July 2023

2023 Reviews: Five of six Legislative Auditor recommendations require action

The Legislative Auditor issued six tax preference reports in 2023. The preferences benefit businesses or individuals involved in:
  1. Providing interstate transportation.
  2. Creating new jobs in rural counties and community empowerment zones.
  3. Providing international business services.
  4. Storing pesticides sold out of state
  5. Maintaining historic vessels.
  6. Rehabilitating historic properties.
Each report includes one Legislative Auditor recommendation to the Legislature. All but one (rehabilitating historic properties) requires legislative action.

This year's reviews include requirement for racial equity analysis

The 2021 Legislature charged JLARC with including a racial equity analysis in its audits and other reviews when it is relevant to the study's mandate and scope (RCW 44.28.076). We identified relevant questions for each of the tax preference reviews (see Study Questions).

Race and ethnicity data for the businesses using the preferences studied in 2023 was not available. In lieu of actual data, JLARC staff searched for other sources of data that could provide insight into who benefits from or is affected by each preference. Our secondary sources included surveys and U.S. Census Bureau data. Specific data sources are discussed in each report.

In 2022, the Department of Revenue asked beneficiaries of 48 tax preferences to submit race and ethnicity data on their annual tax performance reports. This includes beneficiaries that are specifically required to file an annual report and those who use preferences intended to improve industry competitiveness or create or retain jobs.

While this will improve the availability of data, JLARC staff anticipate that obtaining robust race and ethnicity data will continue to be a challenge for future reviews. Limitations include:

  • The request to report information does not apply to all tax preferences JLARC is required to review.
  • Race and ethnicity data is requested about employees, not business owners or other affected stakeholders.
  • Businesses are asked to provide race and ethnicity of their employees statewide. Data will not be location specific.
  • Businesses are not required to supply this information about their employees.

Obtaining race and ethnicity information from all preference users may require additional legislation. For example, the Legislature might require state agencies to collect the desired data. Such efforts will likely require balancing the interest in gathering race and ethnicity data with efforts to streamline and simplify taxpayer reports.

Five recommendations require legislative action

link.png Interstate Transportation Tax Preferences

Conclusion: The four preferences make Washington’s commercial transportation industry more competitive. They support more freight traffic at ports and higher employment in transportation and freight-dependent industries.

Tax type: Public utility tax

Biennial beneficiary savings: $219.8 million (2027-29 biennium)

Applicable statutes: RCW 82.16.050 subsections 6, 8, 9, and 10

Expiration date: None

Legislative Auditor's Recommendation: Clarify because the preferences are no longer necessary to comply with the U.S. Constitution and the Legislature may have other objectives.

Commissioners' Recommendation: Available October 2023

Summary Thumbnail image of the One Page summary

Video Summary

link.png Rural County and CEZ New Jobs

Conclusion: Beneficiaries created over 1,000 jobs in rural counties, but use continues to decline. The preference's wage threshold has not been updated since 1997.   

Tax type: Business and occupation tax

Biennial beneficiary savings: $582,000 (2025-27 biennium)

Applicable statutes: RCW 82.62.030

Expiration date: None

Legislative Auditor's Recommendation: Continue and modify because the preference has been used by businesses that created jobs. However, the Legislature may want to consider increasing the wage threshold or modifying the preference to increase the number of businesses using it.

Commissioners' Recommendation: Available October 2023

Summary Thumbnail image of the One Page summary

Video Summary

link.png International Services

Conclusion: Preference use is 99% lower than originally expected. It has not met the goal of attracting and retaining jobs.   

Tax type: Business and occupation tax

Biennial beneficiary savings: $80,000 (2025-27 biennium)

Applicable statutes: RCW 82.04.44525

Expiration date: None

Legislative Auditor's Recommendation: Terminate because it has not achieved the stated intent to attract and retain businesses in community empowerment zones or international service districts. The Legislature may want to consult with the Department of Commerce and local economic development entities to consider other approaches.

Commissioners' Recommendation: Available October 2023

Summary Thumbnail image of the One Page summary Video Summary

link.png Hazardous Substance Tax Exemption for Pesticides Sold Out of State

Conclusion: Preference is for businesses that store and transport agricultural pesticides sold out of state. Total hazardous substance tax revenue has increased, but likely not due to the preference.

Tax type: Hazardous substance tax

Biennial beneficiary savings: $319,000 (2023-25 biennium)

Applicable statutes: RCW 82.21.040(5)

Expiration date: 1/1/2026

Legislative Auditor's Recommendation: Continue and modify because the preference improves industry competitiveness. The Legislature should consider new metrics to evaluate the preference in light of 2019 changes to Hazardous Substance Tax or recategorize the preference.

Commissioners' Recommendation: Available October 2023

Summary Thumbnail image of the One Page summary Video Summary

link.png Historic Ships and Vessels

Conclusion: Owners of eleven historic vessels saved an estimated $21,000 in 2023. It is unclear if the preference met the inferred goal of keeping historic vessels in Washington.

Tax type: Property tax

Biennial beneficiary savings: $22,000 (2025-27 biennium)

Applicable statutes: RCW 84.36.080(2)

Expiration date: None

Legislative Auditor's Recommendation: Clarify the objectives and identify performance metrics.

Commissioners' Recommendation: Available October 2023

Summary Thumbnail image of the One Page summary Video Summary

One recommendation does not require legislative action

link.png Rehabilitated Historic Properties

Conclusion: Property owners saved $56.8 million over the past 10 years, primarily in King County and for commercial properties. While preference use has declined, use increased 6% between 2020 and 2022.

