WashACE Blog

Tax Scramble Continues

While waiting for the Senate to bring its tax legislation to the floor, consider these news reports. The Olympia highlights an ad campaign by labor and health care groups seeking higher taxes. Attempting to capitalize on some public sentiment against the financial stimulus package, the ad targets the banking industry. The target is a tax exemption for some of the banks' interest earnings on first mortgages. Far from punishing banks, repealing the exemption will increase the cost of capital.

"Our opposition is primarily based upon the impact it would have on consumers," contract lobbyist Dave Fisher said on behalf of the bankers. "It's inevitably going to make mortgages harder to get and more expensive."

So far, it looks like a majority in the Senate understands that, but in the revenue scramble anything can happen, which is why these are dangerous hours in Olympia.

Another example reported in the Washington State Wire: a large tax hike to fund the billion dollar jobs package passed by the House. 

[the] plan would ask voters this fall to approve an $861 million bond issue. The money would be used to retrofit and repair schools and other public buildings, and in the process [prime sponsor Rep. Hans] Dunshee says the state would put 38,000 people to work.

It would have to go to a vote because the bond issue would take the state over the constitutional debt threshold. The billed stalled in the Senate during the regular session for good reason: It's a ton of new debt not backed by a dedicated revenue stream and the jobs and energy efficiency benefits are not proven. Having resurrected the bill in special session, supporters are contemplating a sizeable bump in utility taxes, increasing costs for consumers and businesses.

They don't need to do this. As The News Tribune editorial board writes, the 6,000 jobs a year claimed by the sponsor won't start being created until after 2012, when the economy will already be in recovery. And, with Washington already carrying twice the national average per capita debt burden, the increased debt load could sabatoge the state credit rating. Yet, the editorial points out.

But determined to pass something, they are looking for a new revenue source to pay off the bonds. A bump in the state utility tax is reportedly one of the options.

Another tax increase isn’t the way to convince voters that the Legislature did something for them this year. Nor is it likely to encourage growth in employment sectors that were responsible for the rest of the 190,000 jobs lost in Washington this recession.

Right.

Idaho's Not the Only State Going After Our Businesses

Idaho Gov. Butch Otter's "love letter" to business got a lot of attention recently, even sparking a competitive response from Gov. Gregoire. I wrote about it here. AWB president Don Brunell covered it here.

Now Utah has launched a major campaign to attract relocating businesses, complete with full-page ads in the Wall Street Journal. California is an early target. 

What's our Legislature doing to make this state more competitive in the post-recession scramble for growth?

Everett Chamber Leaders Warn of Consequences of Higher Taxes

In an unusually sharp op-ed in today's Herald of Everett, the leaders of the Everett Chamber of Commerce speak for many Main Street employers.

Grappling with the means to close the state budget deficit, the Legislature has proposed several ideas, including additional consumer and business taxes. These measures are troubling because they would raise the cost of living and doing business in our state, thwarting efforts to give Washingtonians what they need most — job creation and preservation, and a break from the burden of increased taxes.

They acknowledge the difficult situation legislators confront, and share concern for preserving and strengthening essential services. And, like many of us, they wonder when we'll see the overdue structural reforms.

Businesses are already fearfully anticipating another round of unemployment insurance and workers’ compensation increases next year and citizens will not be able to afford another sales tax increase...

After the budget and revenue packages are passed this year and the special session ends, we hope that efforts will be focused on finding long-term solutions to fix this crisis once and for all so that we are not facing the same issue next year.

The Chamber leaders mention the sales tax increase. It's not clear to me that we'll see one this year. But George Howland, Jr., reports in Olympia Newswire that the governor has said she will not veto a sales tax should the legislature send it to her. He also details the Democrats' negotiating process and players, with Sen. Rodney Tom apparently not sidelined despite his budget apostasy.

Washington Economy Lagging the Nation in Recovery

A new Washington Research Council policy brief examines a new report from Philadelphia Fed analyzing economic recovery in the 50 states. Washington, at this stage, doesn't look so good. 

For January Washington was one of the 19 states showing a one-month decline and one of the 31 states showing a three-month decline. For one month, Washington’s decline was 0.1 percent, which ranked 36th among the 50 states. For three months, Washington’s decline was 0.6 percent, which ranked 40th among the states.

The WRC concludes:

The most important thing that state leaders can do to help the economy in the near term is to craft a solution to the 2009–11 budget gap that minimizes tax increases. 

Longer term, state leaders must confront the structural imbalance between state spending commitments and revenues. Legislators will face another multi-billion dollar budget gap when they convene next January to write a budget for 2011–13. Because the 2009–11 general fund budget relies on more than $4 billion in one-time resources (federal stimulus funds, transfers from other state accounts and reserves), it will be impossible to continue to fund in 2011–13 everything that is funded in 2009–11.

And yet, they're considering nearly a billion dollars in new taxes that will slow employment growth and delay the recovery. As the Philly Fed report demonstrates, Washington cannot take recovery or prosperity for granted. We're in a competition. And we're falling behind.

