration dates on the preferences, require intent language, and require performance statements. The amount of tax exemption claimed has to be reported to the Department of Revenue, but is not subject to public disclosure.

That only applies to new incentives, not the hundreds already in existence, but Carter said the state needs to be more selective in prioritizing and characterizing the exemptions that need serious evaluation and discussion. The merits of the sales tax exemption on food is well known enough that it doesn’t need any additional research, she said.

“There are hundreds on the books that have not been reviewed, discussed or classified,” Carter said. “Focus the energy on those that need the heightened level of scrutiny.”

Steve Zemke, director of Seattle-based Tax Sanity, said the state has to address the effectiveness of its system of tax preferences, and Carlyle’s bill is a good next step in that process. Eventually, Zemke contends it should identify incentives for elimination, and as any veteran of the Legislature could tell you, there’s few aspects of politics more cut-throat than aiming to kill a tax exemption.

Some businesses do have to have them to survive in highly competitive markets, but others probably don’t. All are fiercely protective of the exemptions. Inslee took office saying he wanted to raise revenue to satisfy the state Supreme Court’s McCleary decision by eliminating the incentives, but couldn’t get the Legislature to go along.

In his budget for the 2015-17 biennium, he proposed raising $282 million in revenue by closing five tax exemptions. Compare that to the $1.5 billion in new revenue he proposed for the operating budget, including $1.2 billion from a combination of implementing a capital gains tax and a cap-and-trade program.

“I think it’s an emerging problem that the state needs to address,” Zemke said. “To me, it’s astounding that we don’t have more accountability.”

And, Zemke pointed out that Supreme Court Justice Charles Johnson specifically singled out tax exemptions as a potential source of McCleary funding if the Legislature can’t adequately supply the dollars needed this year.

“The state Supreme Court could very well look at this,” Zemke said.

In contrast to last year’s session, Carlyle also has a Republican co-sponsor on his legislation, Rep. Matt Manweller, R-Ellensburg. Manweller said he supports streamlining the process as well as offering firms a second chance to qualify for exemptions if they make a mistake on their initial paper work. That’s currently barred, he said.

He said he shares the concerns over privacy, but felt he could work with the proponents in addressing that throughout the legislative process. Carlyle has called those concerns off base. More importantly, Manweller said he wants to see metrics put on the exemptions to gauge their effectiveness.

“I believe we have to have some accurate metrics on the tax exemptions that we adopt in the state,” Manweller said. “I won’t be legislating in the dark, and so often I feel like I am legislating in the dark.”

But Carter offered the argument that the state should identify the most significant underlying questions about its tax preference system before moving any further ahead in changing the system.

“The policy question is, ‘What’s the underlying purpose of the tax incentive?’ and why impose a review process before that question is answered?” Carter asked.