This report presents a detailed analysis of tax exemptions for Washington state and local taxes. The exemption study is updated every four years (previously on a biennial basis) pursuant to RCW 43.06.400 (see Appendix One). The current study analyzes 431 different exemptions which are derived from approximately 400 tax statutes, principally in Titles 82 and 84 of the Revised Code of Washington. In some instances, similar statutes are considered together as a single exemption, e.g. retail sales and use tax exemptions for the same product or activity. In other cases, a single statute or subsections of a single statute are separated to better illustrate the impacts, e.g. the property tax exemption for public property is discussed separately for the various governmental jurisdictions (federal, state, city, county, etc.).

It is important to emphasize that the estimated revenue impacts reflect savings to taxpayers and do not necessarily indicate the potential revenue which might accrue to governmental jurisdictions in the absence of the exemptions. Constitutional prohibitions against taxing certain activities, property tax rate limits and even the likelihood of changes in taxpayer behavior combine to limit the actual revenue which might be realized. Further, the estimates are in terms of accrued tax liability and the actual cash receipts during a particular biennium might be lower as a result of initial compliance factors.

The aggregate state and local impact of these 431 exemptions amounts to an estimated savings for taxpayers that totals $45,941,065,000 for the 1999-01 Biennium. Approximately 59 percent of the total, or $27,215 million, is represented by exemptions from taxes levied by the state. Exemptions from local taxes total $18,726 million. Over one-half of the state impact is associated with retail sales/use tax exemptions. Property and business and occupation tax exemptions also account for a large share of the state impact. About 80 percent of the local exemption impact is attributable to the property tax, with nearly all of the remainder accounted for by local sales tax exemptions. The distribution of state and local exemption impacts by tax source is summarized in Table 1.

TABLE 1
SUMMARY OF EXEMPTION IMPACTS BY TAX SOURCE

Savings to Taxpayers
1999-01 Biennium, Dollars in Millions

EXEMPTION IMPACTS FOR
MAJOR STATE AND LOCAL TAX SOURCES

Taxpayer Savings for 1999-01 Biennium
Percentage of $45,941 Million Total Tax Savings

Exemptions vs. Revenues

Table 2 compares the estimated exemption impacts for the major state tax sources with the estimated revenue collections for those same sources for the 1999-01 Biennium. (Local taxes are excluded due to the lack of good revenue projections.) For three of the sources, the state property tax levy, the state sales tax and the public utility tax, the aggregate amount of exemptions exceeds the estimated revenues. For the state B&O tax, the amount of exemptions is nearly equal to the forecasted collections. Overall, exemptions from state taxes amount to 128 percent of the revenue; in other words, the aggregate savings to taxpayers in the form of exemptions exceeds the actual revenue collections by about 28 percent. Stated another way, the amount of savings to taxpayers via exemptions exceeds one-half (56.2 percent) of the total potential tax base, including current collections and the amount exempted.

COMPARISON BETWEEN EXEMPTIONS AND REVENUES 1

Selected Major State Tax Sources
1999-01 Biennium, Dollars in Millions

1 Estimated savings to taxpayers as a result of exemptions, compared with the forecasted revenues for major state tax sources from their existing tax bases.

2 Does not include local government taxes or some state nongeneral fund taxes.

3 Cash basis, Economic and Revenue Forecast Council, November, 1999.

4 The value of exemptions compared with the total exempt amount plus the projected revenue, i.e. exemptions compared with the total potential revenue if the exemptions did not exist.

Categorical Analysis

Exemptions are established for a variety of reasons. In an attempt to develop more meaningful data for the various types of exemptions, 13 categories were developed and each of the exemptions was assigned to the category which most closely represents its general purpose or type of beneficiary. A brief description of the categories is provided below:

Table 3 summarizes the 1999-01 biennial impact estimates for the 13 categories of exemptions. The largest category is represented by property tax exemptions for intangibles with 29.8 percent of the total impact. The exemptions for individuals as a group represent over one-quarter of the total savings to all taxpayers. Included in this category are such exemptions as household goods (property tax); food, motor vehicle fuel, nonresidents' tangible personal property and trade-ins (sales tax); and inherited property (real estate excise tax). The share for individuals would be greater if their portion of the services and intangibles exemptions were included.

Exemption categories over which the Legislature has the least discretion are tax base and commerce; exemptions in these categories are either required by the Constitution or would involve a significant departure from current tax policy to eliminate them. Those in the government category, likewise, have little potential for repeal. Taken together, the exemptions in these three categories account for about one-quarter of the combined state and local impact.

Two classes of exemptions represent long-standing and fundamental tax policy: property tax exemption for intangibles (29.8 percent of the total) and sales tax exemption for services (8.3 percent). Significant revision in either category would involve a major change in tax policy. Likewise, most of the exemptions benefitting individuals reflect major policy decisions, such as the sales tax exemption for food.

Preferential tax treatment for business activities, including agriculture and the "economic development" exemptions, accounts for 7.2 percent of the total tax savings and represents legislative policy developed over many years. This leaves nonprofit organizations with only 1.0 percent of the total tax savings and the all-other category with the remaining 0.2 percent.

EXEMPTION IMPACTS BY CATEGORY

Tax Saving for 1999-01 Biennium, Dollars in Thousands