Exactly how do you close tax exemptions in Washington State?

There has been increased discussion in the halls of our capitol about the impact tax exemptions have on our state.  Previously, I talked in detail about just how much exemptions are costing our state and how many we have on the books.  Many have argued that it’s time to close some of those exemptions, or at least bring them under review.  Unfortunately, closing an exemption is more complicated that you might think.

The authority to levy a tax is clearly given in Article VII of Washington’s Constitution, which is aptly named Revenue and Taxation.  The complexities of this article and the authority given have been the subject of numerous debates and countless courts cases.  The debates have played out in the legislature, the Supreme Court, and the ballot.  To say that it is complicated is, well, an understatement.  However, its relevance is paramount in trying to understand just how to address the issue of exemptions.

To put it plainly, the Federal Government and the Washington State Legislature have the authority to manage our tax system, including modifying any existing exemptions.

However, a recent ballot initiative has impacted the legislature’s ability to manage Washington’s revenue system.  Initiative 1053 (led by initiative activist Tim Eyman) passed in November 2010 with over 63% voter approval.  This initiative re-instated a 2/3rds vote requirement in both houses of the Washington State Legislature to make any changes to our tax code.  This requirement was first introduced by I-601 in 1993 and was later reinstated by I-695 in 1999 and again by I-960 in 2007.  The 2/3rds requirement INCLUDES the closure of tax exemptions because it would require legislative action that would amend our tax code resulting in a net increase in revenue. 

The super-majority requirement has plagued reform advocates since it was first introduced.  There have been a number of attempts to mitigate the impact of these initiatives, including the introduction of a temporary increase in sales tax on certain retail items to a full legal challenge of I-1053 which is currently being reviewed by King County Superior Court.  The outcome of the legal challenge will have a big impact on the legislature’s ability to address or modify existing exemptions.  Until then, it’s going to take a supermajority in the legislature to close any of the 452 revenue generating tax exemptions.

BUT, there is another way.  The ballot.  Both I-960 and its predecessor I-1053 reinforce the power of the ballot by reinforcing the people’s right to petition their government.  An existing exemption could be closed by a simple majority vote of the people.  However, it’s important to realize just how difficult it can be to pass an initiative in Washington State.  To date, nearly 1,200 initiatives have been introduced and only 69 have successfully passed into law.

Bearing in mind the complications associated with the closure of tax exemptions, reform advocates should remain diligent in their efforts to bolster fairness in our tax code through the elimination of some outmoded exemptions.  However, the road to closure for tax exemptions is wrought with pitfalls and speed bumps.  When trying to address the fiscal crisis other more short term measures should be explored as well.  Those might include the introduction of mandatory reviews and sunsets of existing exemptions or greater scrutiny of any newly proposed or existing exemptions.  These are two options that are being explored which I will discuss in another post.