Winning a tax break could become a lot harder to do at the Washington state Capitol soon.
In both the Democrat-run House and Republican-leaning Senate, bills have passed unanimously this year either to set a new standard for an existing tax break or to lay out expectations for new ones. The House is taking the stricter position, demanding specific goals for job creation or retention, proof that goals are being met, and an expiration date.
And in what House Finance Committee Chairman Reuven Carlyle says is an Evergreen State first, a bill extending a fuel-tax break for lumber and paper mills — mostly on the economically hard-hit Olympic Peninsula — will require a company to repay tax favors if it takes the money then pulls up stakes and leaves the state for China, Brazil or even Idaho.
“This is the first time in the history of the state where there has been a tax exemption where there is a social contract … between the taxpayers of Washington, the companies getting the tax benefit and the employees in that community doing the work,” Carlyle said of House Bill 1663, known as the “hog fuel” tax exemption proposal.
Hog fuel is the bark and sawdust left over from logging and or lumber milling, and it is ground up or “hogged” for use by pulp-and-paper mills and sawmills as a source of heat and other energy. At Simpson’s lumber mill in Shelton, for instance, it fuels boilers that create heat for kilns that dry freshly sawn sticks of lumber.
TEST SHOWS BENEFITS
As chairman of the Finance Committee, Carlyle is hoping to impose a clear public benefit on the state’s more than 630 tax breaks. He has written a five-point accountability test to grade all new tax requests to this year, and so far only the tax break for hog fuel and another for honey bee pollination services have passed in the House.
In both cases, the vote was unanimous and both bills now await hearings in the Senate. The sales-tax exemption for hog fuel bought by mills passed in spite of a move by Republican Rep. Ed Orcutt of Kalama to strip out the pay-back provision.
By contrast, a tax credit sought by Gov. Jay Inslee for new high-tech companies’ research and development has stalled, failing to meet what some might call the new Carlyle Test.
The House crackdown on tax exemptions comes as Inslee — who campaigned on a no-new-taxes platform — is poised to offer a revenue package this week that includes outright closure of as-yet unspecified tax breaks. Inslee has said he wants to repeal tax breaks that don’t produce a clear public benefit such as jobs.
So far, the Senate is taking a softer approach, and the so-called “clawback” provision requiring repayment of taxes could hit strong resistance there.
But the Senate, which is led by a Republican-dominated coalition, is not ducking the tax-breaks issue. A bill from Senate Majority Coalition leader Rodney Tom, D-Medina, which passed unanimously, requires that new tax breaks after 2013 meet performance standards that include clear goals and expiration dates.
“I think the Tom bill (SB 5843) gives us an idea where we’re going to go,” says Senate Republican Leader Mark Schoesler of Ritzville. “I think people look at it and say ‘for the foreseeable future we’re going to have to be a little more critical about what we do (on tax breaks).’”
COMPETING TAX BREAKS
No new tax breaks have passed the Senate as yet. But Schoesler said tax bills are being kept in the Rules Committee at least until the new state revenue forecast comes out Wednesday and the Senate majority unveils its budget by month’s end.
Schoesler said the two House-approved tax breaks may have merit. But the clawback of taxes that is advocated by Carlyle and the hog-fuel tax sponsor, Democratic Rep. Steve Tharinger of Dungeness, could be a problem for the Senate.
“We’ll have the conversation. I think the hog fuel bill may make a lot of sense for distressed timber areas,” Schoesler said, adding that the temporary sales-tax break for pollinators that use honey-bees is another worthy of consideration.
The hog fuel tax break would cost the state about $1.95 million in lost tax revenue every two years. The bee bill, House Bill 1558, costs about $142,000.
Carlyle said his insistence on putting strict performance limits on tax breaks means that the honey-bee bill has time limits. It lasts only so long as the honey-bee industry is plagued by a “colony collapse disorder,” which is wiping out the bee stock.
He said the small cost has a big upside and huge value to a multi-billion-dollar agriculture industry in the state.
The case for the hog-fuel exemption is different. Begun in 2009 it was scheduled to expire in June but would be extended until 2024 with a requirement that benefiting businesses retain at least 75 percent of their workforce. A report on the bill’s success is to be given to the Legislature in 2019.
Representatives of pulp-and-paper firms testified in committee that the tax help is needed to protect an industry that employs 9,000 in Washington and faces increasing global competition. Tharinger said key jobs on the Olympic Peninsula or Grays Harbor are at stake, including 20 percent of the jobs in Port Townsend that are at a pulp plant.
During a hearing last month in House Finance, Sean O’Sullivan of the pulp-and-paper workers association said the globalized industry is dominated by multinational firms that have deep pockets and can pay the state back if they shutter a facility.
For Simpson, a prominent Northwest forest products firm with a mill in Shelton and a paper plant in Tacoma, the tax break was helpful during the last recession, according to Dave McEntee, vice president of operations services.
He said Simpson lost 130 jobs in Shelton since 2004 and 110 in Tacoma.
“What the tax incentive does for us is allow us to get back on our feet more quickly, add more shifts and expand our businesses,” McEntee said in an interview. “We really feel it’s a job creator more than anything else.”
McEntee, who also serves as Simpson’s renewable energy developer, said the use of waste wood, or biomass, also helps cut down greenhouse gases that otherwise would escape as methane if left to rot after a forest is cut down. Use of the homegrown fuel also makes it easier for the mills to compete with those using other renewable fuel sources or fossil fuels that receive government subsidies.
FIGHT FOR SUCCESS
McEntee said he thinks the results of the tax break can be measured, and he noted that Simpson in recent years invested $90 million in a Tacoma cogeneration plant that uses waste wood products to produce both heat and energy.
But McEntee said the clawback could be a disincentive and sends the wrong message to industry. That is because it doesn’t take into account that a tax break might let a mill keep operating longer during a downturn than it otherwise would, prolonging employment, he explained.
Carlyle isn’t giving in without a fight. If the Senate strips out the clawback rule from the hog-fuel bill, he made clear the pulp and paper industry ends up paying the price.
“If that provision comes out, the bill goes down to a violent and ugly death and the tax exemption goes away,” he said bluntly. “It expires. It is not worth that game. I’m not playing fiddlesticks with this.”