Cover Story: Washington’s Candy Land of Tax Breaks

As our cash-strapped state prepares to cut services for the poor and mentally ill, billions of dollars in tax breaks and exemptions are still being doled out.

When Gov. Chris Gregoire arrived last month at the 100th birthday celebration for Albert D. Rosellini at his assisted-living facility on Seattle's First Hill, she was immediately waved over to the ailing former governor's wheelchair so he could whisper privately in her ear.In a room filled with well-wishers, including members of Congress and five other former governors, Gregoire bent down, listened, replied softly, and smiled agreeably.What do governors talk about when they whisper in each other's ears? Why, taxes, of course."He said, 'Go with your heart on taxes,'" Gregoire confided later. "'Do what's best for everyone,' he said." She pronounced that "good advice."As any of the other political co-conspirators in the room could confirm, taxes are not the sort of thing pols talk about publicly unless they're planning to lower them—and Gregoire's not. But she's also trying to find a way not to raise them as she struggles to mend the $2.6 billion hole in the state's $30.1 billion biennial operating budget. At present, she wants to cut spending, including expanding class sizes and eliminating some social services. She prefers to raid the state's reserve accounts and obtain federal bailout funds to stave off any tax increases.But that's still likely to come up short, and lawmakers seem bent on finding new tax revenue. Among the current proposals in Olympia is a kind of kiddie "sin tax," eliminating the current sales-tax exemption on candy and gum. The kid who toddles up with a dime for that licorice stick will need a penny in the other hand.The bill's sponsor, Sen. Jeanne Kohl-Welles (D-Seattle), would like to see the revenue—as much as $40 million over two years—go toward dental and medical services for low-income citizens hit by earlier budget cutbacks.Which sounds good, but what about all the other sugar out there, the taxes the state doesn't collect? There's a bureaucratic mountain of them. Over the past two years alone, they have accounted for a record $98.5 billion in potential tax revenue the state never got. They're the result of hundreds of tax breaks granted by the legislature, some dating back to 19th-century territorial days, some much more recent. About half the missing money is from state-tax exemptions; the other half is exemptions from local taxes that the state legislature has enacted.When Seattle Weekly detailed the breaks in a cover story six years ago, the headline was "$64 Billion Falls Through the Tax Cracks." There were 503 tax breaks on the books then. Today there are 567. Thanks to new exemptions and inflation, the amount of uncollected taxes has doubled over the past decade.Most of these billions are untouchable as revenue. Among other things, governments, schools, hospitals, and churches are exempt from paying taxes on the land they own, as allowed under the U.S. and state constitutions. The largest single exemption comes to $36.2 billion for personal property-tax breaks on "intangibles," says the state Department of Revenue (DOR), such as money, stocks, bonds, and bank deposits. Were it not for this exemption, businesses and individuals would have to pay property taxes on their financial assets as well as their real estate. Reversing other breaks, such as $7.4 billion in sales-tax exemptions on non-restaurant food and services like plumbing and haircuts, would be unpopular and perhaps counterproductive.But in its latest report, completed in 2008, the DOR identifies $14.8 billion in tax exemptions that "represent potential revenue" if the governor and legislature chose to repeal them. That could shrink the size of a few classes—and send everyone in them off to college, tuition-free.The DOR doesn't make any specific recommendations, leaving repeal decisions solely up to legislators. But even a small bite out of the exemption pie could ease the annual Olympia hat-in-hand parade for state funding. At a recent Ways and Means Committee budget hearing in Olympia, senators heard how chemical dependency and mental-health services have been slashed while the underfunded prison system is overflowing. Foster kids, street kids, and the mentally ill will get even less help this year. "Some cuts are worse than others," said Gregory Robinson of the Washington Community Mental Health Council, referring to a $4.1 million reduction in residential care for patients leaving state mental hospitals. "And this is a real bad one."As a result, some lawmakers think tax breaks could be ripe for rollback. "I believe that many tax preferences and exemptions will be repealed or allowed to expire by the full Senate and House this year," says Rep. Troy Kelley (D-Tacoma), chair of the joint legislative committee that will recommend such changes.To some critics, eliminating tax breaks would amount to tax hikes and an even flatter job market. Many of the more recent "tax preferences," as they're also known, were doled out to aid businesses and promote economic development, in the form of exclusions, deductions, preferential rates, deferrals, and credits.The 19,000-member Washington