House Democrats reconstituted a revenue committee this year, breaking the House Ways and Means Committee in half – leaving House Finance and House Appropriations. Rep. Reuven Carlyle, a Seattle Democrat, is chairing the Finance operation and says he wants to set the table for a broader discussion of the tax system and how special favors in the tax code could be repealed if they are not producing a clear public benefit.
With the Senate caught in turmoil and narrowly led by an anti-tax coalition of 23 Republicans and two Democrats, Carlyle knows the change for any big tax changes may be slim. He says he first wants the House to help find ways to pay for the nearly $1.3 billion or $1.4 billion that some lawmakers think is needed to answer the Supreme Court’s ruling about underfunded K-12 schools.
“The House wants to be thought leaders in terms of helping to design a responsible budget and funding it,” Carlyle said in an interview last week, noting that the Senate goes first on the budget this year. “Funding the budget is job one. Job 2 is to put ‘McCleary’ (the court’s K-12 school funding challenge) on the table. … We defined basic education and we have to fund it.’’
The third piece of Carlyle’s agenda is a more systematic and longer-term look at tax breaks in the code, which are worth billions of dollars a year (some are popular, like the one exempting food and prescription drugs from the sales tax; others that let high-tech companies get credits for research-and-development spending are less so).
“The mere existence of a tax preference or a tax credit is no longer justification of its continued existence. It must provide a return on investment for taxpayers,’’ Carlyle said. “You have to prove the return on investment, prove that it works.’’
Republicans on the new committee include Rep. J.T. Wilcox of Yelm, whose caucus has staked out a no-new-tax stance early on. Wilcox, who has run a dairy products business, is likely to be wary of new taxes – just as the Association of Washington Business and the National Federation of Independent Business already are.
In the past, the Legislature often has hit up select business sectors in the past when they needed extra money – as they did in 2010 by imposing a business-occupations tax surcharge on service businesses. The Democrat-controlled House and Senate at the time raised the B&O tax rate from 1.5 percent of a business’ gross receipts to 1.8 percent, and the surcharge lapses at the end of June.
AWB leader Don Brunell and NFIB leader Patrick Connor both say a top goal is making sure lawmakers do not extend the temporary surcharges.
Gov.-elect Jay Inslee has said he opposes a general-tax increase but his transition-team staffers have said that extending temporary tax surcharges is not the same as raising new taxes. It remains to be seen – when push comes to shove – if Inslee would see that as a realistic revenue option.
With that in mind, Brunell says the tax is a big worry. “One of the things we’ll be asking them to do is since the surcharge was temporary – not to extend it. We’d probably have a stronger case this year than we did four years ago,’’ Brunell said.
Connor said there may be exemptions in the tax code that deserve closing, and he argues that his small-business members typically lack the clout that big businesses have to careve out special treatment in the tax code.
“We need to take a closer look at the work done by the Citizen Commission on Tax Preferences,’’ Connor said, referring to an advisory organization created by the Legislature to help review the more than 500 exemptions in the state tax code.
Most years, the commission finds a reason to close a loophole or end an exemption or change a favorable rate allowed for a particular business or commercial transaction, but lawmakers almost never adopt the recommendations.
Connor said small business also is leery of what new exemptions get written into the code – knowing that Inslee has said he wants to consider tax breaks that encourage businesses to hire and also to help fledging high-tech startups.
“We think it is better overall to have a welcoming tax and regulatory climate” rather than targeted exemptions, Connor said, waiting to see what Inslee and other Democrats propose. “We’ll see how it shakes out.”
In the meantime, Carlyle isn’t promising action on any specific tax bill, and he said he’s not even sure he’ll reintroduce a bill from last year that would put a sunset on all of the state’s tax breaks – requiring all of them to prove their worth every 10 years before being extended. But he does want to get the public and Legislature – and the interest groups that ply its waters – engaged in a broader discussion than has been seen in years.
“My only point is I want taxation on the table,” Carlyle said. “I want everything on the table – no sacred cows – and a courageous conversation about what works and what doesn’t.’’
Should be interesting.