WashACE Blog

Freshman Dems propose tax increases on home buyers

Brad Shannon reports this morning on new taxes proposed by freshman Democrats in the House:

Freshmen Democrats in the House introduced a bill that targets favorable tax treatment for large home lenders and out-of-state shoppers. They say it would raise $170 million for K-3 programs in public schools....

...HB 2078 specifically targets first-mortgage interest earnings of banks that exceed $100 million a year and would end tax breaks for out-of-state shoppers. It would raise more than $80 million a year from each tax.

Missing in this representation of the mortgage interest earnings exemption, in particular, is that if the tax exemptions mortgage lenders now enjoy in Washington were eliminated, banks would pass the tax on through to home buyers.

Result: Home purchases become more expensive and Washington's current housing market, which is struggling mightily to recover, takes another hit.

The continuing hew and cry for "closing tax loopholes" is misleading many into believing there is some quick revenue fix for balancing the state budget. But budget challenges in Olympia have been for some time and continue to be due to legislative over-commitment of state taxpayers to unsustainably high spending.  

Richard Davis's blog on the Washington Research Council's tax loopholes paper and  a subsequent Crosscut column explain the role and complexities of tax exemptions in Washington's tax system. 

The News Tribune calls "'Loophole repeal: An imaginary budget solution," saying 

the “loopholes” targeted by the protestors tend to fall into two categories: Expendable but piddly, and potentially lucrative but also justified.

Not everyone in the political environment currently surrounding the budget debate is interested in fully understanding the why's and wherefore's  -- as they say, "you don't want to wreck a good story with the facts!" -- but the information on tax exemptions is available. 

Coming up next -- legislative townhalls tomorrow in districts around State

Now that we've past the first legislative cut-off, the pace in Olympia promises to quicken.

Lawmakers will be in their districts tomorrow conducting townhall meetings. Labor is mobilizing its supporters to turn out at these events. They want to kill workers comp reform and to increase business taxes in order to continue the unsustainable spending practices that have gotten us into this mess. Here are labor's talking points. 

Business owners need to turn out for these meetings, too.

Tell you legislators that higher taxes and employer costs work against economic recovery and job creation.

Here's the  Legislative Townhall Schedule as it stands currently (we will update it, as we confirm additional meetings). Please try to attend to one in your area tomorrow.

Tell your legislators that higher taxes are NOT the answer.

Tell them that we don't need more studies on workers' comp, we need action now in the House to allow injured workers to settle their claims and get back to work. Explain to them that sensible reforms, which are already working to save money in 44 other states, passed out of the Senate with strong bi-partisan support and the support of the Governor's office. Tell your representatives to get behind SSB 5566 and work to adopt it in the House, too, and send it to the Governor's desk for signature. 

Supplemental budget deal struck

Lawmakers have reached agreement on how to fill more than half of the $550 million budget hole for the remainder of this biennium. The Seattle Times reports this morning that:

The agreement trims several state programs, including the state's health-care program for the poor and aid for the disabled, as well as transfers funds from other programs. The plan cuts the deficit by about $370 million, with about $242 million in cuts and $125 million in transfers.

 According to Brad Shannon, in Tacoma News Tribune, 

The agreement would leave about $200 million of the deficit unsolved. But Chopp and others have said it will be bridged by a one-day delay of per-pupil funding for public schools – until July 1. That delay would be part of a two-year budget to be approved in April.

And Jerry Cornfield blogged on the addition to the negotiating process of House and Senate moderates, which may have contributed to the agreement.

Tax exemptions stimulate investment, job creation

Richard Davis blogs on news from Stateline.org that some governors are pushing for big tax cuts for business. Davis says, "Governors from New York to Florida, Idaho to New Jersey, have turned thumbs down on new taxes, while looking hard for ways to make their states more attractive to corporations ready to expand."

Wisconsin moving aggressively on collective bargaining

Saying he's broke and has nothing to negotiate, Wisconsin's new governor, Scott Walker, has presented a budget that eliminates most collective bargaining rights for state workers.

