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Sometimes a “modest fix to our tax code” is more than it appears.

September 8, 2013

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The maritime industry is among the most important (historical, current and future) economic clusters in Washington State’s economy.

Aside from the formal structure of the industry, there’s a more intangible, gentle and spiritual connection that most of us feel to the water. It’s part of our individual and collective stories.

This year, as chair of the Finance Committee, I grappled with a proposal from the Northwest Marine Trade Association, a well respected trade group, to extend the use tax for boats owned by a LLC or S Corporation–essentially mega yachts–from 60 to 180 days or perhaps longer. Serene, a 440-foot mega yacht, one of the world’s largest, owned by a Russian billionaire, is currently docked in my legislative district. Under current law, if she stays in our waters for longer than 60 days she would owe use tax on her full value. That is, as you can imagine, unlikely to occur and she can be expected to leave our waters before the state tax deadline. Under the trade group’s proposal, this ship and others like her could remain in Washington waters for 180 days or perhaps longer for repairs or merely to visit without incurring use taxes, a move that would certainly generate incremental economic activity into the local economy.

British Columbia, Florida and other governments have discovered the value of favorable tax treatment for these floating cities, despite a number of serious issues, flaws and controversies with larger tax avoidance given that S Corporations and LLCs based off-shore cannot be reached by federal and state auditors.

As committee chair, rather than push the legislation through Olympia this year I opted instead to insert specific language in the state budget–with supporting funding–for the Department of Commerce to conduct a comprehensive analysis of the broader range of major policy issues facing the maritime industry from taxes and regulation to workforce and facilities. Once that review is complete, I argued, we can more objectively assess whether it makes sense for Washington to eliminate the state tax and thus match BC’s tax code–and to in effect create a regional ‘economic cluster’ partnership–so that these large luxury ships can make the magical San Juan and Gulf Islands a common destination.

Rep. Kris Lytton (D-Anacortes) and Sen. Nick Harper (D-Everett), among the most effective and respected legislators in Olympia, penned a thoughtful Seattle Times guest column on Sept. 7, 2013 outlining the reasonable policy arguments for the plan. On the surface the plan to eliminate or lengthen the time before use taxes are due is responsible, and in this case I’m appreciative of the compelling business case for taxpayers, which by many indications seems to pencil. All the while, it stands as a new tax exemption for multi-billionaires’ mega-yachts (the consummate first-world problem.)

And yet, my job as finance chair is to encourage us not to pretend that such action is without consequence or deeper ramification.

We have a policy obligation–actually a serious moral obligation to taxpayers–to look more critically at the implications of the Legislature’s fervent and rote political willingness to limit the fallout of our inefficient tax structure through an endless parade of such “modest fix(es) to our tax code.”

This request is, in some ways, a symbolic representation of our profound fear of a public examination of taxes, fairness, economic efficiency and a narrow rather than broad-based tax base. And we need, simply, to look closer at the context of why so many such requests flow into Olympia.

Too often we jump to the conclusion that there is simply no political appetite in our state for tax reform to alleviate the weaknesses of our system for people, while simultaneously entertaining endless ‘modest’ fixes that alleviate the inefficiencies of our system on important industries.

Despite the rhetoric to the contrary, we actually do embrace elements of tax reform each and every legislative session, each year, each time an industry makes a strong case. We retreat from doing so when the argument is about equity for people not efficiency for business. The challenge is to embrace both sides of the equation in a more authentic way.

Assuming this particular policy request is reasonable, and the data in this case is worth further investigation that there is a net benefit for the state, the broader problem is that by continually modifying our tax code to benefit industries that bump up against the unpleasant reality of a sales and use tax model–and B&O taxes–we distort the system further each year.

Currently we have about 700 tax exemptions, preferential rates and credits on the books. In 10 years will we have 1000, 1250 or 1500? How long can we ‘carve out’ industries that are negatively impacted by our economically inefficient system without collapsing the entire framework?

We have a heavy reliance on our sales and use tax and B&O tax system. We have no personal income tax. There are substantial implications to our model that are not trivial. In most cases the business community has calibrated and adjusted despite the fact that business does ironically, in fact, pay a disproportionate amount of state taxes. When adjusting to the current system is more logistically or operationally difficult for business–when the negative ripple effect of our system can’t easily be passed through to consumers–often the next stop is a visit to legislators requesting a “modest fix to our tax code” to reduce or eliminate the tax altogether.

Rather than the distortion of a high sales and use tax, higher B&O taxes with hundreds of specific tax exemptions, I prefer lower overall rates that are spread more efficiently and equitably across a broader base of business and individuals with very few exemptions. The Legislature is, unfortunately, addicted to the lethargic comfort of the status quo by which we continue to carve out industries year after year after year while lamenting the lack of political will for broader tax reform.

Sometimes a ‘modest fix to the tax code’ is more than it appears.

Your partner in service,

Reuven.

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2 Comments leave one →
  1. Art permalink
    October 2, 2013 12:18 pm

    ” We retreat from doing so when the argument is about equity for people not efficiency for business. The challenge is to embrace both sides of the equation in a more authentic way.”

    Tell the truth — you and your colleagues get off on making the state/local taxing regime here the most regressive in the country. Explain the tax costs of the Sound Transit financing plan, the one enabled by the authorizing legislation the state legislature adopted. Oh, you don’t want to do that? That’s not a surprise — it rests of literally scores of billions of dollars of excessive sales tax confiscations JUST as security for the mountain of long-term bonds the unaccountable political appointees on that board want to issue. Thanks a lot. Way to target the individuals and families of this region with the least for infrastructure that only provides an appreciable benefit to rich urban property speculators.

    No other government leaders use heavy sales taxes like this to finance buses and trains. It’s abusive. Why were’t best practices employed? Do you have any idea of what the cost to the average family around here is of dedicated transit taxes (Metro, Sound Transit, TBD, etc.)? Try to figure that out too, and explain why you think that is such a great idea.

  2. November 22, 2013 12:57 am

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