House committee hears testimony on tax expenditure budget; the flawed concept again on the agenda in Olympia

The real and the ideal often collide in public policy. Concepts with intuitive theoretical appeal frequently run into insurmountable practical challenges when proponents attempt to turn them into public policy reality. A recurring example is the “tax expenditure budget,” of which we first wrote several years ago

Yesterday, the House Finance Committee held a hearing yesterday on HB 1703, which would, among other things (according to the bill summary), provide that 

The Operating Budget enacted by the Legislature must include a discretionary tax expenditure budgets…

Beginning December 2020, the DOR Tax Expenditure Report must be updated every two years instead of every four years…

The DOR must also prepare a discretionary tax expenditure report and transmit it to the Governor. The Governor must submit a proposed discretionary expenditure budget to the Legislature as part of the Governor’s proposed operating budget documents, including the estimated revenue impact…

The fiscal committees of the Legislature must hold public hearings and adopt a discretionary tax expenditure budget as part of the omnibus appropriations act. Failure to include a required discretionary tax expenditure in the enacted omnibus appropriations act will result in the omitted tax expenditure expiring at the end of that calendar year.

Tax expenditures in the discretionary tax expenditure budget must be treated as any other state expenditure and be reauthorized with each biennial budget. In addition, tax expenditures must have an expiration date of 10 years of less. Any discretionary tax expenditures created or extended may not be approved for more than 10 years and must be subject to the JLARC review. The Legislature can expire a tax expenditure earlier than its expiration date by a majority vote or by inclusion in the enacted omnibus appropriations act.

There’s a lot more and this post is not a bill analysis. Read the summary and the bill for detail.

We do, however, have some thoughts about the bill. 

Here’s the TVW coverage of the staff briefing and statement of the prime sponsor

And here’s the four-person panel testifying on the bill (two pro, two con). As one of the proponents testifies, this is the sixth time the bill has been before the committee. There are reasons it has not moved forward. 

Clay Hill, with the Association of Washington Business, testified against the bill.,  particularly objecting to section 4(4) which requires reauthorization of tax expenditures in a budget adopted with the biennial operating budget. AWB does not oppose having  the current DOR Tax Exemption Report, which is currently published on a four-year cycle, being updated every two years.  In his testimony, Hill referred to a   WashPIRG  report that gives Washington a “C” grade on spending transparency, noting that improving spending transparency should also be a concern for those backing the tax expenditure budget.

We noted the collision between the ideal and the real. A Washington Research Council report expands on our theme.

The tax expenditure concept—which is attributed to the late Stanley Surrey, a Harvard law school professor who served as Assistant Secretary of the Treasury for Tax Policy in the Johnson Administra- tion—arguably could provide a useful framework for analyzing tax adjustments. Yet, the theoretical construct has faltered in practical application.

Indiana University professor JohnMikesell explains Surrey’s concept:

Stanley Surrey … observed that anytax structure in practice includes two elements. The first element is the [normal or benchmark] tax policy structure that has been developed to raise revenue. This defines the stand- ard according to which the cost of government will be divided. The second element is the structure that has been enacted to provide relief and subsidization for certain taxpayers. (Mikesell 2012)

Surrey dubbed the adjustments intended to deliver relief and subsidization tax ex- penditures. He believed that tax expendi- tures should be regularly reviewed as part of the budget process and that regular reports cataloguing and valuing tax expenditures would facilitate this…

…while some Washington policymakers would wish otherwise, the state’s ex-emption report falls short as an expenditure budget. Mikesell categorizes DOR’s Tax Exemption Study as a “revenue reducer list,” which makes “no attempt to distinguish provisions that define the basic tax structure from provisions that deliver a preference to certain elements of the private economy” (Mikesell 2012). In other words, the report provides “little guidance” to legislators seeking to use it to shape policy (Mikesell 2002).

The tool proposed, that is, does not exist presently. Of greater concern, though, is the likelihood that the biennial tax expenditure budget as proposed in HB 1703 introduces an unprecedented uncertainty to state tax policy, jeopardizing the certainty and stability that has contributed to Washington’s extraordinary economic growth. We anticipate hearing more about this issue in the coming weeks.