The state Department of Revenue (DOR) is requesting legislation that would automatically sunset any new, extended, or amended tax preference after 5 years. DOR’s request bill (HB 2530) is scheduled for a public hearing at 3:30 on Monday.
According to DOR:
“The Department of Revenue is requesting this legislation at the suggestion of Governor Gregoire. The Department concurs that creating a default five-year expiration date for all future tax preferences would enable the state to better determine whether a tax preference is meeting its intended policy objective.
This proposal is intended to improve accountability for tax preferences in the following ways:
- Inconsistencies and inadequacies with the existing annual survey and annual report required from recipients of certain tax incentives are addressed by:
- Creating a single, uniform tax incentive accountability reporting document by replacing the annual report with the annual survey;
- Requiring the beneficiaries of any new tax preference enacted by the Legislature to file an annual survey with the Department, unless the Legislature excludes the tax preference from this requirement;
- Expanding the annual survey to request information about a taxpayer’s capital investment in this state;
- Providing that all information reported on annual surveys, except for amounts claimed under the aerospace product development B&O tax credit and any information requested by the Department that isn’t specifically required by statute, may be disclosed to the public upon request;
- Requiring the Department to compute the relative tax burden, by tax type, for each taxpayer claiming a tax preference requiring an annual survey. The Department must also compute an aggregate relative tax burden. The relative tax burden is the ratio between the amount of tax paid and the amount of tax that would have been paid by taxpayers without the application of the tax preference.
- The difficulty in eliminating tax preferences that are not meeting current policy objectives is addressed by establishing a five-year expiration date for any new tax preferences enacted by the Legislature, unless the Legislature specifically provides for a different expiration date or that the tax preference is exempt from the five-year expiration date.”
Here is what Section 2 of HB 2530 says:
“The legislature makes the following findings:
(1) Accountability and effectiveness are important aspects of setting tax policy. In order to make policy choices regarding the best use of limited state resources the legislature needs information to evaluate whether the continuation of existing tax preferences is in the public interest.
(2) The existing annual reports and annual surveys used to gather data from taxpayers to evaluate the effectiveness of tax incentives should be improved and consolidated into a single document. This will provide better information with which to evaluate the effectiveness of tax preferences. This will also provide greater consistency for taxpayers and simplify administration for the department of revenue.
(3) The process for evaluating tax preferences would be strengthened by: (a) Establishing a five-year expiration date for those tax preferences enacted by the legislature in the future that are subject to the annual survey; and (b) Requiring that whenever the joint legislative audit and review committee recommends that a tax preference be modified or terminated immediately, the committee must include in its report to the legislative fiscal committees draft legislation to implement the recommendation.”
In 2006, lawmakers adopted HB 1069 which set up the Citizen Commission for Performance Measurement of Tax Preferences administered by the Joint Legislative Audit Review Committee (JLARC). WPC’s Vice President for Research Paul Guppy serves on the commission.
Here is a copy of JLARC’s 2011 Tax Preference Performance Review.
Just as state spending should identify performance outcomes, tax preferences should as well. This is why WPC has been supportive of and serves on the JLARC Citizen Commission for Performance Measurement of Tax Preferences.
Our ultimate goal is to one day replace the B&O tax with a Single Business Tax based on total receipts that would allow all existing business tax preferences to be repealed on a revenue neutral basis. Any repeal of tax preferences should occur for the purpose of adhering to sound principles of taxation (such as simplification and transparency) – not with the intent to take more revenue from businesses for government spending.
Short of this overall reform, the existing tax preference review process occurring by JLARC and the Citizen Commission should be allowed to continue and the Legislature should act on the recommendations.
The Legislature should also review the legislative intent for current tax preferences and make refinements for those that don’t specify a specific performance expectation.
By providing performance criteria, sunsetting new exemptions, and continuing the JLARC and Citizen review process for existing tax exemptions, the policy goals should be able to receive adequate review without providing too much uncertainty.
The challenge with automatically sunsetting tax cuts and exemptions, however, is that doing so creates financial unpredictability for taxpayers from one year to the next. Ultimately, when tax cuts and exemptions are set to expire automatically, it is the same as building automatic future tax increases into the law.
In contrast, tax increases generally don’t expire, or sunset, on a certain date. They tend to be permanent, thus allowing lawmakers to avoid addressing them or having to take an official position. Often taxes are created or increased for specific projects, but they do not expire automatically when the project is paid for or completed. Lawmakers then redirect the revenue into the general fund or mark it for future spending. It becomes tax revenue in search of spending.
This is why if tax preferences are given an automatic sunset, tax increases should receive the same treatment. When new taxes and tax increases are set to expire, lawmakers will have the opportunity to determine whether the tax is serving its intended purpose. If collecting revenue from the tax still serves the public interest, lawmakers can reauthorize it for a further period of time. If the project or goal for which the tax was imposed has been accomplished, the tax should expire and citizens should be permitted to keep their money.
SJR 8217 would implement this type of review process for tax increases by automatically sunsetting them no later than 5 years after they become effective.