A big tax cut for manufacturing businesses was passed by the Legislature with little public notice after a last-minute demand from Republicans during budget talks to avoid a government shutdown.
With little notice, a major tax cut for manufacturing businesses in Washington state was inserted into the state budget deal in the waning hours of all-night negotiations last week.
Under the measure approved by the Legislature on Friday, business-and-occupation (B&O) tax rates for manufacturers will be reduced 40 percent over four years, starting in 2019.
By 2022, manufacturers will be taxed at the lower rate that lawmakers gave to Boeing and other aerospace companies in 2003 and later extended as part of a record-setting $8.7 billion tax-break package.
The move came even as lawmakers raised state property taxes as part of a plan to boost state public-school funding by $7.3 billion over the next four years.
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Though the manufacturing tax cut is a major shift — reducing business tax bills by an estimated $64 million over four years — there was no public indication it was on the table as closed-door budget talks entered their final stages.
The tax reduction could benefit more than 10,000 companies that reported taxable income as manufacturers in fiscal year 2016, according to the state Department of Revenue.
Republican leaders boasted of winning the tax cut, which they said was aimed at aiding smaller manufacturers in rural areas that have struggled while Seattle has boomed.
“What is good for Boeing should be good for the little guy as well,” said state Sen. Michael Baumgartner, R-Spokane, who had sponsored an earlier bill containing the B&O-cut concept, before a vote on the measure Friday night.
The manufacturing cut, included in a package of a dozen smaller tax breaks, passed with bipartisan support, 33-16 in the Senate and 88-10 in the House.
The last-minute business tax cut rankled some Democrats, who noted it came even as lawmakers raised property taxes by hundreds of dollars for homeowners in Seattle, Bellevue and other wealthy school districts to comply with the state Supreme Court’s McCleary decision requiring ample school funding.
In more rural and property-poor parts of the state, property-tax bills will be reduced as part of a complex “tax swap.”
State Sen. Reuven Carlyle, D-Seattle, a longtime critic of the hundreds of tax exemptions and special-interest loopholes in the state tax code, said there is a case to be made for lowering manufacturing tax rates.
But “to jam it through without any analysis, hearing and visibility is simply wrong,” Carlyle said, calling the last-minute insertion of the tax cut a “categorical failure” of the legislative process.
Dems OK GOP demand
The tax cut emerged as a demand from Republicans during an overnight negotiating session that ran from Tuesday night into Wednesday morning, according to Sen. Kevin Ranker, D-Orcas Island, one of the chief budget negotiators.
“It was the last night (of negotiations) … and it was a surprise to me. It was a disappointing surprise,” Ranker said. But with the clock ticking toward a state-government shutdown if a budget was not signed by July 1, Democrats agreed to the plan.
Republican leaders called it a win for a sector of the economy that has lagged.
“When you look at manufacturing jobs, it’s a huge opportunity in areas we come from. These are long-term, family-wage jobs with benefits and stability,” said state Sen. John Braun, R-Centralia, chairman of the Senate Ways and Means Committee and lead budget negotiator for the Republicans.
Braun said the tax cut had been a priority for Senate Republicans, but they had not been sure how to pay for it in the budget. He said in exchange for giving Democrats spending they wanted, the GOP sought the tax cut during final negotiations.
“If we’re going to do the other stuff that they’re [Democrats] proposing, more revenue, and we clearly have in this budget, we have things that are important to us, too,” he said.
Braun is president of Braun Northwest, a company that builds emergency vehicles and would benefit from the tax cut.
Before Friday’s vote on the bill, Braun sought an ethics ruling from Lt. Gov. Cyrus Habib on whether he should recuse himself. Habib ruled that Braun, as part of a large class of beneficiaries, was cleared to vote.
Because it is phased in, the boon to manufacturing companies, and the projected corresponding reduction in state tax revenues, won’t be fully felt until 2022. By then, according to budget-analyst estimates, it’ll be worth more than $60 million a year.
The tax reduction won praise from Eric Lohnes, director of governmental affairs on tax and fiscal policy for the Association of Washington Business, who said business advocates have long been pushing for more support for manufacturing.
“Washington has been lagging behind in the manufacturing sector compared to the rest of the nation,” he said.
Enough time to read bill?
Though Democrats characterized it as a surprise, the tax-cut proposal didn’t appear entirely out of the blue.
Baumgartner proposed a bill with virtually the same concept earlier in the legislative session. Senate Bill 5888 would have cut the B&O tax for other manufacturers to Boeing’s rate immediately in 2018.
“This is a very simple bill,” Baumgartner said in April during a Ways and Means Committee hearing on the proposal, citing the rush lawmakers engaged in to grant Boeing’s tax breaks four years earlier. His proposal passed the committee but didn’t advance further.
At the April hearing, lawmakers spent about as much time joking about Baumgartner’s tie as they did questioning him about the proposal. State Sen. Christine Rolfes, D-Bainbridge Island, who was at the meeting, said in an interview the tone felt “glib” as opposed to serious, so she was surprised when the plan abruptly resurfaced at the end of the legislative session.
Like much of the budget jammed through by lawmakers Friday, details of the tax-break plan — such the text of the tax amendment and the official estimate of its financial impact — were not available to the public or even most lawmakers until shortly before a final vote.
The lack of transparency was sharply criticized by open-government advocates and some lawmakers, who said they didn’t have time to read the bill before voting.
The manufacturing tax cut was the largest of 13 tax breaks voted through by lawmakers Friday, and worth nearly $100 million over the next four years. The tax breaks were combined into Senate Bill 5977, which passed the state House and Senate late Friday.
Among the other tax-break beneficiaries were solar projects, farms, martial-arts studios and film companies.
While granting the tax breaks, lawmakers did close a tax exemption benefiting oil refineries that had long been criticized by Democrats as outdated and wasteful.
They also agreed to add sales tax to bottled water and to require companies making internet sales in Washington to collect and remit state sales taxes.
Still, the ongoing proliferation of tax exemptions for favored industries drew criticism from Misha Werschkul, executive director of the Washington State Budget and Policy Center, a liberal think tank that favors tax reform.
“Now is the time to clean up the tax code to clear out wasteful tax breaks, not add more,” Werschkul said.
Jaime Smith, a spokeswoman for Gov. Jay Inslee, said in an email Saturday that the governor’s budget team is still reviewing the tax package and “no decisions have been made” on whether he’ll sign or veto the bill.