When Gov. Chris Gregoire arrived last month at the 100th birthday celebration for Albert D. Rosellini at his assisted-living facility on Seattle's First Hill, she was immediately waved over to the ailing former governor's wheelchair so he could whisper privately in her ear.
Jeremy Eaton
Jeremy Eaton
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In a room filled with well-wishers, including members of Congress and five other former governors, Gregoire bent down, listened, replied softly, and smiled agreeably.
What do governors talk about when they whisper in each other's ears? Why, taxes, of course.
"He said, 'Go with your heart on taxes,'" Gregoire confided later. "'Do what's best for everyone,' he said." She pronounced that "good advice."
As any of the other political co-conspirators in the room could confirm, taxes are not the sort of thing pols talk about publicly unless they're planning to lower them—and Gregoire's not. But she's also trying to find a way not to raise them as she struggles to mend the $2.6 billion hole in the state's $30.1 billion biennial operating budget. At present, she wants to cut spending, including expanding class sizes and eliminating some social services. She prefers to raid the state's reserve accounts and obtain federal bailout funds to stave off any tax increases.
But that's still likely to come up short, and lawmakers seem bent on finding new tax revenue. Among the current proposals in Olympia is a kind of kiddie "sin tax," eliminating the current sales-tax exemption on candy and gum. The kid who toddles up with a dime for that licorice stick will need a penny in the other hand.
The bill's sponsor, Sen. Jeanne Kohl-Welles (D-Seattle), would like to see the revenue—as much as $40 million over two years—go toward dental and medical services for low-income citizens hit by earlier budget cutbacks.
Which sounds good, but what about all the other sugar out there, the taxes the state doesn't collect? There's a bureaucratic mountain of them. Over the past two years alone, they have accounted for a record $98.5 billion in potential tax revenue the state never got. They're the result of hundreds of tax breaks granted by the legislature, some dating back to 19th-century territorial days, some much more recent. About half the missing money is from state-tax exemptions; the other half is exemptions from local taxes that the state legislature has enacted.
When Seattle Weekly detailed the breaks in a cover story six years ago, the headline was "$64 Billion Falls Through the Tax Cracks." There were 503 tax breaks on the books then. Today there are 567. Thanks to new exemptions and inflation, the amount of uncollected taxes has doubled over the past decade.
Most of these billions are untouchable as revenue. Among other things, governments, schools, hospitals, and churches are exempt from paying taxes on the land they own, as allowed under the U.S. and state constitutions. The largest single exemption comes to $36.2 billion for personal property-tax breaks on "intangibles," says the state Department of Revenue (DOR), such as money, stocks, bonds, and bank deposits. Were it not for this exemption, businesses and individuals would have to pay property taxes on their financial assets as well as their real estate. Reversing other breaks, such as $7.4 billion in sales-tax exemptions on non-restaurant food and services like plumbing and haircuts, would be unpopular and perhaps counterproductive.
But in its latest report, completed in 2008, the DOR identifies $14.8 billion in tax exemptions that "represent potential revenue" if the governor and legislature chose to repeal them. That could shrink the size of a few classes—and send everyone in them off to college, tuition-free.
The DOR doesn't make any specific recommendations, leaving repeal decisions solely up to legislators. But even a small bite out of the exemption pie could ease the annual Olympia hat-in-hand parade for state funding. At a recent Ways and Means Committee budget hearing in Olympia, senators heard how chemical dependency and mental-health services have been slashed while the underfunded prison system is overflowing. Foster kids, street kids, and the mentally ill will get even less help this year. "Some cuts are worse than others," said Gregory Robinson of the Washington Community Mental Health Council, referring to a $4.1 million reduction in residential care for patients leaving state mental hospitals. "And this is a real bad one."
As a result, some lawmakers think tax breaks could be ripe for rollback. "I believe that many tax preferences and exemptions will be repealed or allowed to expire by the full Senate and House this year," says Rep. Troy Kelley (D-Tacoma), chair of the joint legislative committee that will recommend such changes.
To some critics, eliminating tax breaks would amount to tax hikes and an even flatter job market. Many of the more recent "tax preferences," as they're also known, were doled out to aid businesses and promote economic development, in the form of exclusions, deductions, preferential rates, deferrals, and credits.
The 19,000-member Washington Federation of State Employees, however, sees exemption repeal as at least a job-saver. Some of its members were stunned last month when the federation blog mentioned that almost $15 billion was available to offset proposed state cuts in the employee ranks. They swamped legislators with calls and e-mails. Why not use that money rather than hack away at our programs and pay? they asked. Other members couldn't believe the money might really be there. In response to the "skeptical comments about the validity of our assertion," the federation blog ran another item the next day, linking to the DOR online exemptions report.
