Revenue Screams

They say getting the business community together on anything is a bit like herding cats, but what you see in Olympia these days is a regular feline free-for-all. Ever since it became clear that the Legislature would try to get some sort of a tax referendum on the ballot this year, business groups havent exactly been putting up a united front. In fact, youre starting to hear a bit of hissing and howlingbetween big business and the little guy.

On the one hand you have corporations like Boeing and Microsoft that say its time to think about a tax increaseperhaps something like the temporary three-year, half-cent increase in the sales tax that Governor Chris Gregoire has proposed. A half-cent increase in the sales tax would raise an additional $494 million a year.

And then you have the states small businesses, many of them in the retail sector, which would be hardest hit by a higher sales tax. Patrick Connor of the Washington state chapter of the National Federation of Independent Business thinks that if the state needs to raise revenues it ought to close special tax breaks for large companies.

If big business is going to insist on new or more revenue, then I think it is only fair that we take a hard look at the taxes that they are paying, as well what benefits they are receiving, Connor says. If they continue to rattle the saber and call for higher taxes, then they better be the first ones to pony up and show where they are going to solve the problem.

Close tax loopholes? Thats been the rallying cry for years from Democrats and progressive interest groups. When you hear Connor, director of one of the states most conservative business organizations, taking the same side as the Washington State Labor Council and the liberal think tanks and the social service advocates, you know theres something mighty serious afoot.

The state has a $1.5 billion nightmare on its hands this year and some sort of tax increase appears inevitable. Its the result of a stumbling economy, anemic tax revenues and state spending that remains out of whack with revenue despite three years of deep budget cuts. Majority Democrats in the Legislature say the recession has finally forced them to cut too far, and theyre going to have to go to the voters for more tax revenue, perhaps as soon as April. The likelihood of a public vote is the result of 2010s Initiative 1053, which requires either voter approval for tax increases or a two-thirds vote of the Legislature. Republican opposition makes the latter impossible.

So Democrats are expected to write a budget specifically designed to show just how bad things can get if voters dont approve higher taxes. But what taxes should be increased? Progressives are critical of proposals to raise sales taxes, pointing out that such taxes are regressive and affect the poor disproportionately. They would rather see wealthy corporations and individuals pay more.

But Gregoire is well aware of what happened in the 2010 election when she proposed a half-billion-dollar sales-tax increase. Lawmakers two years ago passed a tax on soda pop, and the soft drink industry spent $16 million to roll it back. At the same time, liberal interests pushed a high-earner income tax, and a campaign funded in large part by the high-tech industry managed to kill it. The lesson is that anytime you target someone, the business or group thats designated will fight back. Im being a realist in what I think the Legislature can accomplish and what it cant, the governor said in January. A tax increase that affects everybody is just easier to pass.

Big businesss support for a tax increaseespecially one that doesnt strike it directlyis a reflection of its longtime support for higher education. State colleges and universities have taken a massive hit since the recession began; state support at the University of Washington has fallen from 65 percent of its budget to an all-time low of 34 percent, and it is poised for another cut this year. The rest of its revenues come from tuition and fees. While tuition has been steadily increased, some business lobbyists are beginning to worry that many students are getting priced out of the market.

It is a very difficult situation that were in with the budget, Jim Albaugh, president and CEO of Boeings commercial aircraft division, told The Associated Press in January. It is very hard for me not to support what the governor is doing.

Maybe Boeings support comes more easily because no one is talking about taking away Boeings special tax breaks. The company is one of the key beneficiaries of the $2 billion or so in business taxes that the state forgoes every year in the name of economic development and correcting inequities in the tax code. Exactly how much the state really could realize by ending themand, more important, which ones ought to be canceledis far from clear. And one persons loophole is anothers vital tax incentive.

Ultimately, politics is the art of the possible. Even after a tax referendum passes the Legislature, it still has to survive a public vote, notes Don Brunell, president of the Association of Washington Business. The association, which has more small-business members than it does big business, hadnt taken a stand on Gregoires proposal as this story went to press. But Brunell agrees that a general tax increase is less likely to provoke a deep-pocketed interest group into opposing the measure. At the end of the day, [the Legislature] has to make sure that whatever they propose has a better than 50-50 chance of passing, says Brunell.

They [big businesses] are saying dont touch our loopholes and well let you have your tax increase, says state Rep. Cary Condotta of Wenatchee, ranking Republican on the House Labor and Workforce Development Committee. There are a lot of times that the business community is not on one page, and this is one of them.

Taxes are one of the hardest things to get business to agree on because taxes affect different sectors in different ways, says Steve Mullin, president and CEO of the Washington Roundtable. His association of the states largest businesses hasnt taken a formal position, either. You know, we dont like big fights with the Legislature, he says. We dont like big internal fights, either.

At least theres one point on which everyone seems to agree: Unless the economy improves dramatically, projected spending will continue to outstrip projected revenue year after year, possibly creating a $3.3 billion budget deficit by 2017, according to one widely cited legislative estimate. And thats assuming the economy doesnt fall back into recession.

So theres one common message from all the business players: Reform before revenue. Before the Legislature does anything, it needs to cut long-term expenses to bring the budget in line.

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REVENUE ALTERNATIVES
Few options would hurt big business.

Estimated Impact (in millions of dollars, 20132015)
Raise Retail sales/use tax from 6.5% to 7% $1,118

Ways to change sales tax to expand tax base:
Repeal exemption for gasoline $1,699
Repeal exemption for manufacturing machinery $593
Repeal trade-in exclusion for motor vehicles $256
Repeal exemption for fertilizers, sprays sold to farmers $128
Repeal exemption for nonresidents $52
Impose sales tax on bottled water $66

Source: Washington State Department of Revenue