New tax break audit report: A valuable but limited tool

Related Posts

Washington state’s upside-down tax code is even more racist than you think

It is critical to our future to protect the democratic process & dismantle white supremacy

Washingtonians call for bold action to support an inclusive economic recovery

Now is the time to invest in the health of Washington’s people and communities

Dismal economic forecast shows need for bold investments

New tax break audit report: A valuable but limited tool

By - July 27, 2011

Washington’s Joint Legislative Audit and Review Committee (JLARC) recently released preliminary performance evaluations of 25 Washington state tax breaks (out of more than 500 on the books). The reviewed tax preferences will cumulatively cost our state more than $2.3 billion in the current 2011-13 budget cycle. 

JLARC’s evaluations provide policymakers and the public with useful information about the effectiveness of state spending on special tax breaks. However, the evaluations are greatly limited by state law and available resources. In order to fully understand JLARC’s recommendations, it is important to understand how these constraints affect the review process and analysis.

Important things to note about JLARC’s recommendations

Overall the JLARC report found that of the 25 tax breaks reviewed:

  • Three of these tax breaks, valued at about $44 million, should be terminated or allowed to expire.
  • Eight tax breaks worth about $616 million should be reviewed or clarified by the legislature because they have no discernible public purpose. This includes a wasteful business tax break that primarily benefits out-of-state banks. 
  • Fourteen tax breaks, which total about $1.6 billion, fulfill their intended purpose and should be continued.

While this analysis is informative, it is important to understand the following realities about our tax break system and the constraints around JLARC’s review process:

Many tax breaks cannot be evaluated 

State law places strict parameters around JLARC’s evaluation process. In particular, it is limited by  legislative intent – that is it can only evaluate tax breaks according policy goals established by the legislature. Problematically, the legislature frequently does not establish clear policy goals – i.e. creating jobs – when it enacts a tax break. As a result, JLARC is unable to evaluate these breaks and is forced to simply recommend that the legislature clarify its intent (which has never happened). Of the 95 tax breaks reviewed to date, JLARC has found that 21 do not have a clearly defined purpose. (1) 

Many tax breaks have questionable goals

JLARC cannot comment on the appropriateness of tax break policy goals established by the legislature, even if those goals are overly simplistic, questionable, or even ridiculous.  For example, in its latest report, JLARC recommends continuing a sales tax exemption for certain nonresident shoppers because it fulfills the legislature’s goal of “removing a disincentive for nonresidents…to purchase goods in Washington.” (2)

However, removing a theoretical disincentive is not a reasonable public goal because it is imprecise and not measurable. We don’t want an education system that might educate our children, nor do we want a public safety system that theoretically incarcerates dangerous criminals.  We require that these public systems actually achieve these goals and evaluate them accordingly. The same standard should also apply to narrow tax breaks like the sales tax exemption for nonresident shoppers.  

Yet, because the exemption technically meets the legislature’s  goal of removing a theoretical disincentive, JLARC curiously concluded that it should remain intact. 

(JLARC noted that it is impossible to determine whether this exemption actually increases sales or economic activity in Washington. Accordingly, it should have recommended that the legislature either create a clearly defined and measurable policy goal for this tax break, or eliminate it altogether.)

Reports don’t consider tax breaks within larger budget context

Finally, even in instances in which JLARC recommends that a tax break be continued, the legislature should not necessarily do so. That’s because JLARC’s reports only assess the effectiveness of one type of state spending: tax breaks. (3) Its reports do not evaluate spending on competing priorities, such as ensuring Washington’s children are well-educated, healthy, and prepared to compete in the global economy. Given our limited resources, it may be entirely appropriate for the legislature to redirect funding for special tax breaks (even effective ones) to more pressing investments in health care, higher education, and other important public structures.

Reforms needed to improve tax break transparency

The tax break evaluations conducted by JLARC supply invaluable information about the billions of dollars spent each year on special tax breaks in our state. However, these reports are not enough. State spending on tax breaks still lacks the strict accountability measures that is routinely applied to education, health care, and other public structures. The result has been a highly distorted state budget process in which core health and education systems have been cut to the bone in recent years, while costly and unproven tax breaks have remained completely intact. For more information on how Washington achieve greater transparency over tax breaks read our policy brief Every Dollar Counts: Why It’s Time for Tax Expenditure Reform.

1. One of these 21 tax breaks one was appropriately allowed to expire, but the legislature has never clarified the intent or purpose of a tax break since JLARC began auditing them in 2007. See this summary sheet prepared by JLARC for details.

2. Joint Legislative Audit and Review Committee, “2011 Tax Preference Performance Reviews: Preliminary Report,” July 20, 2011, p. 229.

 3. Most economists and policy experts agree that narrow tax breaks should be treated like direct state expenditures on health care, education, and other public services during the state budget process. More information on this perspective is available here and here.

 

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