Voters Likely to be Shut Out of Special Budget/Tax/Jobs Session

The Senate passed an operating budget today, the same one it had passed previously. This one, again, had only 25 yes votes. One change, Sen. Chris Marr, a reluctant yes the first time, voted no, with Sen. Brian Hatfield providing the 25th yes. Hatfield had been excused the day of the first vote. From this vote, we can't discern any information about how the two chambers will come together. Another vehicle might have provided some clues.

This Sunshine Week promises to be dark in Olympia, as The Daily News editorializes. The Olympian also takes the majority to task for disregarding transparency and public input.

In the waning days of the regular legislative session, Senate Majority Leader Lisa Brown, a Democrat from Spokane, claimed the Legislature is much more transparent than it was when she entered the Legislature.

Brown is wrong.

The hurry-up income tax hearing and title-only tax bills are the prime examples from the regular session. Expect more of the same on the tax and spending bills this special session.

Earlier, I posted on the budget and jobs agenda, without mentioning the jobs portion. It was an oversight on my part, but there's really little to say. The SeattlePI.com has a good explanation for how jobs came to share billing with the budget this week.

Democrats, most of whom up for re-election, know they're going to get lambasted by Republicans in November for summoning the Taxman. That's why during the special session they'll try to come up with a jobs plan, as well.

If that sounds cynical, try this explanation from The Olympian.

To leave behind something that will be remembered more fondly than their budget work come Election Day, Democrats have given themselves a second mission for the overtime period: Create jobs in Washington.

According to a political scientist the paper interviewed, the strategy faces one big problem.

... jobs efforts are unlikely to catch the public’s attention as much as the extra taxes they will pay, especially broad-based ones like the sales tax, said Todd Donovan, a professor at Western Washington University.

Don Brunell writes that Idaho's governor is paying attentionto the Washington tax and jobs trade-off.

With Washington’s Legislature about to raise business taxes to balance its $2.8 billion revenue hole, [Idaho Gov. Butch] Otter upped the ante by openly encouraging employers in both Oregon and Washington to move to Idaho. 

...Faced with ever higher costs and regulatory hurdles in a down economy, many employers are looking for help. If they don’t find it from the Washington Legislature, they may look elsewhere.

The risks are real. Let your lawmakers know that preserving jobs begins with minimizing new taxes on employers.

They're Back! Lawmakers Return to Olympia to Deal with Budget and Jobs

At noon on the ides of March, the special session began. The soothsayer's warning to Caesar should be heeded by taxpayers today and for as long as the session last. As legislative leaders scramble to line up the votes to pass a budget, struggling families and employers are at risk.

Austin Jenkins describes the process well at Crosscut, likening it to a business deal.

Once the size of the tax and spend boxes is established, the details of what to tax and what to buy have to be worked out. Some of the differences between the House and Senate are minor, but others are formidable. For instance, the Senate budget eliminates more than $100 million in K-4 class-size funding while the House mostly preserves it. On taxes, the Senate has approved a three-tenths-of-one-percent temporary sales tax hike while the House says the sales tax is a non-starter.

The trick for negotiators is bridging the budget and tax gap between the two chambers without jeopardizing too many votes in the process.

As Jenkins writes, the Senate budget and tax plans passed with the bare minimum 25 votes. We might expect that the no-margin majority gives the potential 25th vote on final passage considerable leverage. And we've seen how well that has worked in D.C., as health care trading led to the Cornhusker Kickback and a host of other unsavory deals. (You should also read Jenkins article for the rich treatment of the press conference at the close of the special session.)

The sales tax continues to divide Democrats. In The Daily News, Don Jenkins reports on Southwest Washington legislators favoring sales tax hikes. The group includes House Democrats who favor the Senate's sales tax increase.

Rep. Dean Takko, D-Longview, said Friday that a House-passed revenue package, which does not include a general sales tax increase, relies too much on "bits and pieces that hurt businesses."

"I think a small sales tax that's temporary spreads the burden out to more people and is fairer," Takko said.

And in the Kent Reporter, Reps. Dave Upthegrove and Tina Orwall write that the sales tax is not the answer.

Of all the possible ways the state could raise revenue, a hike in the sales tax is the worst possible choice. It is already regarded as a highly regressive tax that hits low and moderate income families harder, because they spend a larger proportion of their incomes simply buying the basics, such as clothing, shampoo, and school supplies for their kids. “Spreading the pain” should not mean balancing the budget in a way that hurts those on the lower end of the wage spectrum.

Hard to see a win-win, unless they do the right thing and scale back spending to minimize the tax hike.

Two Chamber Executives Call for Liquor Privatization

In The News Tribune today, Tom Pierson and Ken Oplinger, respectively heads of the Federal Way and Bellingham/Whatcom Chambers of Commerce, called for privatizing the state liquor system. 

Instead of increasing taxes to pay for record state spending levels that have not declined since the Great Depression, we believe the Legislature should allow the privatization of liquor stores.

