New National Report Outlines Effective Tax Expenditure Budgets

As we’ve written previously, creating an executive tax expenditure budget is one way policymakers in Olympia could improve the transparency and accountability of our murky system of special tax breaks. A tax expenditure budget is a document that provides crucial information about special tax breaks, which are often referred to as “tax expenditures” due to their similarities with direct forms of state spending.

Structured properly, a tax expenditure budget can be a valuable policy tool that allows lawmakers and the public to balance the costs and benefits of narrow tax breaks against other public priorities, such as ensuring we live in safe, healthy, and productive communities.

Benefits of a tax expenditure budget

A recently updated report from the Center on Budget and Policy Priorities (CBPP) highlights virtues of a properly designed tax expenditure budget. According to the report, a tax expenditure budget:

•    Makes tax breaks more transparent.
•    Encourages accountability.
•    Saves money by exposing excessive costs.

Elements of an effective tax expenditure budget

The CBPP report also identifies the core elements of an effective tax expenditure budget. These elements include:

•    Accessibility: The budget should be published regularly (at least once every two years), be available online, and be incorporated into the state budget process.
•    Comprehensiveness: The budget should include all tax expenditures, including implicit tax expenditures such as the sales tax exclusion of consumer services.
•    Detailed information: For each tax expenditure the budget should include information on the cost to the state and local governments, a detailed description, projected future costs, and the number and a description of tax payers that benefit from it.
•    Performance evaluation: Each tax expenditure should be evaluated as to its effectiveness at achieving its intended purpose.

While the Washington State Department of Revenue produces a “Tax Exemption Report” every four years, the report has several significant deficiencies and is largely disconnected from the state budget process. Earlier this year, State Representative Bob Hasegawa introduced House Bill 1889, which would create a true tax expenditure budget here in Washington. However, this important measure is presently stalled in the House Ways & Means Committee.

Read the entire CBPP report for information on how we can create an effective and informative tax expenditure budget.

Tomorrow we’ll detail several other badly-needed reforms to our tax expenditure system and our entire budget process.