$500M in tax breaks targeted to help close budget gap

OLYMPIA — Washington's $2.7 billion budget shortfall is prompting the Legislature to take a closer look at a state tax code riddled with hundreds of tax breaks carved out over decades for various businesses.

Senate Democratic leaders on Tuesday proposed a budget that would pare 26 tax loopholes and exemptions, bringing back $500 million a year to the state treasury. They also want to ensure closer scrutiny of any future tax exemptions.

The Senate plan would end a long-standing tax deduction for used-car trade-ins, cap a tax break for first-mortgage lenders, and start charging sales tax on nonorganic fertilizers and sprays purchased by farms. Private airplane owners, coin dealers and out-of-state credit-card companies would also see higher taxes.

That's only a small slice of the more than $50 billion a biennium worth of state tax breaks on the books.

But the Senate plan immediately drew shots from critics who argue many of the tax breaks are justified — and ending them would cost jobs.

And even as lawmakers look to halt tax exemptions for some industries, there are proposals in the Capitol to extend others benefiting aluminum smelters, zinc mines and newspapers, among others.

With state House budget writers set to unveil their own tax plans as early as Wednesday, the argument over which industries receive or lose cherished tax breaks is bound to grow more intense. Lawmakers are scheduled to pass a budget and adjourn the 60-day legislative session by March 11.

"For every one of these tax breaks there was a lobbying campaign to get them on the books in the first place, and there is a lobbying campaign to retain them," said Marilyn Watkins, policy director for the Economic Opportunity Institute, a labor-supported think tank that has urged legislators to close many more corporate tax loopholes.

Republicans and some business representatives argued the Senate Democrats' tax plans will cost the state jobs.

"The two industries hit the hardest are the two we need the most to recover — home sales and auto sales," said Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee.

Zarelli was referring to the Senate plan's intent to end long-standing tax breaks that aid auto sellers and banks selling home loans.

The car-tax break was created by a voter-approved initiative in 1984. Now, for example, if a customer trades in a $5,000 used car toward the purchase of a $20,000 car, the customer pays sales tax only on $15,000, saving around $400 in taxes.

Ending the trade-in deduction would hurt car dealers already reeling from the recession, said Vicki Giles Fabre, executive vice president of the Washington State Auto Dealers Association. She said new car sales in Washington dropped about 26 percent in 2009, while the national drop was 22 percent.

"This is an industry that has been on the brink — in this state — of disaster for lost dealerships and franchises and you are making that worse by taking away incentives for the customers. You are going to add fuel to the fire," she said.

The Senate plan also would change Washington's sales-tax exemption for nonresidents to a rebate program.

Instead of just flashing an Oregon driver's license to avoid sales tax, for example, Oregonians would have to keep track of purchases and send in an application for a rebate. The state assumes many wouldn't bother, so the state would reap an additional $24 million a year in taxes.

Senate Democratic leaders said they're weighing each of the tax exemptions against cuts to state services that will be required if the state does not raise more revenue.

Senate Majority Leader Lisa Brown, D-Spokane, called the Senate budget blueprint a "moral document" that takes a "balanced and responsible" approach of cuts, tax increases and closing some tax exemptions to avoid slashing services such as education and health care.

The Senate plan also calls for more scrutiny of any new tax exemptions proposed in the Legislature.

At the very least, any tax-break legislation should be required to include a statement saying why it is needed and an end date, according to an outline provided by Sen. Phil Rockefeller, D-Bainbridge Island, who helped write the Senate tax plan.

His proposal also would require businesses receiving tax breaks to divulge more information about the benefits they get.

Rockefeller sits on a citizen panel that has been slowly poring over the tax code's 500-plus exemptions and special, lower tax rates for certain businesses or industries. But that group's mandate has been limited, resulting in few recommendations to actually end tax breaks.

So Rockefeller said he'll also propose a new task force charged with more aggressively scouring tax exemptions, evaluating their worth, and comparing them to other states.

"The narrower the tax exemption, the more specifically targeted to a specific taxpayer or group of taxpayers, the more you have to ask whether it was developed in the public interest," he said.

Staff reporter Lillian Tucker contributed to this report.

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com