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Senate Revenue Plan Won’t Sustain Investments

Posted by Kim Justice at Jun 25, 2015 07:45 PM |
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By Kim Justice, Senior Budget Analyst, and Andy Nicholas, Senior Fiscal Analyst

The Senate released a set of new proposals today that increase investments and add new revenue, but that still fail to provide the resources needed to sustain investments in the long run.

The three proposals introduced include a new budget proposal for the next two years, a plan to raise additional revenue by closing some tax breaks, and a contingency plan to avoid a shutdown by funding state services for the month of July. The Senate also advanced a bill that would create or extend 14 tax breaks worth $114 million in the coming budget cycle.

The Senate’s new version of a budget increases investments by $367 million above its previous proposal. Added investments include:

  • An additional cost-of-living increase for teachers to align with the increase received by state employees;
  • A nine percent increase in cash assistance that help parents on Temporary Assistance for Needy Families care for their families while looking for work;
  • 12 months of continuous eligibility for Working Connections Child Care so families can maintain stability amid job and income fluctuations; 
  • Restoration of funding for food assistance that was previously cut. 

These additional investments bring the Senate budget more in sync with the needs of Washingtonians and the priorities in the House budget. However, their plan to sustain investments over the long haul is a flop. 

The Senate budget prioritizes education, investing over $2 billion in new funding to pay for K-12 basic education enhancements prescribed under the McCleary ruling, early learning improvements, and tuition cuts for middle-income students. Yet, new resources to continue these investments net out to a paltry $40 million (see graph). 

senate 6_25_15

The revenue proposals include:

Tax break reductions (Senate Bill 6138):

  • Eliminating a sales tax break for large software manufacturers ($57.2 million): Software companies are currently able to claim a sales tax exemption on machinery and equipment they purchase for manufacturing software. The Senate proposal would eliminate this exemption for software companies with more than 40,000 employees that have been in Washington state since before 1981.
  • Eliminating a preferential Business & Occupation (B&O) tax rate on royalty income ($31.4 million): Businesses that earn much of their revenue from royalties, including Microsoft and other corporations that receive royalties from licensing software, currently enjoy a preferential rate of 0.484 percent. SB 6138 would eliminate this preference and collect taxes on royalties at the standard 1.5 percent B&O rate for service-industry activities.
  • Eliminating a B&O tax break for out-of-state wholesalers: Large, multistate wholesalers that do not have a physical presence in Washington are not required to pay B&O taxes, despite the fact that they do millions of dollars in business here. Yet wholesale businesses located in Washington do have to pay the B&O tax. Senate Bill 6138 would make progress on correcting this disparity by applying “economic nexus” standards, which are described more fully here, to wholesalers located outside of Washington state. 
  • Other revenue increases ($33 million): The Senate would also raise additional resources through various administrative actions such as spending revenues from unclaimed lottery prizes (SB 5681).

New or extended tax breaks (Senate Bill 6057 and others):

  • Reinstating wasteful sales and B&O tax breaks for high-tech research and development ($73.5 million): Last year, policymakers wisely allowed a costly B&O credit and a sales tax exemption for high-tech firms to expire. An analysis by the Joint Legislative Audit and Review Committee (JLARC) found these tax breaks failed to create jobs. Senate Bill 6057 would bring these tax breaks back to life.
  • Extending a B&O tax break for businesses that package and process food ($13.2 million): These businesses are currently exempt from paying the B&O tax. That complete exemption is scheduled to expire on June 30, 2015. SB 6057 would extend the exemption to 2025.
  • Reinstating a sales tax break for data centers ($12.5 million): Last year, policymakers wisely did not extend a sales tax exemption for equipment used in data centers, or “server farms,” past the current expiration date of July 1, 2015. SB 6057 would extend the expiration date on equipment to 2025.
  • Enact or extend other tax breaks ($13 million): SB 6057 and other legislation would create or extend a number of smaller tax breaks, ranging from a public utility tax break for logging trucks to B&O tax breaks for aluminum smelters.

Without additional, reliable revenue, these investments are perilous and susceptible to collapse in the event our economy experiences any hiccups in the short term. In the long term, our inadequate revenue system will struggle to maintain investments –  for our education system and the needs of Washingtonians and our economy. 

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