Federation of State Employees, however, sees exemption repeal as at least a job-saver. Some of its members were stunned last month when the federation blog mentioned that almost $15 billion was available to offset proposed state cuts in the employee ranks. They swamped legislators with calls and e-mails. Why not use that money rather than hack away at our programs and pay? they asked. Other members couldn't believe the money might really be there. In response to the "skeptical comments about the validity of our assertion," the federation blog ran another item the next day, linking to the DOR online exemptions report."Right now," says Greg Devereux, the federation's executive director, "it seems state workers and teachers are the targets" of budget-cutters. "Our mantra is there should be shared sacrifices. But we're easy targets. Rather than piss off a hundred groups, just piss off two. They don't think they need us to get re-elected."If they want his vote, Devereux says, they'll sacrifice some tax-exempt fat cats, whose identities are something of a secret in Olympia.We can't tell you who specifically gets how much in official Washington tax breaks. That's a secret, says DOR spokesperson Mike Gowrylow. "State law prohibits us from discussing the tax situation of any particular company," he says."Just like the IRS won't give me your tax return if I ask them for it."In addition, it's illegal for the state to extend credit to a single private entity, so when legislators draw up the laws, they come up with more generic identifiers.Also, if fewer than three would-be taxpayers could benefit from a given break, the DOR usually won't identify the amount of unpaid taxes covered by that exemption. That's because deducing the identity of the company or organization involved wouldn't be much of a challenge, and you could therefore also figure out how big a break they're getting.A certain "manufacturer of commercial airplanes," for example, gets a $150 million tax break every two years under one of the exemptions. Another $45 million is granted for "Airplane pre-production costs."The "manufacturer" exemption was passed in 2003 "to encourage the assembly of a super-efficient airplane in Washington." That would be the new 787 Dreamliner, the prize up for grabs in the Boeing Co.'s Best Bribe Sweepstakes, available in the lower 48 states. Victory went to the governor offering the greatest tax breaks and other kickbacks. Then-Gov. Gary Locke threw open our state's safe after hiring Boeing's own consultant to advise him. With lawmakers' approval, he doled out $3.2 billion in exemptions and credits to the Chicago-based aerospace giant, spread over 20 years.Other Olympia incentives granted to the company and the aerospace industry will ultimately save Boeing an estimated $1 billion more over the years, according to Seattle Weekly calculations. Reversing any of those exemptions would make the company howl and threaten to move to whatever state it hasn't already threatened to move to. But didn't Boeing renege on the deal anyway? Last year it agreed to build a second 787 assembly plant—in South Carolina—after Gregoire balked at handing out any new tax breaks here. Carolina lawmakers approved $170 million in Boeing incentives and exemptions that were quickly signed into law by the state's philandering governor, Mark Sanford. (Just back from visiting his Argentine mistress, he had his own incentive, dangling as he was over the maw of impeachment).Deferral of state and local retail sales and use taxes are also allowed for the construction of buildings for high-tech projects involving research and development. That has Microsoft and its ever-expanding campus written all over it, allowing MS to avoid sales tax on construction costs, materials, and new equipment, for example. Another 500 small and large companies also benefit, says the state. The exemption was created in 1994 and extended in 2004 for another 10 years. Over a decade, that's $650 million the state is not raking in.Almost 1,700 high-tech firms also share another $50 million in B&O tax credits for research and development under an exemption that was also renewed in 2004 for another decade. And a $12 million property-tax break goes to companies that use custom computer software.Microsoft, incidentally, has also avoided paying a ton of state taxes by moving offshore, so to speak. According to writer and ex-Microsoftie Jeff Reifman, Microsoft opened a small Nevada office in 1997 to record software-licensing revenue and skirt Washington's half-percent wholesale tax on software-licensing royalties. Reifman estimates that has helped the company of billionaires Bill Gates and Paul Allen avoid more than $700 million in Washington taxes. With interest and penalties, the total exceeds $1 billion.Allen, the world's richest sports mogul, gets other breaks here, too. Besides enlisting state taxpayers to help build his Seattle football stadium, and receiving county tax cuts, Allen's Seahawks and the Seattle Mariners have each benefited from sales-tax exemptions on the cost of stadium construction. The franchises, along with the state commissions that operate the stadiums for them, avoided paying around $50 million in taxes over 10 years. Though they've now begun