In the closing days of the legislative session, a HB 2762, a bill “to periodically expire all nonconstitutionally required tax preferences that are not already subject to expiration” may be getting new life. It passed out of House Ways and Means Committee March 3, on a party-line vote. What “to periodically expire” means is that on a fixed schedule these tax policies will be repealed unless specifically reauthorized.

HB 2762 does not provide for added scrutiny or evaluation, just greatly elevated uncertainty at a time when consumers and employers demand stability. It’s the latest and most sweeping effort to raise taxes by repealing incentives. Back in 2003, we wrote of such attempts:

the broad mandate for regular reviews of tax exemptions simply makes no sense. On occasion, reviews of tax policy will occur, and our tax structure should be benchmarked against those of competitive states, as well as against our particular notion of what constitutes an ideal system. Absent a clear statement of principles and objectives, the review contemplated looks more like [a] “laundry list for raising revenues” …

The Research Council has long agreed that careful analysis of tax preferences makes sense. But we’ve consistently pointed out that the vast majority of Washington’s tax preferences represent sound tax and economic development policy. The automatic sunsetting of all statutory preferences is an overreach that poses a serious threat to policies critical to job creation and investment.

Take one example. We recently published an economic impact analysis of the state’s machinery and equipment tax exemption for manufacturing. The key findings:

• Elimination of this exemption would immediately cost Washington 7,400 jobs.
•  After five years without this exemption, Washington state would lose:
  • More than 22,300 jobs
  • $365 million worth of annual investments in equipment and software
  • $2.3 billion in annual manufacturing output
  • $1.6 billion in annual personal income

As a new AWB report makes clear, manufacturing – a pillar of the state’s economy – faces challenges here. Among the report’s conclusions:

 Tax incentives play a vital role in the growth of the manufacturing industry and must be protected.

Yet, under HB 2762, the M&E exemption would expire in 2021 unless explicitly reauthorized by the Legislature. That kind of uncertainty will surely cause major manufacturers to wonder about Washington as a place for long-term capital investment. Supporters of the legislation may argue that proven tax preferences, like the M&E exemption, will reauthorized because they have demonstrated their worth.

Then why is it on the list? There’s certainly no guarantee of reauthorization. (Click to see the whole list, which includes the incentives, savings, and scheduled sunset.)

In our Thrive Washington paper on economic development, we examined the role of tax incentives. Here’s the crux:

When capital purchases are subject to sales tax, businesses have less incentive to invest in new equipment, machinery and structures. The reduction in investment impedes  labor productivity growth  and, ultimately, wage growth. Sales taxes on input  purchases distort decisions about whether to produce various components in-house or outsource. Finally, sales taxes on input purchases put businesses in our state at a disadvantage against competitors operating in states that tax fewer business input purchases or that have lower sales tax rates.

The liberal Institute for Taxation and Economic Policy concludes that “the exemption from the sales tax of most purchases made by businesses is actually good policy.”

Calling for the sweeping repeal of all tax exemptions, on the other hand, is simply bad policy.