While sitting parched in the Senate Ways and Means Committee hearing yesterday on various tax increase bills, I was very enticed, intrigued rather, by the testimony of Steve Gano representing Miller Coors explaining the impact of extending the “temporary” and expiring beer taxes as proposed SB 5039.

To help demonstrated his point, Mr. Gano began his testimony by opening one of his company’s products and pouring it in a glass to demonstrate the change in beer tax rates overtime.

Here is video of his beer tax demonstration:

The point made by Patrick Connor of the National Federation of Independent Business at the end of the above video is also an important one for the Legislature to take to heart. If Olympia keeps breaking its promises, attempts to build trust with the voters will be a losing proposition.

Though lacking in delicious props, I spent my dry testimony focusing on the potential for tens of thousands of jobs to be lost if the tax increases being considered were adopted. I also highlighted the need to focus on stable sources of revenue as opposed to highly volatile ones (such as income and capital gains) as well as the need for fundamental reform of the state’s Business and Occupation tax (B&O) and creation of a “Tax Preference Performance Statement” for bills creating new tax preferences.

Here is video of my testimony: (Click here for video)

Perhaps showing the spirit of Valentine’s Day was alive and well and that the love of a good policy proposal knows no limits, Nick Federici representing the Our Economic Future Coalition agreed with our recommendation for a Tax Preference Performance Statement.

Here is video of his comments: (Click here for video)

As the Legislature considers tax reforms, here are a couple of recommendations for improving tax transparency and tax preference accountability. 

Tax Transparency Website
Enact a tax transparency website modeled after the state’s searchable budget website fiscal.wa.gov. WPC worked with lawmakers in 2008 on the budget website bill. A previous bill to create a tax transparency website was proposed in 2009 but not acted on.

Tax Preference Review process
Have JLARC group tax preferences into the following categories:

  • Influence behavior (Example: RCW 82.08.963 – Solar energy equipment)
  • Improve industry competitiveness (Example: RCW 82.08.02565 – Manufacturing machinery)
  • Create or retain jobs (Example: RCW 82.04.4461 – Aerospace product development)
  • Reduce double taxation/pyramiding (Example: RCW 82.04.440(2&3) – Multiple activities, instate)
  • Direct financial assistance (Example: RCW 84.38.030 – Senior citizens tax deferral)

After tax preferences have been grouped into these categories, have JLARC go through each preference in that category and identify those without explicit legislative intent or stated policy goal. JLARC should start the review in the category with the highest cumulative dollar amount. Before starting the next category review JLARC should submit a report to the legislature with the recommendation that the legislature adopt explicit intent/policy goal. For those with stated intent/policy goal JLARC will follow the current review process required in RCW 43.136.

New Tax Preferences
For the creation of a new tax preference, require completion of a “Tax Preference Performance Statement” (like a fiscal note) before a hearing/vote can occur that answers these questions:

  • What is the intended purpose?
  • What are the performance measures to monitor success in achieving the intended purpose?
  • Who actually benefits (direct/indirect)?
  • What are the planning, record keeping, reporting, and other compliance costs for taxpayers in using the preference?
  • Which of the 5 tax preference categories (mentioned above) does the preference fall in?

Create an electronic database that tracks reporting of key criteria (2-4) for those that claim tax preferences. Subject new tax preferences to a JLARC performance review once every 10 years that answers the questions specified in RCW 43.136.055.

As for the points I made in my testimony about tax structure stability, the following is from a 2010 study (State Tax Revenue Growth and Volatility) by the St. Louis Federal Reserve Bank. It covers 1995-2009 so it is hard to tell how we still compare in light of the last few years but of note:

  • Note figure 17 (page 48) – Washington Growth Rate and Volatility (1995-2009)
  • Note figure 9B (page 39) – This ranks states by the volatility of their tax revenues – Shows WA as having the fourth least volatile tax revenues.
  • “As mentioned, Washington and Oregon (Figures 17 and 18) provide an interesting comparison in tax policy. They have similar economies that are more volatile than the national economy but that also have higher expected growth rates than other state economies. Oregon’s economy is slightly more volatile than Washington’s. This dissimilarity lies mostly in each state’s reliance on one major tax. Oregon depends primarily on the individual income tax, Washington on the retail sales tax (Panels E, respectively). The growth and volatility of each state’s tax revenue shows the varying effects of these choices. Washington’s dependence on the sales tax places its tax revenues in the low-growth/low-volatility quadrant (Figure 17, Panel D). Oregon’s dependence on the income tax keeps its tax revenues far from the efficiency frontier by maintaining or increasing the undesirable combination of lower expected growth for the given level of volatility.”
  • “The corporate income tax is especially problematic in state budgeting because of its high volatility. Interestingly, its high volatility is not associated with a high growth rate. From a similar point of view used to analyze financial markets, this is a high-risk revenue source without compensation provided by higher expected growth.”
  • “As mentioned, the retail sales and gross receipts tax is a very significant revenue source for state and local governments. As shown in Figures 6A and 6B, it grows moderately relative to other tax revenues and is also reasonably stable. It does have a couple of very negative growth quarters. The mean for this category is probably influenced by a series of three quarters of significantly large declines.”
  • “As mentioned, individual income taxes also constitute a very important source of revenue for state and local governments. Their growth rate exceeds that of the retail sales and gross receipts taxes. It is also much more volatile. This volatility is undoubtedly the source of many of the current budgeting challenges faced by state and local governments. Notice the large number of outliers, which correspond to negative rates of growth during the current recession. The significant number of positive deviations possibly encouraged state and local governments to increase their government expenditures and base budgets.”
  • “The property tax is mainly used to finance local government. Its combination of high growth and low volatility make it a very attractive revenue source. Its high growth rate is undoubtedly related to the real estate bubble that existed during the early part of this century. If real estate prices continue to decline, however, the growth rate of the property tax could decline commensurately.”
  • “This analysis recognizes the importance of sales and individual income taxes as the principal revenue sources in state budgeting. The sales tax offers stability but at the cost of a lower growth rate. The individual income tax offers growth but at the cost of increased volatility. Although the property tax currently is used mostly for financing local governments, its attractive growth and volatility combination might mean that states should consider adopting it as an additional source of funding to complement the growth and volatility characteristics of the sales and individual income taxes. More research is needed to understand how a state’s economy and tax portfolios interact to determine the growth and volatility of its tax revenues.”

Additional Information
Where’s the love for jobs?

What to do about the state’s B&O tax and various preferences

State Tax Revenue Growth and Volatility


[reprinted with permission from the Washington Policy Center blog]