Thursday, May 31, 2012

What are the costs of tax exemptions in Washington State?

According to a recent Department of Revenue report, there are 640 tax exemptions on the books in Washington State.  Of those, 452 would likely generate revenue if eliminated.  However, the bigger question is how much revenue is being lost through these exemptions?

Revenue advocates make the case that closing some exemptions would help to address the budget shortfalls that have plagued Washington since the start of the Great Recession.  Before getting into the weeds of that debate, we need to know just how much the 452 revenue-generating exemptions cost our state.

Exemptions are spread across our entire tax code and can be found in every type of tax applied by the state.  176 apply to the B&O tax, 151 are in sales tax collections, 63 are found in other business taxes, 35 apply to taxes in lieu of an excise tax, 21 in miscellaneous taxes, and 6 in property taxes.  In total, these 452 revenue-generating exemptions resulted in $29.3 billion in lost revenue in the 2011 – 2013 biennium.
To fully understand the $29.3 billion in lost revenue, we need to relate this amount to the big picture—the state’s full operating cost. According to the Washington Citizen’s Guide to the Budget, total expenditures for the 2009- 2011 biennium added up to $74.8 billion.  Of that amount, $26.7 billion was spent on human services, $17 billion on public schools, $10.5 billion on higher education, and $8 billion on transportation.  If viewed as an expenditure, exemptions outweighed any other categorical expenditure in the state.  Currently, exemptions represent approximately 39% of our state’s operating cost.       
Since the beginning of the Great Recession, the legislature has had to rip $10.5 billion from the state’s operating cost as a result of continued budget shortfalls.  These reductions have had a tremendous impact on how the state conducts its business and funds its core values.  Across the board reductions have resulted in increased tuition at our 2-year and 4-year colleges, decreased funding for k12 education (resulting in a legal challenge that was recently upheld by our state’s supreme court), the elimination of vital social service programs, and the delay of critical infrastructure improvements.

Viewed as a whole, exemptions add up to a huge bite out of our state’s operating budget.  Still, a knee-jerk decision to close loopholes could have larger unforeseen ripple effects in our economy.  Currently, these exemptions are not subject to regular and rigorous review, with some exemptions remaining on the books for over 50 years.  When entering into the debate over the closure of exemptions, it is important to not only know the impact that these exemptions have on our budget but to also conduct a full and careful review of proposed exemption eliminations. 
It is hard to argue that the closure of exemptions should not be considered in trying to address the current fiscal crisis in our state.  Even if only 10% of the exemptions were closed, it would result in $2.9 billion of additional funds that could be used to mitigate some of the recent devastating cuts experienced by critical public programs.    

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