Where one may see a tax preference, another may construe a tax incentive.
Washington retailers, distributors, service providers and financial institutions through current state tax incentives – already approved as law – are further incentivized to do business here. That can mean growing their investments in facilities and workers, and maintaining or boosting their spending with suppliers and contractors. The proposed removal of those incentives by lawmakers who created them, sends a message that Washington state is less open for business than before.
Price Tag Of Almost $400 Million
Right now there’s just such a message baked into HB 2996. And it carries a three-year price tag estimated at somewhere between $382 million to $397 million. It’s sponsored by three House Democrats – from Seattle, the San Juan islands, and Olympia. And it’s headed for a rocky reception at a Friday hearing in the House Finance Committee.
The bill to lift what sponsors call tax “exemptions” is itself exempt from the cut-off calendar rules that apply to most bills in the Washington state legislature. It gets special treatment as a so-called “necessary to implement the budget,” or NTIB, bill.
Sponsored by Kristine Lytton (D-40th), Chris Reykdal (D-22) and Sharon Tomiko Santos (D-37th), the measure seeks to fund more teachers to reduce class sizes and expand all-day kindergarten in low-income and Central Washington K-12 schools.
Feels Good, Spends Hundreds Of Millions, Achieves Little
This despite reports in recent years from the legislatively-funded, non-partisan Washington State Institute For Public Policy which found exceedingly modest benefits from class-size reductions across numerous vetted studies; and similarly unimpressive achievement-related outcomes from all-day kindergarten.
Six Different Incentives Targeted
Nonetheless, the press is on. The money would be raised in six different ways via HB 2996.
- Banks and credit unions would have to pay another real estate excise tax (REET), upon taking possession of a foreclosed property, on top of the REET they already pay upon sale. The cost: $34.4 million in 2016-17 and $72.3 million in the 2017-19 budget biennium.
- There would be a tightening of current Washington sales tax exemption for retail shoppers from Oregon, which has no sales tax; harvesting from Oregon shoppers who goose the state economy an estimated $21.9 million in the current biennium and $55.4 million in the next.
- Repealing the approved exemption of the tax on the sales of bottled water would yield $23.2 million in this biennium and $57.6 million in the next. A temporary bottled water tax approved in 2010 was repealed by voters shortly afterward through Initiative 1107.
- Repealing business tax incentives for prescription drug re-sellers, international investment services, and travel agents and tour operators – accounts for the balance of the almost $400 million that would be yielded from all six revenue measures in the Lytton bill.
House Democrats defend the proposed new upfront REET that banks would have to pay upon home foreclosure, saying in a budget brief, “it’s a matter of fairness, an average homeowner owes REET when selling his home, so why should banks not have to?” However, banks argue they already pay one REET upon sale after the rehab of a foreclosed property, so the upfront REET comprises a double whammy.
Some 37 states have REETs, and 15 have double REETS as Washington proposes, but the rates are almost all substantially lower, at .1 to 1 percent compared to Washington’s state rate of 1.28 percent, which with a local version of the tax usually reaches 1.78 percent.
A representative of the Washington Bankers Association, Denny Eliason, said, “financial institutions already pay this tax. In the vast majority of foreclosures, everyone is in a loss position. Certainly borrowers are in a loss position, but they have their mortgage debt completely extinguished in a non-judicial foreclosure. The financial institution is also in a loss position as they take the property back during the trustee sale. The financial institution rehabilitates the property and sells it immediately, and in the process does pay the REET.”
‘Financial Institutions Have Already Stepped Forward’
Eliason added, “Financial institutions have already stepped forward during the most recent economic crisis and we are paying for housing counseling for persons facing foreclosure” and “pay $250 per foreclosure in this State” which “goes into a fund that is ultimately administered by the Housing Finance Commission” and “facilitates independent housing counseling free..to borrowers facing foreclosure.” He said, “Our industry has reaffirmed our commitment to this program this Session in HB 2876 that is moving through the process. The legislation will actually increase funding for this program, and is projected to raise to $7.9 million per biennium to fund the Foreclosure Fairness Act.”
According to Eliason, “Banks already have a significant tax burden in Washington State. Banks pay more than $450 million per biennium in business and occupation and sales taxes in our state. The tax burden on banks in Washington state is one of the highest in the nation. Increasing taxes further will serve as a disincentive for national banks to deploy capital in our state.”
Oregonians, Retailers Appreciate Incentive To Shop In Washington
Jan Teague, President and CEO of the Washington Retail Association, said the organization “opposes taxing bottled water and tampering with the sales tax exemption available to many shoppers from out-of-state. Taxing an essential food such as water places the greatest hardship on poorer customers and discourages sales for retailers.”
“The sales tax exemption is essential to the survival of many retailers along our state’s border with Oregon, where there is no sales tax. Some retailers report that 25 percent of more of their business is from Oregon customers who appreciate the incentive to shop near where they work or travel. Without such an incentive, lost sales would cost jobs and threaten the livelihoods of many small businesses in our state.”
‘It Creates Uncertainty In The Employer Community’
Association of Washington Business President Kris Johnson said of the House proposals to blow-dry the economic lubricants, “Economic opportunity is the key to strong communities and shared prosperity. When lawmakers propose to go back on tax preferences passed with a bipartisan majority in the Legislature and signed by our Democratic governor, it creates uncertainty in the employer community.”
The revised state economic forecast released last week, Johnson said, “predicts a more than $400 million drop in projected revenue through 2019. With the economy showing signs of weakness, now is not the time to place one more hurdle in front of our state’s employers, particularly small businesses, and the Washingtonians who work for them.”
Statehouse observers are handicapping HB 2996 as having low odds of actually getting anywhere, considering the inclinations of the fiscally conservative Senate Majority Coalition Caucus, which released a no-new-taxes budget yesterday. One indication of 2996’s likely fate: the REET add-on has been attempted the last three years without success.
Still, in a crucial election year, HB 2996 throws into sharper contrast the differing fiscal priorities of legislators.
MORE: Realtors: Second Real Estate Excise Tax Would Hurt Housing Affordability, Lens, 2/29/16.