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How to pass a tax exemption through the Finance Committee

February 2, 2013

Since the 2013 Legislative Session began in Olympia and I assumed the role of chair of the Finance Committee, it’s been a bit overwhelming to meet with literally hundreds of representatives from business, labor, cities, counties, non profits and others seeking support for their respective positions on tax policy. My central goal, as I have shared with business lobbyists and citizen activists alike, is to radically improve the analytical rigor with which the Legislature considers tax exemptions, credits, preferential rates and basic tax structure changes.

In nearly every case I have literally asked the proponents to come back with a business plan–rather than a verbal pitch, memo or bill draft–to make the case for their request. Some of the meetings have gone well and some have been incredibly uncomfortable, as veterans of Olympia seem perplexed as to what a business case actually looks like. To date, my request for business plans has been met with blank stares by most but not all.

I suspect it would be helpful to outline in specific detail exactly what I mean. It is my goal that any tax preference, credit or preferential rate legislation that moves through the Finance Committee must now literally not just figuratively have five key elements to the policy: Transparency, intent, metrics, expiration date and accountability.

TRANSPARENCY

One of the reasons the High Tech R&D Tax Credit has received so much attention is that we have accurate data about which companies receive how much in reduced taxes from the credit. In 2012 I sponsored legislation to reform the tax credit given to high tech companies in order to direct most of the resources into higher education and I publicly released the list of beneficiaries. While it had been available before no one had widely distributed the list. You can read about my proposal in the Seattle Times here, here and on my blog here.

I believe if a company or organization wants the financial benefits of a tax policy they should–in a vast majority of cases– be willing to openly share the vital data so that it is easily accessible to the public for review, study and assessment. It seems obvious but folks might be surprised at the complaints about filling out the paperwork. Without reports and surveys the Department of Revenue, legislators and the public are unable to measure results. It’s a deal breaker.

INTENT

The top criticism of the Joint Legislative and Audit Review Committee (JLARC)–the group we task with measuring efficacy of tax exemptions–of the Legislature’s approach to our 640 tax exemptions is that we fail to adequately articulate the specific goals and objectives of a policy. Thus, nearly a third of exemptions can’t be easily assessed for effectiveness by performance auditors because the Legislature merely created the policy without a clear goal in mind (other, it would seem, than a desire to pass the bill). Instead of “create jobs” I suggest something a bit more measurable. The intent language must be aggressively clear, direct, understandable and simple. A made-up example: “The purpose of this tax credit is to provide additional resources to small, early-stage technology companies to help off-set the upfront personnel requirements of investing in research and development for the first 1-4 years before a company is profitable.”

METRICS

Here is where the rubber meets the road. Of the state’s 640 tax exemptions, credits and preferential rates the honest grade I would assign to the metrics and measurement of results is D- without grade inflation. It’s frustrating and, frankly, infuriating that we hold ourselves to such a low bar of quality assessments. There are sincere and genuine attempts but too often the lack of quality metrics is too difficult even to attempt–or the proponents push hard to avoid being held accountable. And so we don’t even try or too easily give up. We know that in four, five or 10 years, for example, when the tax exemption expires that JLARC will conduct a review. How do we want JLARC to measure the efficacy? What metrics would make a review successful? What data would help ensure a quality performance audit? These seem like simple and obvious questions but, to date, the legislative process has efficiently avoided committing to specific metrics of success or failure.

EXPIRATION DATE

In 2011 I introduced sweeping legislation to require an expiration date for the 251 tax exemptions that currently do not have one. I did not propose to change the date of any exemptions that have one already in statute (such as Boeing), only to require that all exemptions (with a few exceptions for food and prescription drugs) must be reviewed and reauthorized by the Legislature every 10 years. I am convinced this is a compelling public policy proposal and I believe it has merit, and my goal was to begin a serious dialogue about the core issue. Without an expiration date, a tax exemption exists in perpetuity and is literally untouched in terms of assessing whether it provides any value to taxpayers. Even if it clearly does not work. The Seattle Times editorial board has been, perhaps surprisingly, a supporter of this proposal and it generated considerable attention. The reaction from the business community was, however, fierce and borderline politically vicious. I stand by the core idea as a responsible approach to fiscal policy, and welcome a dialogue about how to embrace the idea in a thoughtful fashion.

ACCOUNTABILITY

An easy word to say but difficult to translate into reality if the Legislature is uninterested in making it happen. Accountability of a tax exemption can take a wide range of forms. Often a business interest, city or non profit makes a pitch for legislation based upon the promise of positive indirect financial returns to the public. But I have come to learn that the ‘risk’ of the deal is always–exclusively–held by taxpayers and not the other side. ‘Accountability’ means finding creative ways to reduce the risk profile of the tax exemption for the taxpayer and sharing the burden of the opportunity. For example, a bill might include an accountability provision by which an entity (public or private) needs to ‘match’ the value of the tax exemption by placing resources in escrow and if the goals are not met, the cost to state taxpayers is reimbursed. Another example of accountability is to ‘share the upside’ of the deal rather than asking taxpayers to assume the financial risk of reducing state resources while private interests and other parties such as cities and counties capture an incremental upside of the investment of resources.

In my view these five elements are key to a successful business plan. I am not opposed to tax exemptions and have supported many of them that can prove they work without reservation.

No business person would allow major, multi million decisions to be made without a strong business plan. We should expect no less from the public sector.

We are a consumption-driven sales tax and B&O tax state. It’s understandable that many interests want to be carved out of paying the full freight of sales and B&O rates (and property tax once in a while as well). But just because there is a negative economic externality on an industry because of our tax structure doesn’t mean it makes much financial sense for some taxpayers to get relief above others. Eventually everyone will be carved out.

What it really means is that we need thoughtful, responsible, balanced tax reform to broaden instead of narrow the base and keep everyone inside the tent. We’re all in this together.

Your partner in service

Reuven.

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2 Comments leave one →
  1. Jonathan permalink
    February 3, 2013 6:32 pm

    I appreciate your openness, insights and sincere request for feedback. I can only ask, why should legislators be meeting with hundreds of representatives of principals desiring favorable tax treatment? Can any good come from this process?

    Perhaps you could just have an “Open thread” on this blog where anyone desiring favorable tax treatment could openly post their request, and you could get back to them if it really seemed like a state-level emergency, otherwise not.

  2. Mickey permalink
    February 5, 2013 9:11 am

    Minnesota enacted a business subsidy accountability law in 1995 (revised in 1999) which addresses this same issue. The “Good Jobs First” study is a place to start researching and comparing how such a program would work in Washington.http://www.goodjobsfirst.org/sites/default/files/docs/pdf/civiceng.pdf

    A note of interest: In MInnesota, they don’t wait 10 years before checking on the results of business tax breaks. They start at the two-year mark, to ensure that, at the least, job creation plans are being met. And when the companies don’t deliver on jobs or revenues promised, the state demands a repayment of the subsidy, a “claw back.”

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