Upcoming Conference | 2018 Re-Wire Policy Conference, Dec 13, 2018 Register

Will This Finally be the Year for a Loophole Initiative?

Steve Zemke of TaxSanity.org.

Steve Zemke of TaxSanity.org.

OLYMPIA, May 7.—As the “war on loopholes” enters its zillionth year in the Legislature, seeming pretty much like a debate about the weather – people talk and talk, but nobody ever seems to do anything about it – the rumblings about an initiative from the state’s progressive community seem to be getting louder.

The former chairman of the King County Democratic Party says he is getting set to run an anti-loophole initiative. Normally that wouldn’t be worth much ink. Talk is cheap, and a final initiative hasn’t been filed. Except that Steve Zemke, the principal in a loose-knit organization calling itself Tax Sanity, has a long track record in initiative campaigns. He has already filed one initiative on the subject this year, and he is circulating a new draft in progressive circles. But the more important point is that some sort of ballot measure on the subject has been expected for years. The question hasn’t been whether something would be filed, but rather who would do it.

And now here’s Zemke. “Everybody says yes, we should do something, but then nobody does anything,” he says. “And so I am trying to get the word out that yes, we are going to do something. I sense that if we get the right measure out there, it is going to take off and give people something positive to work for, rather than just saying oh, we need to raise revenue, or we need to cut exemptions, and it all depends on the Legislature doing it.”

Zemke says he plans to file an initiative to the 2014 Legislature that in a sense would force lawmakers to re-enact every tax break on the books, every time they pass a budget. It gets a little complicated, but whether it would really mean much is an open question. A bill that appears to have bipartisan support in the Legislature this year might actually have a greater impact, by imposing an automatic expiration date on every new tax incentive the Legislature passes. A version passed by the House April 26 gives tax breaks 10 years to live. But in a year when the governor and his fellow Democrats in the House are thundering about tax breaks and are proposing that a half-billion dollars’ worth of business incentives be eliminated, the possibility of an initiative can be taken as another sign that activity is quickening on the issue. “I’m just surprised it has taken this long,” says Patrick Connor of the National Federation of Independent Business.

War on Loopholes

Snapped at the April 2011 labor rally at the Capitol steps.

Snapped at the April 2011 labor rally at the Capitol steps.

It is one of the longest-running arguments at the statehouse, and one that has raged front and center since the 2009 session, when tax revenues tanked and lawmakers were forced to cut state programs and hold the line on state-employee salaries. Labor unions and activist groups say business gets away with murder. There are 640 tax breaks on the books worth somewhere north of $100 billion every two years. Most of that represents taxes the state could never collect, because of prohibitions in state and federal constitutions – there are no taxes on church property, for example, and the state can’t tax interstate commerce. There are some tax breaks no one would dream of challenging, for political reasons – take the sales tax exemption for food. And there are some tax exemptions that aren’t officially considered tax exemptions, and so no one ever talks about them – like the fact that labor unions don’t pay business and occupations tax on membership dues and fees. That tax break saves labor roughly $9 million a year.

The debate focuses instead on a tiny sliver of the 452 tax breaks the state actually can do something about. That’s the $3.4 billion in exemptions and preferential rates the state grants to business every two years, for everything from fish cleaning to Christmas-tree farming and the sale of human body parts. Whether they are really “loopholes” is a matter of perception – there was always some sort of reason for them in the first place, either a matter of inequitable taxation or an economic development purpose. And whenever there is a proposal to end one, you can be sure there will be an interest that will vigorously make its case. The Legislature has established an elaborate review process, using a citizen’s commission and its own Joint Legislative Audit and Review Committee. But only a handful have been repealed, while lawmakers keep passing them. And really there is nothing new about this story, except that this year the rhetoric has grown painfully loud. You could hear Gov. Jay Inslee, for instance, telling a teacher’s-union rally two weeks ago, “Our paramount duty is to our kids – not to tax breaks.”

At Long Last, an Initiative?

While lawmakers debate, Zemke says he doesn’t think they’re capable of dealing with what he considers one of the biggest problems in state government today. “They all look and say, gee, if I try to get rid of this exemption, then they’re going to spend money against me when I run next time. Well, I don’t have to worry about that, and neither do the citizens. We’re not running for office – we’re running a measure.”

For years some sort of an initiative has seemed just around the corner. At every Capitol-steps rally staged by the state Labor Council there have been protest signs denouncing loopholes, and there have been entire press conferences devoted to the subject. Activist groups like FUSE Washington have horrified the faithful with tales of tax exemptions. Senate Democrats in 2011 even announced plans to run a referendum repealing a series of tax breaks, but that effort fizzled for lack of votes.

