New Research Council Report Offers Flawed Defense of Tax Breaks

A new policy brief from the Washington Research Council doesn’t tell the whole story when it comes to special tax breaks and the state budget.

The Council argues against re-appropriating a small slice of state tax dollars spent on hundreds of special state tax breaks to fund more productive investments in health care and education. We agree that many tax expenditures – the myriad of special exemptions, deductions, credits, and other tax preferences – serve a perfectly valid public purpose. However, the Research Council’s contention that most tax expenditures exist to mitigate structural problems with our revenue system is off-base for the following reasons:

• Ad hoc tax breaks don’t solve structural problems:  The Research Council correctly notes that Washington's tax structure has many serious flaws and inadequacies. However, our current tax expenditure system does not meaningfully address these fundamental problems.  Rather, tax breaks are routinely enacted on a largely ad hoc basis and without consideration to their impacts on our overall revenue structure or the state budget. The result has been an inconsistent patchwork of tax breaks that favor certain industries over others.
• Special tax breaks can exacerbate the flaws in our tax system: As the Research Council notes, one of the major flaws of our tax system is that it unevenly impacts different industries, which results in inefficient decision-making. The most efficient taxes are those that apply a low rate to a broad array of activities, products, services, or income. Here in Washington, we’ve been systematically shrinking our tax base via special tax exemptions over the last 20 years or so. Without fundamental reforms, many of the inefficiencies and flaws in our current tax system could get much worse as policymakers are forced to apply higher tax rates to an ever-shrinking base of activities.(1)
  
• Further cuts to essential services would be more harmful to our state economy than eliminating narrow tax breaks: The Research Council warns that eliminating tax expenditures could harm our economic recovery. Yet they ignore the economic damage that  would result should policymakers enact an unbalanced, cuts-only budget that would further undermine our vital public health, safety, and education infrastructure.  Mainstream economic theory – as articulated by Nobel prize-winning economist Joseph Stiglitz and former Office of Management and Budget Director Peter Orszag – demonstrates that cutting important state services following a deep recession is more damaging to state economies than increasing revenues via tax increases or eliminating tax expenditures. (2)
  

Finally, while the Research Council acknowledges the need for tax expenditure transparency, they suggest that our current Citizen’s Commission on tax preferences sufficiently meets this requirement.  We disagree. The Commission produces detailed reports and recommendations on some tax preferences each year. However, of the 95 tax expenditures reviewed by the Commission to date, they have recommended that 24 be eliminated or clarified.  So far, the legislature has not acted on a single one of these recommendations.

In sum, we need to deal with the fundamental problems of our tax structure with thoughtful, holistic reforms, not ad hoc tax breaks for certain groups or individuals.

For more information on how Washingtonians can modify our opaque tax expenditure system, read our policy brief, “Every Dollar Counts: Why It’s Time for Tax Expenditure Reform.”

Also, check out our new Framework for Prosperity tool, which 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.

1. More details on this point can be found in the 2006 analysis "How Broad Should State Sales Taxes be? A Review of Empirical Literature," by Economists William F. Fox and LeAnn Luna.

2. Peter Orszag and Joseph Stiglitz, "Budget vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?" Revised November 6, 2001, http://www.cbpp.org/cms/index.cfm?fa=view&id=1346.