to pick up the tab in annual increments, that's money that could already be in the state's vaults.Health-maintenance organizations (rhymes with Group Health), along with the major health-care insurers, are exempt from paying almost $300 million every two years in B&O tax on insurance premiums, under a break dating back to 1993. They also don't pay $40 million every two years on Medicare premium taxes that could have gone to the state. The insurers are also exempt from $25 million in dental premium taxes. As of 2006, about 100 unnamed hospitals also get $6 million in B&O credits for buying patient-lifting devices.Here's a real toughie: A tax exemption is provided to unnamed "Persons who conduct horse racing events that are licensed by the State Horse Racing Commission." Since, as the state reveals in a footnote, "Emerald Downs is the only track currently in operation," we'll guess that's the place they mean. The privately owned track, opened in 1996, is allowed to avoid about $4.3 million in biennial B&O taxes.Similarly, "Air pollution control equipment that is constructed or installed at a thermal electric generating facility" is exempt from property tax. That would be the Centralia coal-fired steam plant, worth a couple million every couple years. The plant is also exempt from sales tax on the coal it buys, but because of those confidentiality rules, says DOR, it can't reveal the amount of the exemption. We've learned it's about $12 million biennially, dating to 1997.The cheap-energy-gobbling "aluminum smelting industry" gets lots of breaks, starting with property taxes. Smelters are effectively reimbursed through a tax credit in the same amount. There are also exemptions on personal property, construction, and use of natural gas, along with credits for pollution control. Again, names and amounts aren't listed. But we learned elsewhere those breaks are worth more than $3 million biennially to the state's two smelters, Alcoa Inc.'s plants in Ferndale and Wenatchee. The property-tax credits, created in 2004, are to expire in 2012, but a bill has already been introduced to extend them five more years.Under a B&O tax break for advertising sold to out-of-state buyers, radio and TV stations are deducting $2.7 million every two years. The newspaper industry—particularly the publishers who, unlike freebie Seattle Weekly, for example, sell their print product for hard cash on the street or by subscription—get in on the exemptions too. The sales aren't taxed, mainly to "recognize the practical problem of collecting sales tax on individual sales of about a nickel, the typical price of a newspaper in 1935," the DOR report says. "Arguments have also been made in the past that newspaper carriers (mostly youth) should not have to be responsible for collecting and reporting the tax."Though billing functions have now largely been centralized and computerized by the publishers, and kids delivering papers on their bikes are long gone, the exemptions continue. The Seattle Times, as the state's largest newspaper, presumably gets the largest benefit from the roughly $25 million that publishers (and their print readers) aren't paying over two-year sales periods.Seattle Weekly and other papers, particularly the Times, benefit from additional media-tax breaks. About a dozen papers in all save a collective $1.2 million on sales taxes when buying new computers, as of 2004. And an exemption passed just last year cut the state B&O tax by 40 percent for newspapers. It was approved as the industry fought off death spasms. Times publisher Frank Blethen pleaded with lawmakers, saying he and other publishers were "hanging on by our fingers," while his rival, the Seattle Post-Intelligencer, folded its 146-year-old print edition. Other publications cut staff and teetered on the edge of bankruptcy. Nonetheless, the exemption means at least $2.6 million less going to the state every two years.The DOR's exemption list indicates that most every living soul directly or indirectly benefits. About 4,800 insurance agents collectively avoid paying $40 million in B&O taxes on their commissions each biennium. About 450 travel agents and tour operators don't pay $16 million in B&O taxes. When any of us buy prescription drugs, we collectively avoid paying $613 million in sales taxes that have been exempted. It's an exhausting, all-inclusive club.Legislators are unlikely to touch mass-appeal exemptions. A more likely target could be something like the $1.1 million break given in 1982 to international banking institutions that establish offices here. Similarly, there might not be agreement to reverse a longtime small-boat owners' excise-tax exemption that could produce $4 million. But might lawmakers ding people from out of state who buy a boat here and aren't charged retail sales tax? That's a biennial $10 million exemption.There's $12 million sitting there from a 2006 B&O exemption given the carbonated-beverage-syrup industry. Since 1993, microbreweries haven't had to pay $3 per barrel in beer excise tax, saving them $7 million every couple of years. Farmers get a bounty of longtime exemptions—more than $200 million in farm-product tax breaks alone. There's also an $89 million break on the feed and seed they buy, and $88 