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The moral hazard of tax preference secrecy

January 26, 2014

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With political pressure from industries to “match” Boeing’s state tax preference package rippling through the 2014 Legislature, many on the left and right are asking larger structural and systemic questions: How much do Washington state taxpayers spend on tax preferences, how much financial value in tax preferences does a company receive, and how much do these companies actually pay in state taxes to put it all in context?

The uncomfortable reality is that we do not know how many tax dollars are being spent or not collected—because that information is, if assembled by the state Department of Revenue, almost completely inaccessible and hidden from legislators and the public.

The inside story gets worse: Under state law, for the vast majority of tax preferences, the basic information about what companies, organizations and industries receive how much money under most tax preferences is considered confidential and proprietary information and expressly hidden from legislators, media and the public.

As chair of the tax-writing Finance Committee, I am granted confidential access to the limited corporate tax information that is collected by the state.

This year, it has reached a point where the weight and moral hazard of this information burdens me, on a deep philosophical level, because I believe it is unethical for my colleagues to make fiduciary decisions about tax preferences–to draft bills, debate legislation and vote on behalf of the people–without knowing the true financial value or tax context of those preferences.

If I speak publicly about financial or technical details of who is claiming tax exemptions and how much they pay as a context to those dollars, I would face 90 days in jail, get ejected from the Washington State Legislature and be banned from holding public office for two years.

I’m not making this up. Telling the truth about this basic but vital tax data–even to other legislators–could cost me my elected position and land me in jail.

That’s because the strict interpretation of state law is that the chairs of the respective tax committees in the House and Senate are entitled to this important contextual tax data, but rank-and-file legislators are not. This means two of 147 legislators know the truth of how the money flows.

The old fashioned idea that the value of a tax preference must remain confidential is out of date and philosophically out of step with our state.

Since 1972 our state has been a national leader in public disclosure about who funds campaigns, how state budgets are written and how tax dollars are spent whether it’s the salary of a local elementary school teacher or how much a vendor is being paid to build a tunnel along the Seattle waterfront. A 2012 investigation by the widely respected Center for Public Integrity ranked Washington #3 of 50 states in its “Integrity Index” based on the strength of the disclosure laws when it comes to campaign financing, lobbying reporting, state budget process and public access to information.

However, in contrast to campaign data and budget expenditures–which can be searched on line down to the individual check on www.fiscal.wa.gov, the actual beneficiaries of tax preferences are public for just 32 of the state’s 650+ tax preferences, less than 5%, and the financial value of the value of the tax preferences claimed is public for only 19 categories–less than 3% of the total.

Last year, I partnered with Senate Majority Leader Sen. Rodney Tom (D-Medina), to shine a light on tax preference transparency through ESSB 5882 so the public can more effectively understand the scale and scope of the value of a tax preference created by the Legislature.

Under the new law, all new tax preferences must disclose the basic financial value of a tax preference at the individual firm level, so we can together assess whether there is a return on investment and better study whether a new tax preference achieves the policy goals established or is simply evaporating into the mist.

While this is true for new tax preferences, there are more than 650+ existing tax exemptions, credits and preferential rates on the books that cannot be easily analyzed in depth because the information is confidential or not reported at all.

Transparency and disclosure is a policy foundation that often unites limited-government and progressive think tanks, left and right, Democrats and Republicans. From the Sunlight Foundation to OpenSecrets.org examples, Washington has long embraced the right of the people to know how the money flows in and out of government.

This year, I have introduced a modest step forward in tax transparency legislation–House Bill 2201–that would: 1) consolidate and streamline the multiple annual reports and surveys from businesses into a single, easy to understand “Tax Accountability Report.” 2) Increase the availability, quality and consistency of tax preference data reported internally to the state Department of Revenue–including the value of the tax preferences. 3) Authorize the the public disclosure of certain tax information for publicly traded companies annually claiming one or more tax preferences in excess of $10,000, with a two year lag time to avoid any real-time competitive concerns. Publicly traded companies already provide much of this information at the national level through the Security and Exchange Commission.

How can a legislator realistically be expected to vote on a tax preference bill for a company or industry if she or he does not know the context of whether a tax proposal is small, massive or in-between relative to the overall tax obligation of that firm?

For example, under the state’s extracted fuel tax preference for the oil companies with refineries in Washington, the aggregate public value of this preference is $59 million between 2015-2017. There is no public disclosure, however, of how much British Petrolium, Shell, Tesoro and the other beneficiaries pay in taxes so it is literally impossible for legislators to know whether that $59 million is small, medium or large relative to their overall tax obligation. Given that I have introduced House Bill 2465 to close this tax preference, you can assume I feel strongly there is a painfully obvious answer to this question.

If a tax preference is working–and can make the business case to the public with solid data, facts and evidence as well as political support–we should keep it working to build our economy and quality job growth.

