The text of the Senate capital gains proposal has finally been posted. Part VI of the bill would reauthorize the tax structure work group. (The work group was originally authorized in the 2017–19 budget and made recommendations to the Legislature in December; HB 2157 would also reauthorize it.) In discussing the reasons for doing so, the bill notes that Washington’s Legislature has adopted some 700 tax preferences (the state’s terminology for exemptions, exclusions, deductions, deferrals, credits, and preferential tax rates). The bill then states,

According to the 2016 tax exemption study completed by the department or revenue, these tax preferences forego 50.4 billion dollars in revenue per biennium. This means the state foregoes more revenue in tax preferences than it collects from its remaining revenue sources . . . .

This is not true, according to the Department of Revenue (DOR) study itself. The study estimated that tax preferences would result in savings to taxpayers of $50.4 billion in 2015–17 and $54.1 billion in 2017–19. But, as DOR writes, “Savings to taxpayers do not indicate the potential revenue that governmental jurisdictions would accrue if the exemption did not exist.” (See pages 1-3 and 1-4 of the study.)

There is a difference because a number of preferences exist because they are required by the constitution; also, repealing preferences would affect taxpayer behavior or result in tax shifts.

Given that, DOR estimates that potential revenue gains to the state from full repeal of all exemptions would yield $11.3 billion in 2015–17 (one year’s worth) and $30.1 billion in 2017–19.

Thus, if all preferences were repealed, the state would not collect anywhere close to $50 billion. Further, DOR’s estimate of potential revenue gains is too high because it includes preferences that are highly unlikely to be repealed. These include, for example, the B&O tax exemption for employee income ($3.839 billion in 2017–19), the sales and use tax exemption on food ($2.581 billion), and the sales and use tax exemption on prescription drugs ($758.5 million).

There has been a lot of discussion about Washington’s tax preferences lately. This claim of $50 billion in lost revenue is an example of the rhetoric not matching reality.