A big round of applause for Governor Inslee is in order. The new state budget manages to clean up two perversities of Washington’s tax code that together siphoned more than $140 million per biennium from public coffers to private interests. Sightline uncovered these loopholes and made much of them. We provided original research, fact sheets, and public testimony about their harmful effects even while advocates in Olympia bird-dogged them through tricky politics of the state budget.
The “extracted fuel loophole”: $52 million
A bizarre and purely accidental loophole, the extracted fuel tax exemption had become a straight-up giveaway to oil refiners. That’s more than passing strange because the loophole was created by the state legislature in 1949 before the state had any oil refineries—and it was never intended to benefit them.
The exemption was actually intended for the state’s timber industry. It allows sawmills to avoid paying taxes on the wood scraps they produce and burn on-site to power their equipment. Unfortunately, the exemption was so poorly worded that the state’s five oil refineries, which arrived in Washington much later, were able to find shelter under the provision. (Refineries produce fuel on-site and use that fuel to refine oil, so the exemption turned into an accidental subsidy for oil companies.) In fact, oil refineries now claim 98 percent of the tax benefit’s worth, making it much costlier to the state budget than lawmakers had intended. Even the state’s bipartisan tax review committee was baffled by the loophole. They concluded, in part, “because the public policy objective is unclear, it is difficult to determine whether the preference is achieving any intended objective.”
Sightline wrote extensively about the extracted fuel loophole: see our fact sheet, graphics, video, legislative testimony, and other analyses. Governor Inslee has been a staunch advocate for closing the loophole, including it in every one of his budget proposals, but it repeatedly ran afoul of oil-backed interests in the Republican-controlled state senate. The new state budget is a major victory: it closes the extracted fuel loophole for refineries, but preserves the law’s original intent of benefiting timber mills. That means in the next two-year budget cycle Big Oil will be forking over $51.8 million that it was withholding from Washington taxpayers.
The “trade-ins loophole”: $91 million
The budget also partially closes an illogical and regressive giveaway to car dealerships. Much like buying a used car from a slick salesman, the trade-ins exemption is designed to confuse taxpayers into parting with their money. In fact, the rule is the product of a 1984 ballot initiative bankrolled by, you guessed it, car dealerships.
Here’s how it works. Let’s say I trade in a used car worth $5,000 and buy a $20,000 new car. Under the trade-ins exemption, I pay sales tax only on the $15,000 balance. By contrast, if I first sell my used car to a private buyer, I’ll then have to pay sales tax on the full $20,000 purchase price of my new car. In this example, the exemption provides an incentive of roughly $450 to trade my used car in at the dealership, rather than selling it on my own. The result is to tilt used car transactions toward dealers and away from private party transactions.
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Strictly speaking, the loophole applies to everything that gets traded in, including boats, bicycles, and musical instruments. But almost all of the benefit goes to auto dealerships and to those relatively well-off buyers who regularly upgrade their old cars for new ones. The pricier your cars, and the more frequently you trade them in, the bigger the payoff.
Sightline wrote about the trade-ins loophole in our 1997 book, Tax Shift (see page 47). We took up the issue again in 2011 when the state budget was in crisis, writing about it in detail here and here. Governor Gregoire then included its partial closure in her budget proposal, and Governor Inslee followed suit in every subsequent budget proposal, to no avail—until now.
Fully closing the trade-ins loophole would have netted Washington taxpayers $450 million. The new budget only partially closes the loophole: capping the benefit for trade-ins at $10,000, which means dealers in boats and expensive cars will be kicking in an estimated $91 million to pay for schools and other public services for the budgetary biennium.
Full and fair-minded tax reform can seem a long time coming, but investing in the long term—in a slow motion revolution toward sustainability—is part of Sightline’s DNA. So while the new state budget does seem to have some flaws, we’re very pleased with leaders like Governor Inslee and key state legislators who did not waver in their efforts to balance Washington’s books.