Last year, Zemke says the Economic Opportunity Institute, a liberal think tank, convened a working group to consider an initiative, but it went nowhere. And he says he’s tired of talking things to death. “I was a member of the Tax Fairness Coalition when they were in existence for about five years, and it was a frustrating thing, because they wanted to wait until they had the winning issue, so to speak. And I work differently, in the sense of figuring that you have an issue and you build support by working something like an initiative. You give people something to rally around, rather than saying we need to wait until the people are with us. The thing is that by doing a measure you bring the people with you, by focusing on what the issue is and getting it out there.”

Zemke is a veteran of many progressive-themed initiative campaigns. He ran the campaign for I-394 in 1981, the “Don’t Bankrupt Washington” measure that required voter approval for new nuclear-project bonds. He directed the signature drive for I-97 in 1988, which launched the Model Toxics Control Act, and for I-99, which created the state’s now-suspended presidential primary. He was campaign director for I-688 in 1998, which gave this state the highest minimum wage in the country. And his losses include I-547 in 1989, which led directly to the Legislature’s passage of the Growth Management Act the following year.

Prominent players in the progressive ranks say they haven’t heard of Zemke’s initiative, but that may not mean much. Zemke says he learned in previous campaigns you don’t need a united front when you start – just enough to make a campaign click. He’s been touting the idea on his website, TaxSanity.org, which claims a mailing list of 300, and he says he has had numerous people volunteer to help with the drive. Because it would take the form of an initiative to the Legislature, rather than an initiative to the people, he would face a much easier deadline to turn in the required 246,273 signatures, the first week of 2014 — and so the need for paid signature gatherers would be reduced. He says he is just beginning to circulate his latest proposal among potential supporters. Sounds like he is looking for that winning idea himself.

Modeled After Hasegawa Bill

Part of the latest idea comes from a bill filed this session by state Sen. Bob Hasegawa, D-Seattle – a measure that would require a state “tax expenditure report” to be included in the state budget. Basically, all or most of the 452 tax breaks the Legislature controls would have to be included in the biennial budget bill. That would force lawmakers to vote yes or no every time.

They couldn’t blame decisions made by lawmakers long ago, Zemke says: “It will no longer be a free ride.” And counting those tax breaks as expenditures reflects Zemke’s philosophy – that the money belongs to the state, not to the people and businesses that generated it. Instead the state is giving it back, and so those tax breaks ought to be counted as expenses. But it’s more than a statement. By counting those tax breaks as “expenditures,” the initiative would roughly double the size of the state budget. That would run the state over an expenditure limit imposed by Initiative 601 in 1993. The expenditure limit has never had much effect, because lawmakers always found creative ways to account for their funds. But at least temporarily, until they rejigger the books again, lawmakers would be limited in their spending for tax breaks. Zemke would exempt expenses for education and other services.

Complicated, you bet. The initiative he filed earlier this year was equally complicated, and also would have repealed promoter Tim Eyman’s latest two-thirds-for-taxes law, passed by voters last year. He went back to the drawing board when the Supreme Court tossed out the Eyman initiative in February. He mentioned his plans to run an initiative two weeks ago, as an aside to reporters when he appeared at the secretary of state’s office to denounce Eyman’s latest initiative. But at that point his idea was substantially different. At that point he said he wanted to automatically repeal tax breaks recommended for review by JLARC, unless the Legislature re-enacted them. He says he thinks he has a better idea now. “I think this would be harder for the Legislature to ignore.”

Hard to Imagine

But would it really be that hard? Odds are it wouldn’t be tough getting signatures, allows political consultant Sharon Gilpin. “This loophole initiative, I see how sexy it is, I see how you can title it, I see how you can pitch it in half a second and get a lot of signatures really fast. I see all that stuff. The legislation is what I can’t see. I can’t see how you can do it and nail down the goal that he is going for. I just don’t see it.”

Any measure lawmakers consider too impossible can be rewritten immediately after passage, by a two-thirds vote of the House and Senate. So if the expenditure-limit issue becomes unworkable, it may not last long. Essentially the state has a tax expenditure report already, even if it’s not called that — it is the biennial review of tax exemptions published by the state Department of Revenue. Forty-five other states publish the same type of report. So if it’s just a matter of incorporating the DOR report in the budget, observes Connor, you’ll basically make the bill a couple hundred pages longer. Worst case, the Legislature might find itself bollixed up as it debates each of the 400-odd tax exemptions and preferences. Or it might just shrug and avoid trouble by voting yes.

Nobody would be surprised to see an initiative, he says, “with all of the railing we have heard over the last couple of years about how we are the 99 percent, and how we ought to tax millionaires and billionaires and end the corporate-jet tax loopholes. I’m surprised in this state we haven’t seen something from FUSE or one of the labor unions or one of the other progressive factions in this state. So maybe it is time to have an honest conversation about how to review these things.

“But I think that conversation would take us further than trying to find some way to write existing tax preferences back into the budget biennium after biennium.”