Some tax preferences don’t serve public good

Most of us have a sense of how much a dollar will buy. But it turns out there are times when is a buck is worth more than face value.

For example, every public dollar we spend is actually worth about $1.41, thanks to the mathematics of the multiplier effect. It makes sense when you think about it: A public school teacher receives her paycheck and then spends it on food, clothing, child care and other essentials. Her money ends up with the businesses that provide these goods and services and in the paychecks of the employees of these businesses. Then these employees spend their money to meet their own needs and desires, and the money circulates to other businesses and their employees. That’s the multiplier effect.

But what about the consequence of pulling those dollars from the private sector as taxes to pay her salary? Well, it turns out the negative multiplier of a general tax increase is much less than the positive multiplier of the spending. So even if you ignore the importance of strong public structures like K-12 education, health care and roads, those public expenditures actually help sustain our economy — especially now, when private spending is down during a recession.

So given the state’s projected revenue shortfall, where do we get the money? It’s worth examining whether the numerous tax exemptions and preferences that have crept into our tax code over the years — nearly 600 of them, at last count — still serve a compelling public purpose.

For example, if you are a financial company, you pay the business tax on dividends, interest and capital gains. That makes sense — you, along with all other businesses and individuals, pay taxes to support public services, basic infrastructure, and to maintain the civil society which enables you to make a profit.

If, on the other hand, you are a non-financial company — say, Wal-Mart — and you invest earnings in Wall Street, any dividends, interest and capital gains are free from taxation. It’s a perverse incentive: We encourage firms to gamble on Wall Street instead of building plants and buying equipment and creating jobs. And it costs an estimated $211 million in state revenues a year.

Here’s another: In 2005 the Legislature passed a revamped tax on estates over $2 million to fund the education legacy trust fund. This tax was then deducted from federal estate tax obligations. In 2006 the people resoundingly approved our state estate tax. But this year, there is no federal estate tax. No matter if your estate is $3 million, $30 million, $300 million, or $3 billion, when you die your children will pay no federal tax on that estate.

Washington state has the power to assess some of the inherited wealth of multimillion dollar estates. We could double our own tax on estates over $2 million, which would still leave well over three-fifths of the value of these big estates to the inheritors. This would bring in $66 million in this fiscal year and $132 million in the next fiscal year.

And here’s one more: Since 1970, credit agencies — including banks — have not paid tax on interest earned from loans for mortgages. Recently, HomeStreet, a mortgage company, appealed a decision to make it pay taxes on investment income derived from residential mortgages that it had bundled into complex securities and partially sold off. (This is exactly the kind of activity that helped to create the financial house of cards that collapsed and throttled our economy into this recession, by the way.)

HomeStreet paid, then sued for reimbursement, claiming the first mortgage exemption. The state Supreme Court ruled in favor of Homestreet, allowing them to not only help wreck the economy, but avoid taxes while doing so. This little loophole costs us $85 million a year.

Last December Gov. Chris Gregoire proposed another $2.6 billion in budget cuts, on top of massive cutbacks from the year prior. To her credit, the governor has now proposed reversing some of her proposed cuts with partial funding for basic health, apple health for kids, early childhood education, full day kindergarten, public health and law enforcement training. Her modest “buyback” proposal costs about $779 million.

Closing just these three loopholes gets us almost halfway there. Now we just need political leadership to confront the lobbyists and redirect it to the public good.

John Burbank is executive director of the Economic Opportunity Institute in Seattle (www.eoionline.org ). His e-mail address is john@eoionline.org.