U.S. Government Accountability Office tackles tax exemptions

January 8, 2013

The debate about tax exemptions and their effectiveness is sure to be raged during the 2013 Session.

Rep. Carlyle, Chair of the new House Finance Committee, wrote this insightful blog about what he hopes to accomplish:

My goal is not to close tax exemptions. My goal is to close tax exemptions that don’t have quality, justified and solid data to show lawmakers, reporters, advocates and even companies themselves that there is a ROI for taxpayers. My goal in this area is to rejuvenate legislative oversight, policy analysis and action with regard to fundamental policy questions of whether they work or not for taxpayers . . .

I intend to freely reach out to a wide range of our state’s best think tanks, researchers, special interests and advocates for high quality data and policy assistance in this journey. Washington Policy Center, Budget and Policy Center, Sightline, Economic Opportunity Institute And many other state and national thought leaders will be called upon to help our committee understand the data and make the business case for and against a variety of big policy ideas.

My goal is to lead a cooperative, fair, relationship-based committee that brings the best data into the open and helps everyone–Democrat and Republican, legislator and activist, special interest, media and the general public–engage in a courageously honest battle of ideas about how tax policy impacts our budget, our future and our quality of life.

Finally, I intend to challenge the public to engage with us in elevating the dialogue.

Today the U.S. Government Accountability Office (GAO) issued a report on federal tax exemptions that provides a good cheat sheet of the types of questions that should also be asked at the state level. Among the questions:

  • What is the Tax Exemption's Intended Purpose?
  • Have Performance Measures Been Established to Monitor Success in Achieving the Tax Exemption's Intended Purpose?
  • Does the Tax Exemption Succeed in Achieving Its Intended Purpose?
  • Do the Benefits of the Tax Exemption Exceed Its Costs?
  • Who Actually Benefits From the Tax Exemption?
  • Is the Tax Exemption Simple, Transparent, and Administrable?
  • What Are Planning, Recordkeeping, Reporting, and Other Compliance Costs for Taxpayers in Using the Tax Exemption?
  • Can Taxpayers Understand How the Tax Exemption Works?
  • Would an Alternative to the Tax Exemption More Effectively Achieve Its Intended Purpose?
  • What Data Are Needed to Evaluate the Tax Exemption?

Thankfully Washington State has a head start on this type of review process for tax exemptions.

In 2006, lawmakers adopted HB 1069 which set up the Citizen Commission for Performance Measurement of Tax Preferences administered by the Joint Legislative Audit Review Committee (JLARC). WPC's Vice President for Research Paul Guppy serves on the commission.

Just as state spending should identify performance outcomes, tax preferences should as well. This is why WPC has been supportive of and serves on the JLARC Citizen Commission for Performance Measurement of Tax Preferences.

Our ultimate goal is to one day replace the B&O tax with a Single Business Tax based on total receipts that would allow all existing business tax preferences to be repealed on a revenue neutral basis. Any repeal of tax preferences should occur for the purpose of adhering to sound principles of taxation (such as simplification and transparency) – not with the intent to take more revenue from businesses for government spending.

Short of this overall reform, the existing tax preference review process occurring by JLARC and the Citizen Commission should be allowed to continue and the Legislature should act on the recommendations.

The Legislature should also review the legislative intent for current tax preferences and make refinements for those that don’t specify a specific performance expectation.

By providing performance criteria, sunsetting NEW exemptions after 10-years, and continuing the JLARC and Citizen review process for existing tax exemptions, the policy goals should be able to receive adequate review without providing too much uncertainty.

The challenge with automatically sunsetting tax cuts and exemptions, however, is that doing so creates financial unpredictability for taxpayers from one year to the next. Ultimately, when tax cuts and exemptions are set to expire automatically, it is the same as building automatic future tax increases into the law.

Granted it was 40 years ago, but voters in 1972 rejected a constitutional amendment to automatically sunset all tax exemptions after 10 years and this past election they also recommended the Legislature maintain two tax exemptions that were repealed last year (Advisory vote 1; Advisory vote 2).

Additional Information
Principles of Taxation for Elected Officials
Washington Policy Center Proposes Tax Transparency Website

Tax transparency bill introduced