What Is a Tax Preference?

Tax preferences are defined in statute (RCW 43.136.021) as exemptions, exclusions, or deductions from the base of a state tax; a credit against a state tax; a deferral of a state tax; or a preferential state tax rate. Washington has approximately 600 tax preferences.

Why a Review of Tax Preferences?

Legislature Creates a Process to Review Tax Preferences

In 2006, the Legislature stated that periodic reviews of tax preferences are needed to determine if their continued existence or modification serves the public interest.  The Legislature enacted Engrossed House Bill 1069 to provide for an orderly process for the review of tax preferences (RCW 43.136).

Statute assigns specific roles in the process to two different entities.

• The Citizen Commission for Performance Measurement of Tax Preferences ("The Commission") creates a schedule for reviews, holds public hearings, and comments on the reviews.
• Staff to the Joint Legislative Audit and Review Committee (JLARC) conduct the reviews.

Citizen Commission Sets the Schedule

The Legislature directed the Commission to develop a schedule to accomplish an orderly review of most tax preferences over ten years.  The Commission is directed to omit certain tax preferences from the schedule, such as those required by constitutional law. The Commission may also exclude preferences from review that the Commission determines are a critical part of the tax structure.

The Commission conducts its reviews based on analysis prepared by JLARC staff.  In addition, the Commission may elect to rely on information supplied by the Department of Revenue.

In 2016, JLARC staff completed 22 preference reviews (similar preferences may be combined into one report).  The Commission's website includes analysis of preferences completed in previous years: See http://www.citizentaxpref.wa.gov/.

JLARC Staff’s Approach to the Tax Preference Reviews

Statute guides the 11 questions typically covered in the reviews.

Public Policy Objectives:

1. What are the public policy objectives that provide a justification for the tax preference? Is there any documentation on the purpose or intent of the tax preference?  (RCW 43.136.055(b))
2. What evidence exists to show that the tax preference has contributed to the achievement of any of these public policy objectives?  (RCW 43.136.055(c))
3. To what extent will continuation of the tax preference contribute to these public policy objectives?  (RCW 43.136.055(d))
4. If the public policy objectives are not being fulfilled, what is the feasibility of modifying the tax preference for adjustment of the tax benefits?  (RCW 43.136.055(g))

Beneficiaries:

5. Who are the entities whose state tax liabilities are directly affected by the tax preference?  (RCW 43.136.055(a))
6. To what extent is the tax preference providing unintended benefits to entities other than those the Legislature intended?  (RCW 43.136.055(e))

Revenue and Economic Impacts:

7. What are the past and future tax revenue and economic impacts of the tax preference to the taxpayer and to the government if it is continued?  (This includes an analysis of the general effects of the tax preference on the overall state economy, including the effects on consumption and expenditures of persons and businesses within the state.)  (RCW 43.136.055(h))
8. If the tax preference were to be terminated, what would be the negative effects on the taxpayers who currently benefit from the tax preference and the extent to which the resulting higher taxes would have an effect on employment and the economy?  (RCW 43.136.055(f))
9. If the tax preference were to be terminated, what would be the effect on the distribution of liability for payment of state taxes?  (RCW 43.136.055(i))
10. For those preferences enacted for economic development purposes, what are the economic impacts of the tax preference compared to the economic impacts of government activities funded by the tax?  (RCW 43.136.055(j))

Other States:

11. Do other states have a similar tax preference and what potential public policy benefits might be gained by incorporating a corresponding provision in Washington? (RCW 43.136.055(k))

Depending on the tax preference, certain questions may be excluded.  For instance, question #4 relates to modifying a preference if the public policy is not being fulfilled.  If the preference is fulfilling its public policy, this question is skipped.

Analysis Process

JLARC Staff’s Analysis Process

JLARC staff carefully analyze a variety of evidence in conducting these reviews:

• Legal and public policy history of the tax preferences;
• Beneficiaries of the tax preferences;
• Government and other relevant data pertaining to the utilization of these tax preferences
• Economic and revenue impact of the tax preferences; and
• Other states’ laws to identify similar tax preferences.

Key: Understanding the Purpose

The Legislature now requires that when it creates a new preference, or expands or extends an existing preference, a tax preference performance statement is to be included. The performance statement is to include a statement of legislative purpose as well as metrics to evaluate the effectiveness of the preference. (RCW 82.32.808).

Since the performance statement requirement was first established in 2013, most of the preferences included in this report were passed before this requirement was established. When a preference’s purpose or objective is identified in statute, staff are able to affirmatively state the public policy objective. If not in a tax preference performance statement, the objective may be found in intent statements or in other parts of statute.

However for many preferences the Legislature did not state the public policy objective. In such instances, staff may be able to infer what the implied public policy objective might be. To arrive at this inferred policy objective staff review the following:

• Legislative history, including
• Final bill reports for any statements on the intent or public policy objectives
• Bills prior to the final version and legislative action on bills related to the same topic
• Bill reports and testimony from various versions of the bill
• Records of floor debate
• Relevant court cases that provide information on the objective.
• Department of Revenue information on the history of tax preferences, including rules, determinations, appeals, audits, and taxpayer communication.
• Press reports during the time of the passage of the bill which may indicate the intention of the preference.
• Other historic documents, such as stakeholder statements, that may address the issue addressed by the tax preference.

JLARC staff also interview the agencies that administer the tax preferences or are knowledgeable of the industries affected by the tax.  Agencies may provide data on the value and usage of the tax preference and the beneficiaries.  If the beneficiaries of the tax are required to report to other state or federal agencies, JLARC staff will also obtain data from those agencies.

If there is sufficient information in this evidence to infer a policy objective, JLARC staff state that in the reviews.  In these instances, the purpose may be a more generalized statement than can be made compared to instances that have explicit statutory language.