Tax Expenditure Reforms Crucial to Transparency, Long-term Accountability

We’ve said it before and we will say it again.

We will not have a rational, transparent, and balanced state budget process until policymakers permanently change how they account the unchecked costs of special tax breaks. Especially during recessions, it is critical that all forms of state spending – both spending on public services and on narrow tax breaks – need to be scrutinized and prioritized so that we can retain our core public investments. Yet throughout the current recession, essential public services have weathered more than $5 billion in painful budget cuts while spending on tax breaks has remained virtually untouched.

Yesterday, we highlighted one critical reform -- developing an executive tax expenditure budget – that could foster a more reasonable budget process in future budget cycles.  Today, we focus on other reforms that would help elected officials keep better tabs on the billions of dollars spent each year on narrow tax breaks.

Earlier this week, the Center on Budget and Policy Priorities (CBPP) released an updated report describing how policymakers and the public can improve oversight of tax expenditures – the myriad of exemptions, deductions, credits, and other special tax breaks.  Their recommendations (many of which are discussed in a recent Budget & Policy Center policy brief) include:

• Establish sunset dates: All other forms of direct state spending on public services must be renewed every two years during the budget development process. By contrast, most narrow tax breaks are “hardcoded” into our state tax laws, meaning they can continue for years or decades without ever being reviewed by policymakers. Establishing “sunset” or renewal dates would force officials to review tax breaks at regular intervals to ensure they meet concrete public goals efficiently. Introduced earlier this year by Senator Kohl-Welles, Senate Bill 5857 would apply renewal dates to most narrow tax breaks in our state. That bill is currently stalled in the Senate Ways & Means Committee.

• Cap the Total Cost of Tax Expenditures: Unlike direct state spending on public services, most narrow tax breaks are not constrained by the state budget – that is, if they cost more than initially projected the state automatically absorbs that cost with no input from policymakers or the public. Capping special deductions or credits can help the state set limits on this type of spending, just as it does on appropriated spending on public services.  According to the CBPP, “This is typically done by requiring anyone requesting a tax expenditure to get approval from a state agency before claiming it on their tax form, and limiting the total dollar amount that the agency can approve in a given year.”

• Eliminate Supermajority Requirements: Under current state law, spending on education, communities, and other public priorities can be cut via a simple majority vote in the state legislature while spending on narrow tax breaks requires a supermajority (two-thirds) vote.  According to CBPP, “The special protection these [supermajority] requirements provide tax expenditures makes it more difficult for legislators to manage the state budget. During recessions, for example, special protection for tax expenditures likely increases cuts to programs funded through appropriations, even when these programs are more valuable to the state’s economy and the long-term health of its communities than certain tax expenditures.” Recently, Senator Ed Murray introduced Senate Bill 5944, would place a referendum on the November ballot to allow that spending on special tax breaks be modified by a simple majority vote of the legislature. (The supermajority requirement for general tax increases would not be effected.) This measure is presently stalled in the Senate Ways & Means Committee.

• Establish performance criteria for recipients of business tax subsidies:  In this time of scarce resources, Washingtonians should not subsidize businesses that ship jobs and investment out-of-state. To prevent this, policymakers should establish specific performance criteria for those businesses that receive special tax breaks. For example, eligibility for business tax subsidies should be based on maintaining a minimum number of jobs and facilities in Washington state.  Businesses that fail to meet these requirements should lose their eligibility for special tax treatment.

Now more than ever, it is critical that policymakers adopt reforms to our state budget process that will allow us to make balanced decisions about our shared investments as we gradually recover from the worst recession since the Great Depression. This cannot be achieved unless we reform how policymakers account for state spending on special tax breaks. The reforms listed above would do much foster greater transparency and accountability over our entire budget process.

For more information on these and other reforms, read the entire CBPP report and our recent policy brief, “Every Dollar Counts: Why it’s Time for Tax Expenditure Reform.”