September 16, 2012 in City

Inslee, McKenna propose tax tweaks

By The Spokesman-Review
 

With state unemployment staying stubbornly above 8 percent and the economy on many voters’ minds, economic issues play a major part in the campaigns of Republican Rob McKenna and Democrat Jay Inslee for governor.

Both candidates don’t just want to stimulate the economy. They need an improving economy to pay for other things they want the state to do without raising taxes, which both candidates say they want to avoid.

Their proposals differ, but neither is revolutionary, experts say, and they may not provide the kind of economic boost the candidates suggest.

“There’s a lot going on in the world that the governor of Washington has no control over,” said Trent England, vice president of policy for the libertarian-leaning Freedom Foundation.

“Neither plan has things that no one has ever thought of before,” said Mark Smith, a professor of political science at the University of Washington who has followed both campaigns.

Both candidates want changes to the state’s business and occupation tax, which is perennially criticized because it places a tax on gross receipts rather than net profits. McKenna wants to help small businesses by raising the current credit of $420 to $4,800 per year, so the smallest companies would be spared the tax until they have a chance to grow.

A higher tax credit is not necessarily a bad idea, said Remy Trupin of the Washington State Budget & Policy Center, a progressive research group, but the key question is how much revenue does the state lose? (Editor’s note: Trupin’s name was misspelled in early versions of this story.)

An Office of Financial Management study for an initiative that proposed raising the small business B&O credit to $4,800 estimated state revenue would drop $260 million in fiscal year 2013. More modest increases might make more sense and would certainly be cheaper, the center’s analysts said.

The B&O tax is regressive, so it’s possible that a higher credit would help create enough jobs that would then produce more new revenue than the credit would cost, England said. But any amount of revenue lost or gained is speculative, he added.

Inslee wants to stimulate what he says are key sectors of the economy, like aerospace and biotechnology, by giving those businesses B&O tax breaks and offering credits for businesses that hire new workers.

Tax incentives are usually less effective at improving the economy than direct spending by the state on things like education to improve the kind of workforce those industries need, Trupin said.

Governors of both parties in other states support targeted tax breaks, said Amber Gunn, director of economic policy for the Freedom Foundation. “But it’s really hard to measure the success of these programs.”

Picking industries can be risky, Smith said, because “you think you’ve got the industries of the future, but maybe you’ve got it wrong.”

Inslee would also offer small businesses a tax credit of up to $4,000 for each new worker hired, with some limitations that peg the credit to the wages and cap the state’s total payout at $8 million. England questions whether that would prompt many businesses to make hires they weren’t going to make anyway. A company has to weigh the cost of wages and benefits along with costs of training against the increased productivity or sales that employee can provide.

“It may, on the margin, encourage hiring, but that margin is tiny,” England said.

McKenna wants the state to provide businesses with a simpler system to collect sales tax. Local sales tax rates differ around the state, and businesses pay the rate based on where the product is delivered or the service performed, which can complicate record keeping. He would change that so businesses would pay the tax where they are located.

That may be popular with businesses but probably not with the cities and counties, Trupin said: “Local option sales tax is not a great idea, but it is a local control idea.”

The sales tax is a diminishing resource in an economy that relies increasingly on services, Trupin said. It might make more sense to lower the rate and broaden the tax to some services not currently covered.

But neither candidate is talking about adding taxes to increase the state’s general fund. Both are, however, talking about finding savings by making government run more efficiently. If that sounds familiar, it’s because candidates have suggested it for decades, analysts said.

“Government efficiency and policing waste, fraud and abuse is probably something we could find written about in Persian manuscripts 3,000 years ago,” England said.

“Government in itself was never really designed to be efficient,” Gunn said. “Government isn’t a business; it isn’t going to be run efficiently.”


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