Why repealing tax incentives will not be the answer to the school funding problem

Attacking “tax loopholes” is nothing new in Washington budget debates. It’s the perennial tax policy panacea, the painless way to raise a lot of money without imposing a general tax hike. Everybody talks about it, but rarely do the efforts gain much traction. 

There’s a good reason for that. There’s no there there.

Yesterday, in a press conference after the state Supreme Court’s hearing on whether to hold lawmakers in contempt for not satisfying the court’s orders to fund education, Gov. Inslee again targeted tax incentives for scrutiny.

Inslee said he believes the Legislature will have to find more money by closing some tax breaks that businesses receive, a course he’s advocated for the past two years without much success. There are many options for legislators to consider next year, but “you can’t generate $5 billion out of thin air.”

True that. But you also can’t generate $5 billion – or anything close to it – from tax incentives. We go into some detail on the matter in this policy brief and in this one. Back in 2011, when the loophole-closing craze also seized Olympia, I addressed the issue in Crosscut. Not much has changed since then, and we agree with the governor that it makes sense to conduct responsible reviews of the effectiveness of tax policies. But, as I concluded then,

Of course, the tax code should be regularly evaluated. Systematic, thoughtful, and objective review of tax preferences … may indicate that some preferences no longer make good fiscal policy sense. When they don’t, they should be repealed.


Clearly, however, this year’s focus on exemption review has been driven by a search for more money for the state budget. It has little to do with responsible tax policy. And it comes with considerable risk. We should be careful about increasing business costs. By raising taxes on business, we will make the recovery, as painfully slow as it has been up to now, even slower.

Inslee’s predecessor, Chris Gregoire, at one time also looked for the gold in loophole repeals, even specifically targeting gold bullion. And her 2010 budget proposal proposed some small changes in exemption policy.  Later, though, even as candidate Inslee in 2011 attacked tax incentives, Gregoire said this:

“For the alleged tax loophole as has been described… there is always some advocate, there’s always some consequence and often times it’s a job that will be lost,” Gregoire said. “That may be a big answer in Washington, D.C., but we don’t do what they do.” (Video here.)

Gov. Inslee did propose some policy changes in the last biennium. 

Governor Inslee’s budget office worked with the Department of Revenue to review dozens of  tax breaks. Based on that review, the Governor is proposing eliminating or modifying a dozen
tax breaks worth more than $500 million in the 2013–15 biennium.

The list included the sales tax exemption on bottled water, a trade-in exemption, and the tax exemption for non-residents. There’ll be time again to consider the merits of the proposals. But Inslee’s list, like the list proposed by House Democrats, will likely be back. And, again, we’ll see that there’s not much there there. And nowhere near the $5 billion some say is necessary.

Gregoire was right. Often, it’s a job that will be lost. And, we really don’t hand out tax dollars like they do in D.C.