House bills would close tax breaks to fund education, mental health, and in-home care
Three bills were recently introduced in the House that would close targeted tax breaks that primarily benefit out-of-state entities while funding vital programs that serve some of the most vulnerable in our state. All three bills seek to repeal the sales tax exemption for out-of-state residents. One of the bills also seeks to curtail a business and occupation (B&O) tax deduction that predominately benefits large national banks.
As we’ve previously highlighted, even though they have a large impact on the state budget, tax expenditures in Washington state are largely exempt from the accountability and transparency structures applied to other forms of state spending.
• Tax breaks for banks and out-of-state shoppers are highly unfocused policy instruments that lack accountability requirements: There are no requirements that the benefits of these expenditures remain in Washington state. In all likelihood, most of their benefits simply flow out-of-state.
• Tax breaks for banks and out-of-state shoppers are extremely inefficient mechanisms for stimulating our state economy: This is especially true in the case of the first mortgage deduction for banks. It is important to note that the bulk of this subsidy goes towards interest income received from existing home mortgages -- that is, mortgages on homes that have already been built. Yet, subsidizing mortgages for houses that are years or decades old has no stimulative impact whatsoever. The goal of this tax break is unclear. However, if the goal is to stimulate housing construction, there are far more cost-effective ways to do so.
• Investments in our public structures have a much higher bang for the buck: A wide body of research shows that investments in education, health care, and transportation infrastructure have a proven bang for the buck when it comes to stimulating state economies – both in the short run and in the long run. Accordingly, reinvesting the more than $200 million spent each biennium on these two tax breaks in services like health care and education would be a far more effective way to stimulate our economy.
HB 2078- would curtail a B&O tax deduction that predominantly benefits large banks and financial institutions headquarted out-of-state. By capping the deduction at $100 million (in other words, banks would still be able to deduct up to $100 million in mortgage interest income each year), the measure would protect small community banks. The measure would also eliminate the non-resident sales tax exemption. In aggregate, HB2078 would generate some $143 million in new resources over the coming 2011-13 biennium, which would be used to restore funding for smaller class sizes in kindergarten through 3rd grade. (K-3 funding is slated for elimination in both the House and Senate budgets).
HB 2087- also seeks to close the sales tax exemption for out-of-state residents. The resulting revenue would fund mental health services for people who do not meet Medicaid requirements (slated for elimination in both the House and Senate budgets).
HB 2102—repeals the non-resident sales tax exemption as well as extends sales and use taxes to debt collection services. The revenues from closing both tax breaks would go to in-home care services provided to seniors and people with developmental disabilities, (slated to be reduced by $97 million in the Governor’s proposed budget as well as the House and the Senate budgets).
Both HB 2087 and HB 2102 have a referendum clause, which means if passed, they would need approval through a public vote.
Our recent policy brief, “Every Dollar Counts: Why It’s Time for Tax Expenditure Reform,” provides more analysis on how we can reform our tax break system.
Be sure to check out our new Framework for Prosperity website. This tool provides a common sense, vision-based approach that includes measuring our progress toward key public priorities and securing our fiscal future through long-term reforms.
