State lawmakers convening in Olympia are looking under every pebble for new money. They must write a budget with as much as 20 percent less tax revenue.
Often when cash is short, some want to repeal the so-called “tax loopholes.” They presume that businesses will simply cough up the extra cash. There are two problems with that line of thinking: First, the extra tax burden will cause some businesses to stop hiring or close altogether. Second, eliminating tax incentives tells prospective new employers, “Go away, we don’t want you here.”
Look at California, for example. Its combined state and local sales tax is 10.25 cents on the dollar – the highest in the nation. Yet state lawmakers have consistently rejected proposals to reduce the sales tax for manufacturers.
That is one reason the Golden State has lost 633,000 manufacturing jobs since 2001. According to a Business First of Buffalo study released at the end of December, the Los Angeles area alone lost more than 300,000 jobs averaging $64,000 a year.
Washington has long understood the value tax incentives bring to the state. In 1972, following massive layoffs at Boeing, state lawmakers created the Economic Assistance Authority to attract industrial investments.
It worked. The EAA incentives were pivotal in Crown Zellerbach’s decision to modernize its mammoth Camas pulp and paper mill where 3,000 people worked, instead of expanding a newer mill in Oregon. The EAA included a sales tax exemption on new pollution control equipment – roughly half of the modernization cost – a sales tax deferral on the entire project and a business and occupation tax credit on the other half of the costs. In 1978, with the incentives in hand, Crown began the five-year modernization project despite a deep recession with double-digit unemployment, inflation and high interest rates.
But in 1981, when Republicans took control, the state was in a financial hole. Republican Gov. John Spellman, House Speaker Bill Polk, R-Bellevue, and Senate Leader Jeannette Hayner, R-Walla Walla, faced plummeting state revenues, much like the situation we face today.
Desperate to bring in much-needed cash, Spellman and Republican lawmakers repealed the EAA tax incentives. That one decision added $10 million to the cost of the Camas modernization project and even though Spellman and lawmakers later restored the EAA credits for the Camas facility, the damage was done. Since then, Crown Zellerbach and its subsequent owners have concentrated their investments outside Washington.
In 1995, Democrat Gov. Mike Lowry and a bipartisan group of legislators restored sales tax exemption on manufacturing machinery and equipment with spectacular results.
For example, an Association of Washington Business survey of 150 small manufacturers showed they invested more than $250 million in the first year alone. Over the first decade, it added $81.5 billion to the state coffers, generated more than $16.5 billion in income and created nearly 285,000 jobs.
Conversely, a 2007 California Manufacturers and Technology Association study found that California lost more than $5 billion in state tax revenue by not having a sales tax exemption for manufacturers.
Finally, a three-year study by Washington’s Joint Legislative Audit Review Committee found that most business tax incentives are functioning exactly as they were intended, either stimulating business or helping level the field for Washington firms that compete nationwide. The committee warned that ending the tax exemptions would simply cause businesses to move out of state.
Tax incentives work. So when someone starts bellyaching about lost revenues and tax “loopholes,” tell them to look at what is happening in California.
Don Brunell is the president of the Association of Washington Business.