New National Report Highlights Weaknesses of Washington’s Tax Break Evaluations

Posted by Andy Nicholas at Apr 13, 2012 03:24 PM | Permalink

Filed under: State Budget, State Revenue

Washington gets a mixed assessment for its process of evaluating special tax breaks according to a new report from the nonpartisan Pew Center on the States.

The Pew study found that overall Washington ranks among the 13 states that are “leading the way” on tax break evaluations. Washington’s evaluation process was praised for evaluating the majority of state tax preferences over a 10 year period. However, our state received lower scores for the quality of its tax break audits.

Tax break evaluations don’t answer key economic questions

The report finds that effective audits should evaluate how tax breaks impact a state’s economy and the extent to which they create jobs. Many of the audits in Washington don’t provide such an assessment, which is why Pew gave Washington a lower score in this area. It’s important to note that answering these questions isn’t easy. As the study states:

“A core problem vexing states is that it is difficult to determine what would have happened but for the tax incentives. In some cases, they might cause companies to create jobs or increase investment, but they might just be offering public dollars to reward businesses for what they would have done anyway.”

Even so, other states have found ways to tackle the “but for” question. Oregon received high marks for both the scope and quality of its tax break evaluations. The study cited creative approaches taken by that state to assess the economic and jobs impact of several large state tax breaks.

Sunset dates necessary for transparency

Oregon was also praised for applying systematic expiration or “sunset” dates to most state tax credits. Sunset dates are important because they force state policymakers to balance the costs and benefits of state tax breaks against competing public health and education priorities on a routine basis -- an area where Washington needs improvement.

While audits provide useful information regarding the performance of tax breaks, policymakers in Washington state are not required to act on that information. As Bill Longbrake, Chair of Washington’s Citizen Commission for Performance Measurement of Tax Preferences, states in the report:

“It is a great process in terms of depoliticizing it, it is a great process in terms of providing really high-quality analysis and information, it is a great process in terms of involving public stakeholders and getting their views on the table, but it stops at that point […] There is nothing that requires the legislature to do anything other than receive the report and hold one hearing on it.”

As we’ve argued previously, applying sunset dates to most tax breaks in Washington would push lawmakers to act on the findings of state auditors.

The report, co-authored by Jeff Chapman, the Budget & Policy Center’s former Research Director, shows that Washington has made great strides in recent years toward better evaluation of tax breaks, but more needs to be done. Going forward, policymakers should apply routine sunset dates to most tax preferences and should give auditors the tools they need to provide more comprehensive assessments.

For more information read the entire Pew report.

Also check out our policy brief, “Every Dollar Counts: Why it’s Time for Tax Expenditure Reform.”