Legislation Promotes Tax Expenditure Transparency and Accountability

New legislation will finally recognize that tax breaks are really expenditures and should be treated as part of the biennial budget. That legislation is Senate Bill 6853, “The Tax Preferences Act of 2010.” (Note: see the amended bill at the bottom of the linked bill report page)

In describing the legislation last week, Senator Rockefeller explained that the proposal would make “those who receive preferential treatment under our tax code” justify their preference like other parts of budget such as education and health care spending.

So, what are tax expenditures? They are special tax breaks that reduce the funds available for other priorities. In total, we will forego $13 billion of tax revenue in the coming two year budget cycle because of tax exemptions ($1.6 billion from those passed since 1995 alone). The figure below shows tax expenditures enacted since 1995 by category. Some of these tax expenditures make clear improvements to the tax system. Others need to be reviewed to determine whether they are meeting their stated purpose and whether they are a priority when considered alongside other spending items. (See the Center on Budget and Policy Priorities’ paper: “Promoting State Budget Accountability Through Tax Expenditure Reporting” for more information).

 
In Washington State, tax expenditures are treated quite differently from other expenditures in the budget process. We regularly review our spending on education, health care, and transportation, but not how to fund tax breaks. In Oregon, the Governor's biennial budget proposal includes a biennial report. Additionally, in 2009 Oregon enacted legislation which places a sunset date on most existing corporate and personal income tax credits.

While we don't do an official biennial review as part of the budget process, in 2006 the Legislature created a process for a long term review. The Joint Legislative Audit and Review Committee (JLARC) conducts extensive reviews of each tax expenditure based on predetermined calendar and makes recommendations about continuing or altering most of them (some were excluded from consideration). A Citizen's Commission for Performance Measurement of Tax Preferences then reviews JLARC's report and makes independent recommendations to the Legislature.

Unfortunately, JLARC's review process hasn’t resulted in many changes. This legislation would be giant step forward towards transparency and accountability.