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Originally published February 4, 2012 at 8:05 PM | Page modified February 4, 2012 at 8:44 PM

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Even unused tax breaks tough for legislators to plug

Proposals in Olympia would force lawmakers to start examining some of the hundreds of state tax breaks currently on the books.

Seattle Times Olympia bureau

Biggest state tax breaks

$1.6 billion sales-tax exemption for personal and professional services, including doctors, lawyers, movie theaters and football games.

$1.4 billion business and occupation tax exemption on the income of employees. In other words, the state doesn't have an income tax. The state Department of Revenue arrived at the value by estimating how much money would be generated if the B&O tax on business was applied to employee income.

$974 million sales-tax exemption on food and food ingredients.

$820 million sales-tax exemption on gasoline. The state does collect a 37.5 cent-a-gallon gas tax but does not charge sales taxes in addition.

$538 million sales-tax exemption on "special fuel" including natural gas and propane used for heating, and to power government vehicles.

All figures are annual value

of tax exemptions

Source: State Department

of Revenue

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While the sales tax on food does cost the state almost $1B, it would hurt people a lot... MORE
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OLYMPIA — Lawmakers have talked for years about plugging holes in the state budget by paring back the dizzying number of tax breaks.

But the political reality is, they can't even get rid of ones that aren't being used.

Case in point: Seventy-one years ago the Legislature approved a property-tax exemption for out-of state-municipalities that own airports in neighboring Washington.

No such thing exists anymore.

A state review panel in 2009 recommended it be eliminated. Yet that tax exemption still exists, along with several others the panel suggested ending, including $92 million worth of tax breaks on certain interstate-commerce activities, and a special property-tax exemption for nonprofit orphanages.

"We cannot seem to get the political will to even take the most analyzed recommendations for tax-loophole closure and act on them in this body," said Sen. Karen Keiser, D-Kent, who sponsored a bill to get rid of several tax breaks in 2010, including the airport exemption.

This year, there's been no serious discussion about closing tax exemptions to help bridge a $1.5 billion budget shortfall. Under state law, it takes a two-thirds vote of the House and Senate for the Legislature to eliminate a tax break, a hurdle that's proved impossible to overcome.

Another approach, however, is gaining bipartisan support — requiring all future tax breaks to have an expiration date unless the Legislature specifies they should be permanent.

Interest groups are contemplating taking that idea a giant step further and putting an initiative on the ballot that would set expiration dates on nearly all existing tax exemptions.

"We need wholesale reform so that we force legislators and corporate lobbyists to justify these exemptions every few years," said Adam Glickman, a spokesman for the Service Employees International Union (SEIU), which is considering such a ballot measure.

Flawed system

Republicans and Democrats alike agree that the current system for evaluating the benefit of a specific tax break isn't working.

The Legislature has enacted 640 tax exemptions over the years. Many of them are protected under state law, such as limits on the growth of property taxes, or are required by the state constitution.

However, a state Department of Revenue analysis found 452 exemptions that could generate additional revenue for the state if eliminated. The department estimates they represent roughly $24 billion in state tax savings over two years.

They include both broad exemptions, such as the sales-tax break on food or prescription drugs, and targeted tax breaks, such as a sales- and use-tax exemption for wood waste used to produce electricity. Newspapers, including The Seattle Times, benefit from a reduction in state business-and-occupation taxes passed in 2009.

Only about 14 percent of the exemptions have expiration dates.

After the economy nose-dived in late 2008, Democratic lawmakers and special-interest groups tried to get rid of some exemptions to help offset deep budget cuts. SEIU members and others marched through the Capitol campus session after session, chanting for an end to corporate tax breaks.

After a while, they gave up.

"We've been incredibly frustrated with the failure of the Legislature to close tax exemptions," Glickman said. "Clearly going after them individually hasn't been a successful strategy at all."

Banking lobbyists in 2010 succeeded in killing a plan that would have raised millions for the state by eliminating a business-and-occupation-tax exemption for the interest that banks and other lenders earn from real-estate loans.

