Inslee Tax Break Proposals Won’t Solve Long-Term Revenue Problem

As part of our role to evaluate fiscal policies, we will continue to provide independent, unbiased analysis on this and other gubernatorial proposals as they arise.

Gubernatorial candidate Jay Inslee proposes tax cuts for a variety of industries in Washington state, but this approach is unlikely to boost investments in public health and education that are proven to create jobs and help build a strong economy.

Inslee argues that targeted tax breaks – including breaks for small businesses, aerospace, clean energy, life sciences, and technology companies – would stimulate the economy, which would in turn boost revenues needed to pay for public health and education priorities. But in reality, that approach would force policymakers to further cut these job-creating investments by eliminating tax resources needed to pay for them.

Inslee’s proposed tax cuts could stimulate the economy to some degree. But any benefits associated with the tax breaks would be more than offset by another round of damaging cuts to Washington’s core education, health, and public safety systems – which have already been slashed by some $10.6 billion since the start of the recession.

Former Federal Reserve Board Economist Robert Tannenwald and Iris Lav, former Deputy Director of the Center on Budget and Policy Priorities, concluded that tax breaks are ineffective tools for stimulating state economies. According to Lav and Tannewald:

“State balanced-budget requirements prevent states from stimulating their economies by cutting taxes. If a state cuts a tax, it generally has to make an offsetting cut to expenditures for a program or service in order to maintain balance. This spending cut is likely to reduce demand in the state just as much as the reduction in taxes may stimulate demand. It is at best a zero-sum game, where the gains in one area are offset by the losses in another.”(1)

In the race for the Governor’s seat, neither candidate has offered a viable solution to boost our economy and strengthen our state’s investments. As noted in previous schmudget posts (available here, here, and here) gubernatorial candidate Rob McKenna has an unrealistic budget plan that would significantly damage Washington’s public health and safety investments.

To create jobs and get Washington’s economy moving again, policymakers should invest in job training, child care, education (pre-school through university), adequate health care, and other proven public services.

Making these critical investments won’t be possible without addressing Washington’s outdated and inadequate revenue system. Reforms like updating the state sales tax to include consumer services that didn’t exist when the sales tax was enacted in 1935, and enacting a new tax on high-end capital gains would go a long way towards building a strong economy in the coming years.

Unfortunately, neither candidate has addressed the 800-lb. revenue gorilla.

Stay tuned. More analysis to come on proposals from the gubernatorial candidates.

1. Iris J. Lav and Robert Tannenwald, "Zero-Sum Game: States Cannot Stimulate Their Economies by Cutting Taxes," Center on Budget and Policy Priorities, March 2010, http://www.cbpp.org/cms/index.cfm?fa=view&id=3100