...Getting Washington state out of the liquor sales business would ... likely result in more state revenues and create more jobs for Washingtonians as we have seen in other states that have converted to privatization of the liquor stores. A recent report by state Auditor Brian Sonntag found that “state revenue could increase by $130 million to $244 million over the return from the current operating structure, including one-time revenue.”

Efforts by Republicans and Democrats to privatize the system this year went nowhere in the regular session, blocked by union opposition. The Pierson-Oplinger call should be heeded.

Risks Rise with Special Session

The special session starting Monday poses higher risks for families and employers. Lawmakers attempting to reconcile dueling budget plans will face interest group pressure to increase spending and taxes.

The House has adopted a tax package totaling $681 million for the balance of the biennium. The Senate's tax plan goes higher, to $890 million.

Both increase business and occupation taxes on services. Both raise taxes on direct marketers in the wake of the Dot Foods case. Both include controversial economic nexus and tax avoidance provisions.

The Senate raises the state sales tax from 6.5 percent to 6.8 percent and creates a new "working families tax credit," essentially a new entitlement program.

The House also passed a new tax on custom software development, which the Washington Technology Industry Association describes as...

...a new tax on a whole range of innovative software companies that are at the center of our technology industry. Without any input from industry, the House passed a version of Senate Bill 6143 that includes a new tax on custom software development-a fundamental shift in tax policy that could lead to job losses, business closures and new taxes on other professional services

That one came at the last minute without consultation with the industry - a perfect illustration of the out-of-the-blue risks we face in the special session.

Let your lawmakers know this weekend that you expect them to rein in spending, resist the spending lobby, and adopt policies that stimulate job creation.

Tax Increases Will Hurt the Economy, Destroy Jobs

In tomorrow's Seattle Times, Washington Research Council economist Kriss Sjoblom has a good op-ed analyzing the effects of tax increases on the economy. The article is online now.

WITH Washington state lawmakers poised to adopt nearly $1 billion in new taxes on families and businesses, it's important to set the record straight.

These tax hikes will cost Washingtonians jobs and depress the economy. The damage will be greater than it would have been had lawmakers shown more restraint and cut spending deeper.

Sjoblom responds to an earlier Times op-ed arguing that spending cuts would be more damaging the tax increases. He tests the assertion.

Using a well-established economic model of the state economy, [the WRC] simulated several different $1 billion tax-increase scenarios. The simulations show increased taxes would result in the loss of 11,200 to 12,250 jobs in 2011. In contrast, a simulated spending cut of the same magnitude would cost only 8,600 jobs. If lawmakers handle the budget with spending restraint rather than raising taxes, 2,600 to 3,650 more Washingtonians keep their jobs.

Moreover, inflation-adjusted personal income is $600 to $900 million higher in 2011 when spending is cut than it is when taxes are raised.

Sjoblom's op-ed also examines the claim that state spending stimulates economic growth (as contended here).

Some of the confusion in Olympia on this point stems from a misreading of a widely publicized estimate made by Mark Zandi of Moody's Analytics. Zandi has written that an additional dollar of state government spending increases gross domestic product (GDP) by $1.41. This estimate appears in an article he wrote last October laying out a fiscal-policy road map for the federal government in 2010. The $1.41 GDP increase is for the nation as a whole and assumes that the state spending is funded by the federal borrowing. As such, the number has no relevance to a state decision to increase spending by raising its own taxes.

Right. The proposed tax increases will cost Washingtonians jobs.

Fitting the Budget Pieces Together

Late Friday, the House adopted a supplemental budget. Saturday, the Senate, which had previously adopted an operating budget, worked through all of the amendments to the tax plan passed out of the Ways and Means Committee Friday.

As expected, most things are moving along party lines, although Sen. Joe Zarelli managed to get consent for an amendment that if the proposed temporary 0.3 percentage point increase in the sales tax doesn't come off in three years, lawmakers lose their expense allowances. As Brad Shannon reports in the Olympian,

But it may end up as just a formality — if the Senate Democrats and House Democrats don't ultimately agree that a temporary three-tenths of 1 percent sales tax is part of the answer to closing a $2.8 billion shortfall.

The House firmly opposes it. Gov. Chris Gregoire doesn't much like it either.

I watched the debate. As Shannon writes, it got intense at times. They adjourned until noon Sunday, possibly lacking the votes to pass the package without all members present. Democratic Sen. Paull Shin had to leave early to attend a funeral.

The House, which is not meeting Sunday, is expected to adopt its revenue package on Monday. This is from Shannon's story:

HB 3176 includes about $758 million in new revenue and shifts another $100 million in revenues to general-fund accounts.

The new revenue is raised mainly through closing tax exemptions and increasing the business-occupations tax on lawyers, accountants and certain agents by 0.5 percent. HB 3176 also adds a sales tax on candy, gum, custom software, janitorial services and bottled water.

Reconciling the conflicting tax and spending plans be the work of the final days of the session, which is scheduled to end March 11. The Seattle Times editorial board weighs in with a proposed compromise, with about $512 million in new taxes including the Dot Foods fix.

I think it can bet resolved in a few days. We'll see.