Jobs and Education Should Prevail Over Tax Breaks

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Jobs and Education Should Prevail Over Tax Breaks

By - April 24, 2013

Opponents of legislation that would close wasteful tax breaks to build a better education system for all of Washington state’s children are using flawed arguments to try to derail the effort.

House Bill 2038, which passed the House Finance Committee yesterday, would invest about $900 million in schools and expand opportunities for generations to come. To generate the resources needed to modernize our schools, the legislation would close or narrow about $400 million in tax breaks and continue a tax increase on business services that is scheduled to expire at the end of June.

Investing in education is one of the most effective ways of creating middle class jobs and a vibrant, competitive state economy. Yet, at a recent public hearing on HB 2038, a range of corporate special interests erroneously claimed that if they were required to pay the same tax rates as most other businesses in Washington state, they would be forced to fire some of their workers and not hire others. They ignored several facts:

  • Education is key to building a strong economy: Consistently, businesses cite an educated and skilled workforce as a primary factor in deciding where to locate and create jobs. Investing in high-quality schools fosters  economic growth and creates an economy capable of sustaining a strong middle class with well-paying jobs. Unfortunately, per student funding has been consistently cut since the start of the recession, while spending on tax breaks has remained virtually untouched. 
  • Demand for goods and services creates jobs: Washington state’s economy is not struggling because there are too few tax breaks on the books. If tax breaks created jobs, the economy ought to be booming with 640 tax breaks currently in place. Ultimately, businesses hire workers when they expect an increase in demand for their products or services. Consumer demand remains very weak in wake of the Great Recession, which is a big reason businesses in Washington state are not hiring. Tax cuts for businesses, broad or narrow, do little to spur demand among consumers.
  • Public investments bolster demand for goods and services: Investments in education, health care, and other public services can help stimulate local demand during hard economic times. State and local governments purchase many products and services from local businesses, hire local workers who spend their money at local stores, and contract with local businesses to provide essential services and to build roads, bridges, and other vital economic infrastructure. All of these things help sustain economic demand during tough economic times while laying the groundwork for a more prosperous state economy in the long run.
  • Many tax break dollars subsidize jobs and shareholders in other states: It is very difficult to ensure that tax break dollars, and their benefits, stay in Washington state. Rather than creating jobs in local communities, a significant portion of tax break dollars pad the profits of corporations and corporate stockholders in other states. That is very likely the case for a number of tax breaks that would end under HB 2038 – such as a high-tech research and development credit claimed by many large software companies, which created few jobs at a very high cost to the state; a complete business tax exemption for importers; and a preferential business tax rate for prescription drug wholesalers that is available to both in-state and out-of-state businesses.
  • Most tax breaks under consideration have failed performance evaluations or serve no purpose: Of the 11 tax breaks that would be eliminated or narrowed under HB 2038, seven have been reviewed by state auditors. In four of those cases, the auditors found that the tax breaks should be repealed because they failed to create jobs or serve any other valid public purpose. Auditors were unable to measure the performance of the remaining three tax breaks because they could find no measurable purpose for them whatsoever.
  • Most tax breaks don’t create jobs: State taxes represent a tiny fraction of business’ overall costs. Nationwide, all state and local taxes combined represent between 2 percent and 3 percent of total operating costs for the average corporation and have only a marginal impact on business investment decisions. Moreover, the resources used to finance these poorly designed tax breaks would be far more effectively used to fund education and other public priorities that have a much larger return on investment.

The bottom line is that HB 2038 is a modest but smart step toward creating middle class jobs and a state economy that works for all Washingtonians. Those who claim that tax breaks are needed to create jobs overstate their effectiveness and fail to recognize the economic benefits of investing in better schools for our children.

About Andy Nicholas, Senior Fellow

Andy specializes in state budget and tax policy. Since joining the Budget & Policy Center in 2009, he has served on a Legislative Task Force on Tax Preference Reform and has conducted numerous analyses of Washington state’s tax code.

Read more about Andy