Testimony Before Citizen Commission on Tax Preferences
Last Friday, our Senior Fiscal Analyst Andrew Nicholas testified before the Citizen Commission for Performance Measurement of Tax Preferences in Olympia. He was addressing concerns about the preferential B&O tax rate for prescription drug resellers.
"Thank you Mr. Chair and members of the Commission for giving me the opportunity to testify this afternoon.
I am here to express my concerns about a costly tax break for prescription drug resellers and to offer several reform options for you to consider as you develop your own recommendations for this preference.
The 0.138% preferential business tax rate for prescription drug wholesalers has no proven benefit for workers, families, or the economy in Washington state. Yet, this tax break drains about $20 million in tax resources each budget cycle that would otherwise support education, health care, public safety, and other vital economic investments.
More specifically, this preference:
• Still has no proven benefits for Washington state: Although the analysis of this preference by the Joint Legislative Audit and Review Committee (JLARC) found it is intended to ameliorate a competitive disadvantage for prescription drug wholesalers, critical questions remain unanswered about the true extent of this disadvantage and whether this tax break helps or hinders the overall state economy. The nonpartisan Pew Center on the States identifies the “but for” question – that is, determining what would have happened had the tax preference not been enacted – to be of crucial importance when assessing the efficacy of a state tax break. However, likely due to a lack of data and resources, JLARC auditors were unable to answer this core question. As a result, whether this preference has any tangible benefits for Washingtonians remains unclear.
• Benefits out-of-state businesses: JLARC’s analysis shows this preference to be poorly structured, allowing at least 11 percent of the benefits to accrue to wholesalers located in states other than Washington. As structured, it provides little incentive for firms to relocate to Washington state or to expand existing facilities located here.
• Lacks basic accountability provisions: While proponents of this tax break argued it was needed to protect family wage jobs in Washington state, there are no performance standards in place that would require businesses to maintain or expand such jobs in Washington state. Nor are there any reporting requirements attached to this preference, which would enable JLARC to answer the critical “but for” question mentioned above.
• Mostly benefits large multinational corporations: This tax break is not targeted at smaller firms that lack the resources and economies of scale needed to compete with large corporations. Rather, as noted in JLARC’s analysis, the bulk of this preference goes to three large multinational drug wholesalers that don’t need it.
In light of these problems, I offer the following reform options I hope the Commission will consider as you develop recommendations and comments to policymakers about this tax preference:
• Terminate: Terminating this preference and redirecting the resources to K-12 education is reasonable given that this preference still has no clear benefits to Washington state, and that the state must find billions of dollars in new resources for basic education reform as a result of the McCleary ruling. Governor Inslee and the state House proposed doing just that during the 2013 legislative session.
• Ensure benefits remain in Washington state: Policymakers should restructure and limit this preference to businesses located in Washington state and that continue to make investments here. It makes little sense to subsidize businesses with no presence or investments in Washington state.
• Cap and redirect benefits to small businesses: Establishing limits on both the amount of total state resources devoted to this tax preference and on the amount any one business can claim would help policymakers control costs and more accurately target businesses that most need assistance. Doing so would likely entail converting the program into a credit administered by the Department of Revenue or other relevant state agency. Policymakers could also consider establishing limits on the size of firms eligible for the preference, which would ensure the benefits are directed to small businesses.
• Apply accountability and performance standards: This tax break should not reward businesses that ship jobs out of state or that pay their workers too little to support their families. Accordingly, policymakers should require recipients of this preference to maintain or increase the number of workers employed here. They could also set threshold requirements on wages, salaries, and benefits to ensure workers can support their families without relying on public assistance programs. In addition, firms utilizing this preference should agree to a stipulation that any future investments will occur in Washington state.
• Mandate reporting requirements: Policymakers should require businesses that benefit from this tax break to disclose to the public the total amount of the preference they receive each year, the number of workers they employ in Washington state and the average salaries and benefits of those workers, the number of facilities located in Washington state, and any other relevant information. Such information would help policymakers and the public determine whether or not this preference is performing as promised. In addition, this information would help JLARC answer the all-important “but for” question noted above, which is crucial to evaluating the preference’s overall success.
With the exception of the first option, these options are not mutually exclusive. Ideally, reforms to this preference would include limiting it to Washington state-based businesses, capping benefits, targeting it to smaller businesses, and requiring performance standards and public disclosure.
Thank you again for giving me the opportunity to testify this afternoon."