War on Loopholes Will be Tested With Unexpected Advisory Vote – Mortgage Tax Goes to Ballot

Forgotten Initiative Requires a Pair of Votes No One Demanded, Except Maybe the Public – Interest Groups Caught by Surprise

Seen at a Washington State Labor Council protest last year.

OLYMPIA, July 31.—Washington voters will have two more choices to make this fall, state elections officials announced Monday, and even though neither vote will actually decide anything, one of them may tell lawmakers what the public really thinks of the War on Loopholes.

It is an unexpected turn of events – a pair of votes nobody was expecting, prompted by an initiative nearly everyone had given up for dead. The first-ever statewide advisory votes won’t change a thing. Yet one of those votes at least will gauge the public mood on an issue fraught with significance at the state Capitol – the crusade against corporate tax breaks that has been mounted by labor organizations and activist groups. Their biggest target was a banking tax exemption that lawmakers ended this session after years of agitation. Now voters will get their say.

There’s no telling whether anyone will bother running a campaign – already the banking industry is saying it’s going to sit this one out. Calls by Washington State Wire late Monday afternoon to other players elicited mainly surprise. And perhaps the only one who isn’t surprised is Tim Eyman, the professional initiative promoter who got I-960 to the ballot back in 2007, and who has been telling elections officials for months that a public vote is required on this year’s tax increases.

“Two of them!” he said. “Two of them, yes!” He added, “The thing I’m most excited about is that legislators now know that this is what happens when they unilaterally increase taxes in Olympia.”

Unexpected Test for Loophole Crusade

Members of Fuse Washington stage an elaborate protest on the steps of the Temple of Justice in 2011.

An advisory vote also will be held on a non-controversial bill that extended taxes on wholesale petroleum products. But of the two the bank-tax measure is by far the more important. The vote will be a test of popular support for a cause that has energized “progressive” groups for several years now – a crackdown on the $4 billion or so in tax breaks Washington extends to business every two years.

Ever since recession hit, the critics have been calling for repeal or reduction as an alternative to big cuts in state spending. Some protests have drawn thousands. Many Democrats have taken up the battle cry, introducing bills that would reduce all business tax breaks by a certain percentage, for example, or hinting at a possible initiative. All that has stood in the way of a mass repeal effort are initiatives like I-960 and its successor, I-1053, which require a two-thirds vote of the House and Senate for tax increases. Whenever the initiatives are in force, Republican votes are required, and those tax votes don’t happen very often.

Of all the exemptions on the hit-list, in the last two sessions only one has been curtailed. That’s the banking exemption from B&O tax for interest on residential first mortgages. Lawmakers this year voted to end the exemption for banks doing business in 10 states or more. That means banks like Bank of America, Chase, Citibank, Key Bank and Wells Fargo, which write about 70 percent of home mortgages in this state. The argument was that state review panels could find no evidence that the tax break was stimulating lending – though of course the fact that big banks are a favorite political target these days may have had something to do with it as well. Republicans, meanwhile, had political reasons for offering their votes. The bill passed both chambers with a two-thirds vote, in the Senate by 35-10, and in the House 74-24.

Not that the tax increase did much to bail the state out of its multi-billion-dollar budget trouble. The mortgage business is in the doldrums, and by ending the exemption the state will raise just $14.5 million during the current fiscal year. Previous estimates, from the years in which business was going gangbusters, had indicated the state might raise as much as $176 million every two-year budget cycle.

No Participation From Banks

It’ll probably be the quietest campaign you’ll see this year. No TV ads, no mailers, nothing – except a few pages in the voters’ pamphlet, as required by the initiative. Bankers weren’t keen on the tax increase, but they were just as surprised as everyone else to hear that the measure might be heading for the ballot.

James Pishue, president of the Washington Bankers Association, said it’s a measure his group didn’t ask for, and won’t be supporting with a campaign.

Said Pishue, “Obviously, while we are very concerned about the tax structure of the banking industry in our state, we recognize that the Legislature did their job, we worked it hard, and obviously we came up on the short end of that issue. But we have no intention of participating in the advisory vote and getting involved in that. We respect the legislative process, and it is what it is, and that has always been our focus and will continue to be our focus.”

