Don’t forget the tax expenditures: The need for sunset dates
At a time when policymakers are contemplating massive cuts to core public priorities, one large area of state spending – tax expenditures – remains in need of significant reform.
Earlier this week, we noted that the bevy of preferential tax rates, exemptions, deductions, and other tax expenditures costs our state some $6.5 billion in foregone resources each year – a cost that is borne by ordinary tax payers through higher general tax rates and diminished public services. Yet, these tax subsidies escape even basic scrutiny during the budget process, meaning their costs are not balanced against other public needs, such as educating our children.
Today, we propose the first of several common-sense, and long overdue, policy reforms that would address these problems: imposing expiration or “sunset” dates on all current and future tax expenditures.
Sunsetting tax expenditures would force policymakers to consider their costs
The major problem with tax expenditures is that legislators are not required to review them during the budget process to ensure they achieve their intended public purposes. As a result, during recessions policymakers often resort to cutting basic public services in order to balance the state budget, while costly tax expenditures avoid serious scrutiny.
An effective way to force policymakers to balance the need for health care, public safety, and other core services against the costs of tax subsidies would be to: 1) apply expiration dates to all existing tax expenditures; and 2) apply automatic sunset dates to all newly enacted or re-enacted expenditures.
Reform is long overdue
The vast majority of tax preferences do not have a scheduled sunset date. The graph below shows that of the 301 tax preferences that would generate revenue if repealed, only 37 (12 percent) include an expiration date.
A new framework
Developing a systematic framework to sunset all tax expenditures over the next several years would help policymakers make balanced and reasonable choices about spending priorities while our state recovers from the Great Recession.
The key advantages of this approach include:
- Creating a holistic view of the state budget: In deciding whether to renew expiring tax expenditures, legislators would be forced to consider how each one impacts our ability to maintain basic public services. This would assist them in making more balanced and rational choices when recessions and other disasters strike.
- Making better use of Washington’s current tax expenditure audit system: In 2006, the legislature created the Citizen Commission for Performance Measurement of Tax Preferences, which is charged with reviewing all tax preferences to ensure they achieve their intended public purposes. The commission has already reviewed 133 tax preferences, but the legislature is not required to act on its recommendations. Sunsetting tax expenditures would force the legislature to make use of the Commission’s prior work; the Commission would also be the logical entity to conduct future audits of expiring tax preferences. Currently, the Citizen's Commission has the capacity to analyze about 30 tax preferences per year. That number could be increased with additional resources, however.
- Starting a dialog about long-term reforms: As noted earlier this week, special tax preferences targeting a minority of taxpayers mean that ordinary taxpayers in Washington must pay higher tax rates in order to maintain essential public services. Sunsetting all tax expenditures would force policymakers to consider this and other deficiencies of our current revenue system and could spur them to enact needed long-term reforms.
Don’t change that dial. Future schmudget posts will detail other long-term reforms that would enhance transparency in Washington’s tax expenditure system.