2019 Post-Session Survey

The recently completed legislative session ended on time April 28, with passage of a $52.8 billion state budget. To support an 18.3 percent increase in biennial spending, lawmakers adopted approximately $1 billion in new and increased taxes

The Legislature also lifted the cap on local property taxes adopted last year, making it possible for school districts to seek voter approval of property tax increases to support local schools. The budget includes increased spending for higher education and financial aid (paid for with increased taxes on service businesses), public employee compensation, mental health, and special education. 

We’re interested in your thoughts on the state budget and legislative session. Thank you for taking a few minutes to complete our brief survey.

Getting to “fair”: understanding tax burdens and the policy implications

The Pew Foundation recently reported the results of a poll testing the public’s view of the federal tax system. Unsurprisingly, most people don’t like it much.

The public sees the nation’s tax system as deeply flawed: 59% say “there is so much wrong with the federal tax system that Congress should completely change it.”

More surprisingly, though …

Just 27% are bothered “a lot” by the amount they pay in taxes. By contrast, 64% say they are bothered a lot by the feeling that some corporations do not pay their fair share of taxes, and 61% say the same about some wealthy people failing to pay their fair share.

Maybe that’s not so surprising considering the inequality drumbeat. Pew writer Drew De Silver, a former business reporter for the Seattle Times, provides some context, including noting the blurry lines between business and personal income taxes given the various ways businesses are organized. Also, this:

In 2013, according to our analysis of preliminary IRS data, people with adjusted gross incomes above $250,000 paid nearly half (48.9%) of all individual income taxes, though they accounted for only 2.4% of all returns filed. Their average tax rate (total taxes paid divided by cumulative AGI) was 25.6%. By contrast, people whose incomes were less than $50,000 accounted for 63.4% of all individual income tax returns filed in 2013, but they paid just 6.2% of total taxes; their average tax rate was 4.2%.

This may or may not be “fair.” But it is progressive. 

Which brings us to today’s installment of the KPLU series on state tax policy, which looks at tax exemptions. Most of them benefit individuals.

KPLU pie

 

Just a small slice of that pie represents business tax incentives. While lawmakers often look to the exemption lists as a source of potential new money, it’s not that easy, KPLU reporter Kyle Stokes writes.

But ending tax exemptions is no simple way to generate new revenue. End the most lucrative sales tax exemptions — such as on food, drugs or services — and individuals will feel it. But ending tax breaks or preferential rates for businesses has its perils, too.

“What a lot of academics will tell you is that, ultimately, people pay taxes,” said Dick Conway, a regional economist who has argued for an income tax in Washington state.

The reason is that businesses dealing locally easily pass along any tax increase to their customers, a phenomenon the Washington State Tax Structure Study Committee noted in its 2002 report

On the other hand, Conway worries about the impact of increases on larger corporations based in Washington state. He says the fear with increasing Boeing’s tax burden, for instance, is that the company would either move jobs away or wouldn’t be able to keep up with their competition, Airbus. Either scenario hurts Washington state’s economy, and, in turn, individuals.

Something to think about when the House budget is unveiled tomorrow.

Aerospace tax incentives are working; the state should honor its commitments

In November 2013 the Legislature extended aerospace tax incentives as part of a strategy to encourage The Boeing Company to locate wing production and final assembly of the 777X in Washington. The company subsequently did so, assuring a continued long-term manufacturing presence in the state by Boeing and its many suppliers. Call it a win.

Yet, from the moment legislators acted, the incentives have been the subject of criticism. An important Washington Research Council policy brief analyzed how the incentive package has been mischaracterized as an $8.7 billion tax break

A competitive tax policy is not a “subsidy” that costs the state money. It is, rather, a pragmatic response to the marketplace, including the global competition for major industrial projects. Tax policies adopted in 2003 were essential for securing the 787. Extending those policies in 2013 helped to win the 777X.

It’s a detailed report, worth reading in its entirety. This session, some legislators are looking to rewrite the agreement, tying the incentives to some baseline employment numbers. HB 2147 was heard last Friday. Research Council president Lew Moore testified that the bill violates three tax incentive principles. (Video here.)

First, a tax incentive should foster the long term success of the recipient, which will secure jobs and revenue, directly and indirectly. Our state’s Office of Financial Management estimates Boeing’s tax incentives will actually create $21 billion in additional revenue. Boeing’s family wage jobs are estimated to create approximately three additional jobs each. Second, the incentive should create certainty and build trust, itself an incentive to stay in our state. And third, the incentive should ensure the state’s competitiveness relative to other states in terms of taxation to keep and grow jobs here. 

The Everett Herald carried pro-con pieces Sunday. On the pro side is HB 2147 sponsor Rep. June Robinson. Taking the opposing view are Chris Knapp and Troy McClelland, respectively chair and president of the Economic Alliance Snohomish County.

EASC makes the critical points:

It is, first important to note that the tax incentives in question are working as they were intended. They’ve already proved to be a valuable, important economic growth engine for our communities and state, even during the nation’s worst recession on record. According to the state’s own estimate the incentives, introduced in November 2013, will generate more than $21.3 billion in state and local tax revenue over 16 years.

