Search for tax revenue will continue

By Richard S. Davis

A compromise that allows all parties to claim victory should not be disparaged. Legislative leaders and the governor were fulsome in their praise of the fiscal achievements of the recently adjourned 2012 legislative session.

The final budget offered something for everyone. Legislators scraped together enough money to preserve education and social service programs. The bipartisan coalition that took control of the budget in the Senate persevered and prevailed, securing reforms that will help bring future spending under control. If the economy stays healthy, the deal should stick. But with just a $320 million balance, things could go bad quickly if there’s another downturn.

Although there was a lot of tax talk earlier in the year, much of it directed at repealing various business tax breaks, lawmakers repealed just one: a mortgage interest deduction for banks operating in more than 10 states. While getting rid of the exemption may raise only about $15 million a year, the legislation had symbolic significance to those looking for a way to stick it to “Wall Street banks.”

The search for tax revenue will continue, spurred by the desire to rebuild services cut during the recession and the lingering belief that our tax structure is riddled with loopholes. People on both sides of the debate will be able to find support in a new report from the Pew Center on the States. The research study, “Evidence Counts,” examines how states evaluate tax incentives designed to “encourage businesses to locate, hire, expand, and invest within their borders.”

Pew identifies Washington as one of 13 states “leading the way” in the systematic evaluation of tax incentives. The research “does not take a position on whether tax incentives for economic development are good or bad.” The study is an examination of process, focusing on four questions:

Do states routinely evaluate all major tax incentives?

Do the evaluations measure economic impacts?

Do they draw clear conclusions?

And how do lawmakers use the evaluations?

Washington hits the mark on three of the four. We’re faulted for not adequately measuring the economic impact of the incentives.

The criteria make intuitive sense. Let’s focus first on what Washington is doing well.

The review process established here in 2006 is one of the nation’s best. It systematically reviews tax incentives (and other tax policies that carve out exemptions, credits and the like) to determine how well they meet the Legislature’s policy objectives. The reviews are done by nonpartisan legislative auditors, reviewed by a citizens’ commission, submitted to the state revenue department and budget office, discussed at a public hearing conducted by the citizen commission and at a second hearing held by legislative fiscal committees.

Critics who claim the Legislature hands out loopholes like lollypops are wrong. The exemption review process is transparent, comprehensive, and directly tied into legislative decision-making. Lawmakers are free to disregard the commission’s recommendations, which is as it should be. Policy and politics are intertwined. And critical reviews can lead lawmakers to clarify legislative intent and redesign the tax policy.

Washington, however, does not regularly subject incentives to an economic impact analysis. Pew acknowledges the difficulty: “There is no simple way to isolate the impact of tax incentives…” They additionally complicate the challenge by arguing that the assessments should measure the cost/benefit of the incentive against “budget trade-offs,” although how that hypothetical could be accomplished is far from clear.

Measurement challenges can be overcome. There will be times and occasions when an economic impact analysis is justified. Legislators should begin by clearly stating tax policy objectives and defining evaluation criteria. Pew commends Oregon for a 2009 law that has most tax incentives expire after six years. Legislation introduced here last session had a similar objective.

It’s a bad idea. Rather than burden the entire system with uncertainty masquerading as due diligence, lawmakers here should selectively identify sunset dates for specific, targeted incentive programs. Corporations intent on making major, enduring capital investments will shun an environment that offers the tax policy equivalent of Lucy holding the football for Charlie Brown. Like most things involving money and politics, tax incentives spark heated debate. There’s no reason to shy away from a thoughtful evaluation process. Fortunately, Washington already has one in place.

Richard S. Davis, president of the Washington Research Council, writes on public policy, economics and politics. His email address is rsdavis@simeonpartners.com.