million on fertilizer and chemical-spray purchases. More than $13 million in taxes are not paid on new parts for their tractors and other machinery.Even chickens benefit: Farmers collectively save $1.4 million on taxes when they use natural gas to heat poultry barns. They avoid paying another $360,000 when buying bedding for their birds.Fowl as that might sound, however, the issue for Olympia is sacred cows.Any major exemption repeals would be a course change for the legislature, which has been adding breaks at the rate of more than a dozen each year. Repeal may be in the air, but more than two dozen new exemption bills have already been offered this session. They include breaks to aid seniors and the disabled. But more common are the proposed business exemptions, including new give-backs for rural data centers, medical-equipment firms, electric-car owners, and producers of hog fuel used to generate energy.Supporters say many of the breaks are needed to counter a sucking economy and rocketing unemployment. But that's also an argument for repealing some of that $15 billion jackpot, says Rep. Kelley, the exemptions-review committee chair."In this tough economic climate, we realize that we are competing with other states and need to make sure we create a climate to help make Washington businesses successful," he notes."On the other hand, we are not in the business of giving tax breaks to one group at the expense of another group or the public at large."Gregoire, too, says she's open to eliminating some of the exemptions. "I have worked with my staff to review the tax system to look for loopholes and identify tax preferences that are no longer effective," she says. "I plan to revise some tax preferences, allow some tax preferences to expire as scheduled, and renew selected others that are working." She thinks those changes, if approved, could produce $15.7 million this biennium and $63.7 million in the next.If so, the governor, Kelley, and other state lawmakers could certainly argue they covered the spread without raising new taxes. They'd be reviving existing ones, and doing something akin to what Oregon voters did last week. They approved taxing wealthy families and corporations, raising income taxes on households making more than $250,000 annually, and hiking the state's corporate income tax.Even so, the governor and lawmakers so far seem willing to wade into only the shallow end of the exemption cesspool. Comparably few preferences have been yanked or allowed to expire in recent years, and Gregoire is so far moving slowly on her planned repeals.That's due in part to a lumbering bureaucratic process. The Department of Revenue report—issued every four years—is sort of the starting point. Rep. Kelley's group, the Joint Legislative Audit & Review Committee (JLARC), then steps in with the assistance of the Citizen Commission for Performance Measurement of Tax Preferences (CCPMTP) to review the list.From that alphabetic nightmare, with input from state auditor Brian Sonntag, emerge some recommendations and legislation.The JLARC takes a close look at the history, beneficiaries, use, and economic impact of tax breaks. Now and then, change results. But in 75 reviews over three years, the JLARC has recommended 50 exemptions not be changed. Seventeen of them should be re-examined or clarified, it decided. Just eight, worth $9 million, should be terminated or allowed to expire, it concluded.Among the most recent reports was a January summary of 12 exemptions. Eleven should remain unchanged, the report states. The one break that might be repealed? The one granted to newspapers, allowing them to avoid paying taxes on newsstand and home-delivery sales. It was unclear, the report said, whether a purpose exists for the exemptions "given the changing industry conditions and the 2009 B&O tax preference enacted for newspapers."At a January meeting of JLARC members, several other encouraging repeal recommendations (if yours is not the ox being gored) popped up. The break to hospitals for buying patient-lifting devices should be allowed to expire, the JLARC staff told members. Same for an exemption to farmers who use machinery, rather than fire, to ready their fields for replanting. A break dealing with rural utility contributions and another for rural software developers both ought to expire, the staff said. Separately, legislators have also proposed some rollbacks, including repeal of the $12 million biennial exemption for the Centralia steam plant.The CCPMTP, meanwhile, has suggested that the sales-tax exemption granted to janitorial-services firms be done away with. It could sweep in $8 million.Hearings for some of these proposals are already set, and some measures are likely to make it to the floor, Kelley indicates. The criteria lawmakers might consider, he says, is to repeal any exemptions that have "become a giveaway."In the eye of some beholders, that's almost all of them. But Greg Devereux, the state employees' federation leader, says don't bank on a tax-break revolution yet. "The exemptions are a perpetual-motion machine," siphoning off more would-be revenue with each new session, he observes, "and no one's willing to step in front of it."

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