According to Stateline.org, "The new governors of Iowa, Ohio and Wisconsin—all Republicans with Democratic predecessors—are gearing up for heated showdowns with unions in their states."

Are tax incentives in play?

We've written here before about efforts to repeal tax incentives/exemptions/loopholes/breaks/whatever in order to find more money in this cash-straitened legislative session. In my column in the Puget Sound Business Journal Friday, I challenge the assumption that there's a lot of free money laying around.

Still, the myth persists. In the last 48 hours two Seattle Times business columnists lend their voices to the chorus claiming business incentives are depriving the state of funds necessary to maintain "the commons." Brier Dudley, the Times' technology writer, takes on the research and development credit.

Starting in 1994, the state offered to defer sales taxes on investments in research and development activities. Companies were supposed to eventually pay the taxes. But then the law was changed so they don't ever have to pay, as long as the investments continue to be used for R&D. That means, though the policy is still called a deferral, it's basically an exemption.

Microsoft used this program to defer $34 million worth of sales taxes in 2009. To put that in perspective, the company paid $1.9 billion toward income taxes in the past three months. During that same quarter, Microsoft had sales of $19.95 billion and net profit of $6.6 billion. It spent $2.1 billion on R&D in the quarter, when its overall tax rate was 22 percent, down from 25 percent the year before.

Seriously. Does he believe the state, an innovation economy leader, would not suffer a significant - potentially fatal - loss if the credit were repealed. Many of us are looking to the tech sector to lead the regional recovery? The R&D incentive is common in other states with vibrant technology sectors. Call it what you will, it's essentially just good tax policy.

Jon Talton used his Sunday column to argue, unremarkably, that corporations don't pay enough taxes. Here's his conclusion.

The argument for now has been won by those who say corporations have no social obligation but exist only to make maximum profits for shareholders. That seemed acceptable in better times, even as the political power of major corporations increased. Now, as high unemployment continues, poverty rises and the civilization Americans of a certain age once took for granted are at risk, it seems less convincing.

Completing the Times' tax trifecta was this op-ed by Aubrey Davis, arguing for an April referendum on exemption repeal to save the Basic Health Plan. Here's the strategy and campaign theme.

Here's why — and how — it could work. First, a referendum requires only a simple legislative majority to be put on the ballot. Second, the BHP is currently funded until this May; an April vote would be both feasible and timely. Third, it gives citizens a clear choice about public priorities: spend money on tax breaks, or to ensure our lowest-paid people can live healthy and productive lives?

Those of us who believe private sector investment will spur the economic recovery and job creation should be prepared to defend those incentives that maintain and enhance our competitive position. The facts are on our side, but there will be a strong appeal to emotion that we must be willing and able to counter effectively.

A Personal Note Beginning tomorrow I am rejoining the Washington Research Council staff as full-time president. That means I'll no longer be acting as WashACE coordinator and primary blogger here. Please stay tuned to this site. WashACE continues with new writers and coordination. And, please join me and the WRC staff in our conversations on the Research Council blog.

Budget challenges across the nation

I've been remiss in not flagging this New York Times piece from last Sunday. (h/t Don Brunell, who wrote about it here.) The NYT sets the tone up front, based on a reading of the inaugural remarks of two dozen governors.

The dismal fiscal situation in many states is forcing governors, despite their party affiliation, toward a consensus on what medicine is needed going forward.

The prescription? Slash spending. Avoid tax increases. Tear up regulations that might drive away business and jobs. Shrink government, even if that means tackling the thorny issues of public employees and their pensions.

That's a little dire, as we've written before. Credit Gov. Gregoire for approaching the same situation with some necessary and uplifting remarks about streamlining, transformation, and positioning for a better future. (I haven't done the reading, but I'd guess most of the nation's governors have learned to find silver linings in the dark clouds over the capitols.) Still, the message is clear and the choices are stark.

In Oregon, the new governor, reprising a role he has played before, uses a metaphor to depict the situation.

...John Kitzhaber, the new governor of Oregon, elaborately described the state, which needs to bridge a projected budget deficit of $3.5 billion, as an old house in need of an overhaul.