The banking industry has a rather different position on the tax exemption, of course, and certainly wouldn’t call it a loophole. The exemption is unique in the country, but so is Washington’s tax code. Washington is among the handful of states that does not have an individual or corporate income tax, and instead it levies its unique business and occupations tax on gross receipts. For the last 42 years, ever since the B&O tax was extended to banks, the banking industry maintains that the exemption for mortgage interest has mitigated for a tax structure that ignores profitability, thus encouraging the flow of credit to this state. Bankers say that is a benefit to consumers, not to banks’ bottom lines. “The added expense now of a mortgage is going to get passed on to the consumer,” Pishue said.

The exemption was retained for smaller community banks, though of course they could fall under the crosshairs in upcoming sessions. The advisory vote, while it doesn’t carry any weight, offers a most interesting test, said Brad Tower of the Washington Community Bankers Association. “If it is not worked by either side, it could be a pretty clear indication of the general public’s appetite for what is being called closing loopholes, but what is in fact a policy of raising taxes on a product that is consumed by the general public,” he said.

Form Not Clear

At this point it’s not clear what form the ballot measure will take. The bank tax was contained in a measure, SB 6635, that also reduced taxes for other industries. So it is uncertain whether voters will be asked to cast an advisory vote on the entire bill, or just on the portion that raised taxes. The attorney general’s office still must write a “short description” for the ballot.

Aaron Ostrom, executive director of Fuse Washington, one of the activist groups at the forefront of the War on Loopholes, said, “The public will be very happy to close the big bank tax loophole, unless [Attorney General Rob] McKenna really slants the ballot title to help Eyman and the banks, or the banks spend a ton of money spreading misinformation about it.

“It is a significant waste of public funds to seek an advisory vote on these laws which were overwhelmingly approved by legislative supermajorities.”

The other tax measure, HB 2590, doesn’t pose any confusion. Only one item was included in that bill. The measure actually reduced the tax rate on petroleum products for a state program that provides liability insurance for underground storage tanks, but because it extended the expiration date for the program from 2013 to 2020, the measure is considered a tax increase. That measure generated no controversy: It passed the Senate 40-0 and the House 93-1.

About all that is certain at this point is that the Secretary of State’s office will be adding a new type of ballot measure this year as ballots are printed — joining initiatives, referenda, joint resolutions and so forth. These will be called Tax Advisory Proposition No. 1 and No. 2.

A Forgotten Initiative

The advisory votes are being prompted by an initiative that seemingly just about everyone forgot. Initiative 960, passed by voters in 2007, was one of the long series of ballot measures that have imposed the two-thirds-for-taxes rule on the Legislature over the last two decades. That game-changing rule has forced majority Democrats to negotiate with minority Republicans whenever it is in force, making tax increases difficult if not impossible. Lawmakers have regularly deep-sixed the initiatives whenever it becomes feasible to do so – after two years it becomes possible to modify an initiative with a majority vote.

That’s what happened with I-960. Majority Democrats in 2010 disposed of the measure after one of the longest and loudest debates in legislative history, and promptly passed a multi-billion-dollar tax increase. Voters responded later that year by passing I-1053, an almost-identical copy of the earlier initiative. But the key thing is that lawmakers didn’t repeal I-960 – they merely suspended it, which made that vote a little easier to take. S0 the measure quietly came back into force in July 2011, virtually unnoticed in the shadow of its younger cousin. One of the unique requirements of that measure was that if the Legislature found the votes to pass a tax increase, the matter had to go to the ballot for an advisory vote. And it appears there was no awareness of the matter. As lawmakers debated the two relatively small tax bills this year, not a word was mentioned about the possibility.

The moment this year’s session ended, Eyman began reminding state officials about the rule. The law required the attorney general’s office to make a determination by Aug. 1. Thus it came to pass: The attorney general’s office notified the Secretary of State’s office Monday that the session’s two tax bills had to be placed on the ballot.