** UPDATE 11/16 — Crosscut published an updated and refined version of this piece.
Washington’s legislature will soon be convening for a special session that the governor has already called “brutal” for its potential impact on education and other services. Today, she outlined $1.65 billion in cuts to cover the projected two-year budget shortfall.
It’s going to be a tough session, but I can knock out one-fifth of the state’s budget problem right now—$344 million in new state revenue—just by closing a single tax loophole designed to boost car sales. Plus, closing that loophole would provide an additional $106 million to cash-strapped local governments over the next biennium.
Too good to be true? Hardly. Check out the Washington Department of Revenue’s most recent “Tax Exemption” report. (It’s circa 2008 with a new one due out next year.) If you can make it through to page 288 of the full report, you’ll find the goldmine I’m talking about: ol’ RCW 82.08.010, better known as the “trade-ins exemption.” As the name implies, the law exempts trade-ins from sales tax by defining the purchase price of an item, the price eligible for taxation, as the price of the item minus the price of a trade-in item. So if I trade in a $5,000 used car in order to buy a $20,000 new car, I only pay taxes on the $15,000 balance.
By contrast, if I sell my used car to a private buyer, he would legally be required to pay sales tax on my $5,000 car, and then I would pay sales tax on the $20,000 new car I buy. So the trade-ins loophole is a very sweet deal for car dealerships. And it is mostly about car dealerships. Vehicles constitute by far the dominant share of trade-ins, though there are other items like farm equipment and boats that are also commonly traded in. (Things like bicycles and musical instruments are too sometimes, but the purchase prices are so low that they don’t represent an important share of the tax exemption.)
Oddly enough, the trade-ins loophole is the product of a quarter-century old ballot measure, Initiative 464. (A 1982 version of the measure, Initiative 426, failed to gather enough signatures to qualify for the ballot.) Like many bad ideas, I-464 was a smash hit at the polls: it passed with 69 percent of the vote.
Reading the 1984 voter’s pamphlet is illuminating. The “statement against” arguments
have been proved basically right. Here’s my updated version of them:
- It’s a fundamentally regressive tax loophole, mainly benefiting the well-off who have high-priced vehicles to trade in frequently. It doesn’t do much to help lower income folks who are far less likely to own cars, and when they do own cars tend to own lower-priced cars that they maintain for a long time.
- It stimulates auto sales, which probably help in-state dealerships, but the automotive industry is not a big factor in Washington. If anything, encouraging car purchases is a bad economic strategy because fuel costs are so high, and because Washington supplies essentially none of its own fuel.
- Higher education funding tends to bear the brunt of state revenue losses. I’d wager that Washington’s public universities could make good use of $344 million right now.
The bottom line is that the state budget is in a bad place. There are no easy spending cuts left and there are not likely many easy revenue-raising options either. Yet closing tax loopholes—especially those that are regressive and yield small economic returns—is the smartest path toward stabilizing public budgets.
Among the many obstacles is Tim Eyman’s undemocratic (and probably unconstitutional) minority-rule provision put in place by last year’s Initiative 1053. It’s time to challenge 1053 in court, ignore it legislatively, or else just close the worst darn tax loopholes by super-majority vote.
One closing note. If I hear one person—just one person—tell me that closing this tax loophole isn’t “politically possible” or “is too heavy a lift” for this session, I’m officially going to blow my stack. You know what’s too heavy a lift? Cutting low income people off from health care, dismantling the public education system that the middle class relies on, slashing environmental protections, and all the other stuff that the legislature has been hacking away at over the last couple of years. It’s about time we share the pain with car dealerships.