Ending special-interest tax breaks is an increasingly popular rallying cry for Democrats in the Legislature as they search for cash to plug a $2.6 billion shortfall and avoid deep cuts to government services. But as lawmakers have discovered before, it's much easier said than done.

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OLYMPIA — Ending special-interest tax breaks is an increasingly popular rallying cry for Democrats in the Legislature as they search for cash to plug a $2.6 billion shortfall and avoid deep cuts to government services.

But, as lawmakers have discovered before, it’s much easier said than done.

Take one emblematic example, the sales-tax exemption enjoyed by gold-bullion dealers, one of more than 500 tax breaks scattered throughout the state’s tax code.

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At first glance, canceling bullion’s special deal might seem like a no-brainer. After all, if people can afford to buy gold coins or bars, they surely can pay sales tax, right?

Gov. Chris Gregoire repeatedly has singled out the bullion tax break since she ran for her first term in 2004 as an example of the sort of preferential treatment that ought to end.

The governor followed through this year, proposing to start taxing bullion sales as part of her budget proposal to the Legislature. State-employee unions, interested in staving off job cuts, have come out in support.

The break applies to gold, silver and other precious metals sold as coins or bars, such as Krugerrands or vintage silver dollars. By not taxing those items, the state loses an estimated $4 million a year, according to the state Department of Revenue.

But the plan to tax the collectible coins sparked protests from dozens of small coin and bullion shop owners across the state, who quickly mounted a campaign to tell lawmakers it makes more to sense to keep the sales-tax break in place than eliminate it.

“The state will net nothing, and it will actually be a costly thing for them because of the people who will be out of business,” said George Marley, who owns The Coin Market in Lynnwood.

Key lawmakers and even Gregoire’s office now have backed away from the idea, although they still are considering increasing the business-and-occupation tax that bullion dealers have to pay.

“Everyone who looks at the list of tax exemptions, the big thick book … says, ‘This is crazy, what do you mean they get a sales-tax exemption for gold bullion?’ ” said Rep. Ross Hunter, D-Medina, chairman of the House Finance Committee.

But Hunter said the bullion tax exemption is similar to many others that have existed for decades. “Those that stay in the book for 20 or 30 years are in there because there is a reason.”

So why does bullion warrant special treatment?

Coin dealers reminded lawmakers of the original reason for the exemption. It was created in 1985 after the Legislature determined that Washington state was losing coin and bullion business to neighboring states that didn’t have a tax.

“The exemption was put into place so we could create a homegrown industry in Washington, and it worked,” said Erin Robinson, secretary of the Washington Coin and Bullion Association.

The association estimates there are now at least 100 coin and bullion dealers in the state — small coin shops and larger dealers who also sell gold as an investment for retirement accounts. Their businesses would be in jeopardy if the state reinstitutes the sales tax, Robinson said.

As an added blow, national coin-dealer trade shows no longer would consider meeting in Washington.

Because the price of gold is set like a stock on a national market, dealers operate on only a 1 to 3 percent markup, said Karen Feldman, who owns Tacoma Mall Blvd Coin Stamp & Jewelry.

Gold is selling at more than $1,000 an ounce, so if Washington dealers had to tack on a sales tax of nearly 10 percent, it would add about $100 to the price of a 1-ounce gold Krugerrand, Feldman said. Customers simply would buy gold on the Internet or in Oregon and Idaho, which don’t tax bullion sales.

Feldman’s lease on her small strip-mall shop is up soon. While she has signed five-year extensions in the past, she said she’d be reluctant to agree to anything longer than six months if the Legislature cancels the tax break.

Gregoire spokeswoman Karina Shagren said the governor was not picking on gold-bullion dealers and that, given the budget situation, the state needs to look at all tax exemptions.

“Everyone who is brought up, you are going to hear outcries from,” Shagren said. “That is understandable.”

Far from being a wealthy people’s racket, gold and silver frequently are investments for working-class people who can’t afford — or don’t trust — the stock market, said Marley and other bullion dealers.

Those arguments have convinced some key lawmakers that Gregoire’s proposal doesn’t make sense.

“Applying the sales tax to this product is likely to make it uncompetitive,” said Hunter, the finance-committee chairman.

Mike Gowrylow, a spokesman for the state Department of Revenue, said the department is backing off and will support striking out the sales-tax portion of the proposal.

But the department still may push for an increase in the business-and-occupation tax paid by bullion dealers. That would bring in an estimated $200,000 this year and $500,000 in 2011.

Bullion dealers say that would be unfair, too, because it would create a tax penalty for people who invest in gold, when people who buy stocks still wouldn’t pay the tax.

“If we didn’t have that sort of stigma of the ‘fat cat’ industry,” Robinson said, “this wouldn’t be up at all.”

Jim Brunner: 360-236-8267 or jbrunner@seattletimes.com

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