“There are too many rooms, and they aren’t the right size,” Mr. Kitzhaber said. “There’s no insulation, and the windows are drafty. And the cost of keeping this house is more than the family can afford. The roof needs to be replaced, and the siding is falling off.”

Let the makeovers begin.

Among the changes we're seeing is a national reconsideration of the push to smaller class sizes, social services cutbacks, and pension reform.

In all, the toughest year yet for state budgets.

House committee releases partial suplemental budget

House Democrats unveiled their first steps toward resolving the shortfall in the current fiscal year, which ends June 30. It doesn't close the gap completely, but makes inroads, including a new twist on how to maintain the Basic Health Plan. Here's The News Tribune's description:

Only about $18 million in immediate savings comes from ending Basic Health because those who get subsidized health insurance under the program will be moved to something called Basic Health Transition. It's meant as a bridge to 2014, when broader Medicaid coverage kicks in as part of the federal health care overhaul.

Lawmakers hope to make up the funding cut to Basic Health by "harness(ing) private contributions and federal funds," according to the text of the bill. 

The House also preserves the Disability Lifeline, a priority of House Speaker Frank Chopp.

TNT reporter Jordan Schrader writes that part of the secret to the House plan is the decision to tap a dedicated toxics account, a move opposed by the ports.

The Herald of Everett reports the lack of GOP enthusiasm for the budget proposal.

State governments expect a slow recovery. Some make it even less likely.

Stateline.org regularly scans the national landscape for policy and economic trends. Today they look at what seems to be the theme of the 2011 legislative sessions across the country: More of the same fiscal distress.

When will the budget situation for states return to normal? Not in the foreseeable future. Although NASBO's Pattison thinks fiscal year 2013 will look better than 2012 for most states, there are signs that the road to recovery is going to be a long one. 

A big reason why is the nation's stubbornly high unemployment rate. Joblessness remains a drag on personal income tax revenue and sales tax revenues — states’ two biggest revenue sources. That’s not likely to change soon. The Federal Reserve projects that unemployment will remain around 8 percent by the end of 2012.

States close to Illinois may have better prospects, as the Chicago Tribune points out.The state legislature just passed massive corporate and personal income tax increases.

The outcry by business leaders, and even Chicago Mayor Richard Daley, was not lost on neighboring states.

"We won't be the only ones coming to poach companies out of your state, and I guess we'll be well-received by frustrated firms there," said Indiana Commerce Secretary Mitch Roob.

Indiana Gov. Mitch Daniels joked that having Illinois as a neighbor "is like living next door to 'The Simpsons,' you know, the dysfunctional family down the block" during a chat this week on the Don Wade & Roma morning show on WLS-AM 890.

Coverage also in the Wall Street Journal.

On The News Tribune's editorial page blog, Cheryl Tucker takes note and asks an intriguing question.

A slew of bad ideas in labor council's legislative agenda ...

The Washington State Labor Council's legislative agenda offers little in the unexpected. Oblivious to the results of the last election, the WSLC wants lawmakers to put a $3 billion tax package on the November ballot. Here's how The News Tribune characterizes it:

Washington's biggest labor group wants lawmakers to put $3 billion or more in tax breaks on the ballot for suspension as early as this spring, in an attempt to avoid the worst proposed budget cuts.

The kind of tax breaks the State Labor Council is contemplating for a proposed three-year moratorium include sales tax exemptions for business services like investment advice and architectural services.

The paper quotes newly-elected WSLC president Jeff Johnson:

"We have to be bold, put something out there for the people to vote on, and then make the case for it," [Johnson] said.

Because nothing says bold so much as tax increases. The labor group also wants to create a new unemployment insurance benefit,

...we propose coupling lowered U.I. tax rates with a children's benefit of $15-per-week per child... This children's benefit, which would cost the U.I. Trust Fund an estimated $202 million between 2011-2017, is absolutely necessary to balance a proposal that dedicates significantly more of that fund to permanent tax cuts for businesses.

Establishing a new entitlement at this time is counterintutive and counterproductive. The governor's plan to hold back a scheduled UI tax increase on businesses makes good sense, as a way to stimulate job creation. That's the best way to help struggling families.