…The proposed constrictive legislative changes would hurt employers other than Boeing. In 2013 alone, 458 other Washington aerospace companies used one or more of the existing incentives to help create or retain thousands of jobs in our state, ensuring a strong future for our local aerospace industry.

And, finally,

If the state reneges on a commitment that is delivering so positively, as promised, why would Boeing or for that matter any industry regardless of cluster, trust our future commitments? Simply put, they would not.

…Trust binds people, businesses and legislators together. These proposed legislative constraints would do the opposite.

More on all this in the Puget Sound Business Journal.

WTO questions Washington state tax policies, alleges unfair Boeing subsidy: A teachable moment for policymakers

The World Trade Organization has announced that it will look into Washington state’s aerospace tax incentives, at the request of the European Union (Airbus). The policies adopted in November 2013 have been repeatedly and mistakenly characterized as an $8.7 billion subsidy, a claim nicely debunked in this Washington Research Council report.

The WTO will, naturally, do its own homework. But the charge provides an opportunity to revisit the role played by tax policy in stimulating business activity, creating and retaining jobs, and avoiding distortions like double taxation of commercial transactions.

Washington taxes fall heavily on business, much more so than in most other states. In the Opportunity Washington research report, we wrote:  

Like all states, Washington has adopted tax policies that lower rates and make adjustments to the economic activity being taxed for specific purposes and activities. In addition to the four major Business and Occupation (B&O) tax rates, there are a number of specialized B&O rate classifications designed for different industries. Similarly, the sales tax base has been defined to exclude certain types of transactions, such as food purchases and purchases of various personal and professional services. These adjustments generally promote specific public policy objectives. The business tax burden would be considerably higher — and the state less competitive in attracting and retaining these types of businesses — were it not for such policies.

Although some of the modifications are designed as incentives to promote a specific type of business investment, others are designed to offset disincentives to economic development or competitive inequities that our tax system would otherwise create. (Such disincentives and inequities exist in all state and local tax systems, but they are particularly prevalent in a system like Washington’s that relies heavily on business taxes relative to other states.) In this way, the policies perform a special role in normalizing the tax structure and maintaining a level field of competition.

Additional Washington Research Council reports examine how certain tax policies level the playing field, promote research and development, and explain why the great majority of perceived “breaks” survive our state’s careful review of their effectiveness. 

The EU and WTO may be slow to understand. But it’s very important that policymakers in Olympia get this right.

Changing the rules on tax incentives in Olympia: What message do lawmakers want to send?

The House Labor Committee has scheduled a 1:30 hearing on HB 1786. The bill analysis gets into some background and detail. Jerry Cornfield’s story in the Everett Herald hits the key points.

Aerospace companies that save millions of dollars through tax breaks — or billions in the case of the Boeing Co. — could face new rules if they want to keep them.

A group of House Democrats are pushing to set a minimum wage of more than $20 an hour for veteran employees of those firms and to shrink the tax break for the Boeing Co. if the firm cuts its job force too much.

As Cornfield reports, more is in the works.

A second bill, which could become public this week, will target Boeing. As drawn up, the company would have its tax break reduced if it trims its workforce in the state by a certain number of jobs. Rep. June Robinson, D-Everett, is expected to be the prime sponsor.

Read the whole story, it’s good reporting. Here’s how HB 1786 would change the rules.

Each September, the companies would report the annual earnings of each employee who has been with the firm for three or more consecutive years. As written, the bill covers all jobs including assemblers and engineers, executives and janitors.

Under the bill, each of those employees must be paid at least the state median wage for a one-earner family as reported in the American Community Survey by the U.S. Census Bureau. That wage is currently $52,384 a year.

This mandate is phased in over three years. Starting in 2016, workers must be paid at least 80 percent of this year’s median wage or $41,900, which works out to $20 an hour for a full-time worker. Workers must make 90 percent of the median in 2017 and 100 percent by the start of 2018.

If one employee does not earn the standard in any year, the company loses its entire tax break, according to the bill. A firm can get it back the following year if it complies.

We noted earlier today the importance of manufacturing to our state. A Washington Research Council report last year put the Boeing incentive package in context, dubbing it a mythical $8.7 billion tax break. 

Cornfield’s story closes with the Everett mayor asking the right question.

Everett Mayor Ray Stephanson said he couldn’t comment on the specifics of either bill yet, because he has not seen them. If lawmakers impose new conditions on receipt of the tax breaks, it could quiet the interest of any firms eyeing a move to the city or state, he said.

“I think the risk is this: What kind of message does it send to other companies that you’re recruiting to your state?” he said.

The question answers itself, but as KPLU reports, The Boeing Company provides a clear answer.

“The 2013 incentives require Boeing to build the 777X exclusively in the state — an unprecedented safeguard for taxpayers,” the company said in the statement. “Changing the legislation undermines the confidence of all businesses that the state will honor its commitments.”

Right.