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.
Savings to Taxpayers
1999-01 Biennium, Dollars in Millions
|Tax Source||# of Exemptions||State Taxes||Local Taxes|
|In Lieu Excise Taxes||30||42.5||15.7|
|Business & Occupation Tax||112||3,516.8||- -|
|Public Utility Tax||27||1,898.7||- -|
|Other Business Taxes||33||171.5||- -|
|Retail Sales & Use Tax||111||14,332.9||3,687.6|
|All Other Taxes||24||2,796.6||113.3|
|Total Taxpayer Savings||431||$27,214.6||$18,726.4|
EXEMPTION IMPACTS FOR
MAJOR STATE AND LOCAL TAX SOURCES
Taxpayer Savings for 1999-01 Biennium
Percentage of $45,941 Million Total Tax Savings
Exemptions vs. Revenues
Table 2 compares the estimated exemption impacts for the major state tax sources with the estimated revenue collections for those same sources for the 1999-01 Biennium. (Local taxes are excluded due to the lack of good revenue projections.) For three of the sources, the state property tax levy, the state sales tax and the public utility tax, the aggregate amount of exemptions exceeds the estimated revenues. For the state B&O tax, the amount of exemptions is nearly equal to the forecasted collections. Overall, exemptions from state taxes amount to 128 percent of the revenue; in other words, the aggregate savings to taxpayers in the form of exemptions exceeds the actual revenue collections by about 28 percent. Stated another way, the amount of savings to taxpayers via exemptions exceeds one-half (56.2 percent) of the total potential tax base, including current collections and the amount exempted.
COMPARISON BETWEEN EXEMPTIONS AND REVENUES 1
Selected Major State Tax Sources
1999-01 Biennium, Dollars in Millions
|State Tax Source 2||Total of Exemptions||Projected Revenues 3||Exemptions as a Percent of Revenue||Exemptions as a Percent of Total 4|
|Public Utility Tax||1,898.7||434.9||436.6||81.4|
|Real Estate Excise||275.3||768.6||35.8||26.4|
1 Estimated savings to taxpayers as a result of exemptions, compared with the forecasted revenues for major state tax sources from their existing tax bases.
2 Does not include local government taxes or some state nongeneral fund taxes.
3 Cash basis, Economic and Revenue Forecast Council, November, 1999.
4 The value of exemptions compared with the total exempt amount plus the projected revenue, i.e. exemptions compared with the total potential revenue if the exemptions did not exist.CHART 2
COMPARISON BETWEEN EXEMPTIONS AND REVENUES
and Projected Revenue Collections
Major State Taxes (not Local), 1999-01 Biennium ($ in millions
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:
|Tax Base||This category includes activities which were not intended to be included in the original tax base. For example, the state B&O tax is intended to tax the privilege of engaging in business. Working as an employee is not considered as engaging in business. Thus, there is a specific statutory exemption (RCW 82.04.360) to assure that employees are not subject to B&O tax, even though it was never the intention that the tax apply to salaries and wages.|
|Government||Governmental jurisdictions include the federal government, the state of Washington, local governments, and foreign countries. In some instances these entities may be taxed, e.g., state and local governments pay sales tax on the acquisition of tangible personal property. Even the federal government is indirectly taxed through the use tax liability of contractors who install tangible personal property pursuant to federal construction contracts. However, for some other taxes, subjecting publicly owned property and governmental activities to tax would simply amount to a transfer of funds among jurisdictions. Particularly in the case of property taxation, valuation of public property would significantly increase the cost of administering the tax.|
|Commerce||The U.S. Constitution prohibits direct taxation of interstate commerce. As a result, certain exemptions have been enacted to assure that Washington does not violate this requirement.|
|Intangibles||Wealth that is represented by intangible assets, such as money, stocks, bonds, deposits and other securities is exempt from property taxation. Because of its unique nature and the difficulty of distinguishing between intangibles that are owned by individuals and businesses, a separate category has been assigned to this major exemption.|
|Services||A major exclusion from the base of the retail sales tax is represented by services. Initially, the sales tax applied only to tangible personal property (i.e., goods) but over the years the base has been extended to certain other activities such as construction and repair services. If the sales tax is considered as a broad-based tax upon consumption, then purchases of services by individuals and businesses could logically be subject to tax. However, this would represent a major new direction in state tax policy.|
|Nonprofit||There are a variety of property, B&O and sales tax exemptions allowed for nonprofit organizations. The exemption report further categorizes these exemptions according to the specific type or function of the organizations:|
"H" - health or social welfare organizations;
"C" - charitable or religious organizations;
"A" - arts or cultural organizations;
"O" - all other nonprofit organizations.
|Individuals||These exemptions generally benefit people, as opposed to businesses or other entities. Some exemptions in this category are directed toward a certain group of people, e.g., the senior citizen property tax exemption.|
|Economic||This category of exemptions, which generally benefit businesses, is denoted as "economic development." Some preferential tax programs are clearly intended to stimulate the economy and create new employment opportunities in designated areas, e.g. the sales tax deferral for new/expanded manufacturing facilities in rural areas. Others simply attempt to enable a particular industry to be more competitive, e.g. preferential B&O tax rates.|
|Agriculture||Many tax exemptions are directly oriented toward the agricultural industry, so a separate category is included for such exemptions.|
|Other||A final "catch-all" category contains various other exemptions.|
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
|Category||Exemptions||State/Local Impact||Percent of Total|
|health or social welfare||27||194,153||0.4|
|charitable or religious||13||95,026||0.2|
|arts or cultural||5||23,619||0.1|
|TOTAL EXEMPTION IMPACT||431||$45,941,065||100.00%|
The final comparison of exemptions is historical. Table 4 lists the number of exemptions and their current aggregate state and local impact by year of adoption. Currently existing tax exemptions have been established during 60 different years throughout the course of Washington's history, beginning with property tax exemptions enacted in conjunction with establishment of territorial government in 1854. Significant enactments occurred in 1931 (property tax exemption for intangibles), in 1935 (retail sales, B&O and other Revenue Act taxes with the original exemptions for these sources), and in 1977 (sales tax exemption for food products). In recent years the largest impacts have occurred in 1995, led by the sales tax exemption for manufacturing machinery.
Starting as early as the 1920s, at least several exemptions were
established almost every biennium through the 1960s. Since 1970, the adoption of new
exemptions has been an annual occurrence, with the sole exception of 1978 when the
Legislature did not meet. With the adoption of the Initiative 601 state expenditure
limitation measure in 1993, there is now more incentive to return excess revenues which
cannot be spent to taxpayers. Such revenue reductions often take the form of new
exemptions, deductions and credits. Thus, in 1997 there were more new exemption statutes
adopted than in any other year since 1935. Since the previous Tax Exemption Study two
years ago, 31 new exemption statutes have been adopted (plus broadening of other exemption
statutes) representing a total tax savings of $55 million for the current biennium.
Tax savings for 1999-01 Biennium, Dollars in Thousands.