I am not opposed to tax preferences that work and add measurable value, but I struggle with the lack of intellectual, financial, political and analytical rigor applied to our state tax preferences. Specifically, I have stood firmly and publicly in support of tax preferences that can clearly prove with hard data—such as the Boeing package—that they achieve a compelling return on investment for taxpayers and our quality of life.

If a tax preference cannot justify its continued existence with data, metrics and facts and must retreat into brute lobbying force, then we should probably close the tax preference and instead invest those precious dollars into public education from early learning through K-12 and higher education.

The responsible next step is to pass HB 2201 and open the books in a careful, measured way and let citizens–and 147 legislators–know the truth of how the money flows.

Your partner in service,

Reuven.

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9 Comments leave one →
  1. Liv Finne permalink
    January 27, 2014 7:56 am

    Good Morning, Reuven. Great post below.

    Fyi, I should not have to make a public records request to find out how many millions of dollars the legislature puts into the teachers’ pension program. The LEAP budget notes for the 2013-15 budget do not disclose the figure. Pension contributions should be broken out as a line item in the budget, and not included as part of a benefits percentage, as they are currently.

    Liv

  2. Linda Seltzer permalink
    February 2, 2014 8:03 pm

    Why is this limited to publicly traded companies?

  3. mickey permalink
    February 5, 2014 12:59 pm

    Hey, Reuven, speaking of outsized tax breaks for corporations… how was the big shindig that Boeing threw for you Tuesday night? Was there a band, and swing dancing? Did the big Boeing brass toss you a bouquet of Valentine’s Day flowers for shepherding $8.7 billion in taxpayer money their way? Did you all toast each other with flutes of Veuve Cliquot and giggle about how the word “pension” means “boarding house” in French? Was there a voice vote on how “McCleary” isn’t nearly as groovy sounding as “McNerney”?

    Do tell! Everyone loves a party.

  4. February 5, 2014 8:33 pm

    I like the proposed legislation but think Boeing an extortion artist with the social conscience of Bernie Madoff. I hope you did not attend that party mentioned above. It reeks. By granting this tax break you allowed Boeing to shakedown the people of WA., and left the machinists to be strong-armed while abetting a sham auction that put another 20 states through a costly exercise of public begging. Can’t you see where this leads?

  5. mickey permalink
    February 6, 2014 9:38 am

    Sy – Aviation analyst Richard Aboulafia agrees with you:

    “Speaking to local industry suppliers in Lynnwood at the annual conference of the Pacific Northwest Aerospace Alliance (PNAA), Aboulafia also had sharp words for Boeing’s hardball management approach.

    He said Boeing’s strategy of forcing major labor concessions on the Machinist union in exchange for building the 777X in Washington ‘reeks of some sort of psychological exercise rather than an economically driven process.’

    ‘Congratulations,” he said sarcastically. “They saved the cost of a 777 or two per year, and lost the opportunity to work together with the workforce to be innovative and productive.’”

    “Aboulafia said he sees the same dynamic in Boeing’s corporate strategy of pushing suppliers to cut costs by 15 to 20 percent in order to win business on new programs like the 777X.

    Boeing Chief Executive Jim McNerney last year said suppliers who didn’t play ball would be put on a ‘no-fly list.’”
    ————————–

    http://seattletimes.com/html/businesstechnology/2022841094_aboulafiapnaaxml.html

    ————————–

    But, see, when it comes to Boeing, that’s just how they roll…right over anyone who gets in their way. And the plebes are expected to genuflect because the politicians who fuel the Boeing bulldozer approach say “well, at least their tax breaks are transparent.” Or some such nonsense.

  6. mickey permalink
    March 2, 2014 10:41 am

    Boeing continues to loot the state coffers while paying no federal income taxes — instead, receiving multi-million dollar tax refunds.

    Dominic Gates’ article in the Seattle Times explains it all for you:

    http://seattletimes.com/html/businesstechnology/2023026545_boeingtaxesxml.html

  7. Sy Schwartz permalink
    March 2, 2014 2:23 pm

    On Sunday, March 2, 2014, Official Reuven Carlyle Blog wrote:

    > mickey commented: “Boeing continues to loot the state coffers while > paying no federal income taxes — instead, receiving multi-million dollar > tax refunds. Dominic Gates’ article in the Seattle Times explains it all > for you: http://seattletimes.com/html/businesstechnol” Roger, Mickey, > and thanks. My car currently sports a bumper sticker which read,”BOEING — > flyway robbery. ss

  8. Charlie Mas permalink
    April 10, 2014 5:18 am

    How about we replace all of the tax breaks with tax rebates. That way they will all appear as spending – which is what they are. When they are checks going out we will be able to see them all as line items in the budget instead of invisible reductions in revenue that never appear in the accounting. It will be essentially neutra to the businesses – they will only lose the use of the funds for the time it takes to calculate their rebate and return it to them and the cost of creating the liquidity to send in the full payment. Surely that is a compromise they are willing to make in exchange for the tax rebate.

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