Tax Increases? Where?

Yesterday’s state budget agreement might have left some with the impression that lawmakers eliminated scores of tax breaks, raising millions upon millions of dollars to preserve public health and education priorities. That simply isn’t the case.

All told, tax increases resolved only $250,000 of the more than $6 billion in revenue shortfalls encountered since the current budget took effect in July 2011, even taking account of what the Legislature did yesterday. During the same period, public investments in schools, health care, transportation, and other things that promote job growth and economic prosperity have suffered some $5 billion in harmful cuts (see graph below). (1) This lopsided approach has only worsened Washington’s long-term economic challenges.

Wait, didn’t policymakers just curtail a wasteful tax break for out-of-state banks? Yes they did. Limiting eligibility for that break to small banks (those that operate in fewer than 10 states) will generate about $14.5 million in the fiscal year that begins this July. They also closed a tax loophole for businesses that sell roll-your-own cigarettes, which will raise about $12 million.

Yet, since January 2011 lawmakers have also created or extended a number of other tax breaks for specific industries – ranging from fruit and vegetable processors ($6.7 million per year) to real estate firms ($1 million per year) to movie production companies ($3.5 million per year). They also established a permanent tax break for newspapers worth about $7,000 per year.

When all of the tax giveaways enacted since early 2011 are accounted for, net tax increases raised less than a quarter of a million dollars for the current budget, leaving important economic investments without desperately needed funding. In fact, if you drew a line to represent the proportion of new revenue over that period, it would be one inch long. A line representing spending cuts would stretch the length of five-and-a-half football fields.

To build a state that can compete in the 21st century economy, policymakers must support first-rate schools, affordable colleges and universities, and a healthy, productive workforce. Doing so will require us to generate new resources by eliminating wasteful tax breaks, modernizing our sales tax by including more consumer services and enacting a new tax capital gains.

1. Net tax increases resolved only $250,000 of about $6.3 billion in budget shortfalls encountered since the start of the 2011-13 fiscal biennium. Going forward, total tax actions enacted since early 2011 will result in a net annual increase of about $3.5 million.