That same year, a proposal by Gov. Chris Gregoire to eliminate a sales-tax exemption for gold bullion stalled after protests from small coin-shop owners who said it would drive their customers to the Internet or tax-free states.

Exemptions studied

The Legislature in 2006 passed a law requiring the Joint Legislative Audit and Review Committee to examine tax breaks.

The panel was directed to study exemptions, based on a schedule set by yet another committee, and tell lawmakers why they were put on the books, if they still serve a public interest, who benefits, and what the impact would be to state revenues if the exemptions continue.

After going through that analysis, the panel recommends whether to keep, modify or eliminate the tax breaks — or say it doesn't have enough information to decide.

To date, the panel has recommended that only six tax breaks be eliminated, including the airport exemption. So far, all of them are still on the books.

The Legislature has let several tax exemptions with expiration dates, worth millions of dollars, go ahead and expire. And lawmakers eliminated a few where court decisions forced their hand.

But the Department of Revenue could only find a few isolated cases where the Legislature got rid of tax breaks on its own.

In many cases, the Audit and Review Committee can't even advise lawmakers whether to retain tax breaks because it can't determine why the Legislature approved them originally.

"We continually run up against this problem. First off, how long the Legislature intended for a bill to last, but even more critically not knowing what the Legislature wants to have evaluated," said Sen. Craig Pridemore, D-Vancouver, who chairs the committee.

For example, there's a 126-year-old property-tax exemption for charitable hospitals — later narrowed to just nonprofit hospitals — valued at more than $50 million annually.

In a 2007 report, the review committee said "overall, the data do not support the premise that nonprofit hospitals are serving more low-income patients than other hospitals ... so it is not clear that the current tax preference is accomplishing a public-policy objective related to provision of additional charitable services."

But the panel also asked lawmakers for guidance, saying it didn't know whether the exemption was intended to help nonprofit hospitals provide more charity care than other hospitals.

So far, the Legislature hasn't responded to that request, or any others in which the review committee has asked for clarification.

Similar measures

Pridemore has introduced SB 6088, which would require that all future tax exemptions expire after five years, unless the Legislature specifies a different time frame. It also would require lawmakers to specify the intent of the exemption.

"So if it's to create jobs, how many jobs, how soon?" he said.

Nineteen senators have signed on to the measure, including Sen. Joe Zarelli, the ranking Republican on the Senate Ways and Means Committee.

Zarelli, though, wants to change the bill. Instead of having an automatic expiration date, he wants the measure to require lawmakers to set some sort of sunset, or specify that it won't expire.

Zarelli said he supports stating the purpose of exemptions because, in many cases, "unless you're a 50-year veteran of the Legislature you have no clue why something is in place."

A similar measure, HB 2530, was introduced in the House. It's sponsored by Rep. Reuven Carlyle, D-Seattle.

Carlyle also introduced another bill, HB 2762, that would require 251 existing tax exemptions to expire in the future unless the Legislature reaffirms them.

The measure, he said, "shifts the entire paradigm where the default position of the state is that tax exemptions expire and must be reauthorized to continue."

The bill would require a two-thirds vote in the House and Senate to become law. That's because eliminating a tax exemption is considered the same thing as increasing a tax.

Carlyle's measure would exempt certain tax breaks, such as the sales-tax exemptions for food and prescription drugs, as well an aerospace exemption lawmakers approved several years ago to help keep Boeing manufacturing in the state.

But those not exempted would start expiring in phases starting in 2017.

"You force exemptions to go through the process of representative democracy to justify their existence," he said.

If the bill goes nowhere, SEIU is looking at putting a similar measure on the ballot in November, Glickman said.

In the meantime, Rep. Bob Hasegawa, D-Seattle, has introduced a bill that would get rid of the unused property-tax exemption for airports, among others.

The bill was first introduced last year. It has yet to get a hearing.

What are the odds of it going anywhere this session?

"Not so good, realistically," Hasegawa said.

Material from The Seattle Times archives was used in this story.

Andrew Garber: 360-236-8266 or agarber@seattletimes.com

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