Tax type: Property tax

Biennial beneficiary savings: $22.7 million (2025-27 biennium)

Applicable statutes: RCW 84.26.070

Expiration date: 1/1/2031

Legislative Auditor's Recommendation: Continue because the preference is meeting its objective to promote historic property revitalization. JLARC staff will review the preference again before the January 1, 2031 expiration date and determine whether preference use has increased over time.

Commissioners' Recommendation: Available October 2023

Summary Thumbnail image of the One Page summary Video Summary

The Citizen Commission for the Performance Measurement of Tax Preferences also considers preferences based on information provided by the Department of Revenue. View the 2023 Expedited Preference Review.

 

 

2023 Tax Preference Performance Reviews

July 2023

Joint Legislative Audit & Review Committee

More about 2023 reviews

Study questions

The Citizen Commission for the Performance Measurement of Tax Preferences selected the following tax preferences for a performance review by JLARC staff in 2023:

In addition, the Commission opted to consider the following tax preferences, using an expedited process. The expedited process is primarily based on information published by the Department of Revenue in its most recent statutorily required tax exemption study. View the 2023 Expedited Preference Review.

Table 1: 2023 expedited review included 45 preferences

Click on header titles to sort table by preference name, RCW, or year enacted.

Preference Name RCW Year Enacted
Bailed Tangible Personal Property for R&D (Use Tax) 82.12.0265 1961
Cigarette Stamping (B&O Tax) 82.04.601 2007
Custom Computer Software (Property Tax) 84.36.600 1991
Custom Software (Sales and Use Tax) 82.04.050(6)(a)(i)-(ii) 1998
Digital Codes (Sales and Use Tax) 82.08.0208; 82.12.0208 2009
Digital Goods and Services for Business Purposes (Sales and Use Tax) 82.08.02087; 82.12.02087 2009
Digital Goods and Services for Multiple Points of Use (Sales and Use Tax) 82.08.02088; 82.12.02088 2009
Digital Goods or Automated Services for the Public (Sales and Use Tax) 82.08.02082; 82.12.02082 2009
Easements for Removing Products (Leasehold Excise Tax) 82.29A.020(1)(b)(i) 1975
Federal Small Business Innovation Grants (B&O Tax) 82.04.4261 2004
Federal Small Business Technology Transfer Grants (B&O Tax) 82.04.4262 2004
Forest Land Compensating Tax (Property Tax) 84.33.140(13)-(14) 1971
Forest Land Special Assessments (Property Tax) 84.33.210(1) 1992
Form Lumber (Sales and Use Tax) 82.08.0274; 82.12.0268 1965
Goods in Transit (Property Tax) 84.36.300 1961
Data Center Equipment (Sales and Use Tax) 82.08.986; 82.12.986 2010
Gravitational Wave Observatory (Sales and Use Tax) 82.08.02569; 82.12.02569 1996
Historic Property (Leasehold Excise Tax) 82.29A.130(17) 2005
Import and Export Commerce (B&O Tax) 82.04.610 2007
Import and Export Commerce (Sales Tax) 82.08.990 2007
Grave or Cemetery Lot for Sale (Real Estate Excise Tax) 82.45.010(3)(m) 1951
Joint Municipal Utility Authority (B&O Tax) 82.04.655 2011
Joint Municipal Utility Authority (Public Utility Tax) 82.16.305 2011
Joint Municipal Utility Authority (Sales and Use Tax) 82.08.999; 82.12.999 2011
Intangibles (Property Tax) 84.36.070 1931
Life Sciences Discovery Fund (B&O Tax) 82.04.4263 2005
Mini bottle liquor sales (Liquor tax - expires 6/30/2023) 82.08.150(10)(b) 2021
Minimum Taxable Threshold (Estate Tax) 83.100.020(1) 2005
Minimum to File Tax Return (Multiple Taxes) 82.32.045(5) 1996
Municipal Sewer Service Payments (B&O Tax) 82.04.432 1967
Nonprofit R&D (B&O Tax) 82.04.260(3) 1965
Newspapers (Sales and Use Tax) 82.08.0253; 82.08.0253(1)(b); 82.12.0345 1935
Prewritten Computer Software (Property Tax) 84.40.037 1991
Public Historical Sites (Leasehold Excise Tax) 35.21.755 1977
Public Institution R&D Machinery and Equipment (Sales and Use Tax) 82.08.025651; 82.12.025651 2011
Purchases by Residents of Alaska and Hawaii (Sales Tax) 82.08.0269 1961
Recycling or Salvage Materials (Solid Waste Collection Tax) 82.18.010(3) 1986
Sales Tax Sourcing Costs (Multiple Taxes) 82.32.760(1)(b) 2007
Sales to Nonresidents from No or Low Sales Tax States (Sales Tax) 82.08.0273 1965
Small Timber Harvesters (B&O Tax) 82.04.333 1990
Standing Timber (B&O Tax) 82.04.334 2007
Timber Tax Minimum (Timber Tax) 84.33.086 1984
Self-Service Laundry Facilities (Sales and Use Tax) 82.04.050(2)(a) 1998
Vending Machine Sales (Sales Tax) 82.08.080 1963
Trade-Ins (Sales Tax) 82.08.010(1)(a) 1984
Source: 2023 expedited tax review
Table 2: 2023 expedited review included 17 preferences that are a critical part of the tax structure

Click on header titles to sort table by preference name, RCW, or year enacted.

Preference Name RCW Year Enacted
Casual Sales (Sales Tax) 82.08.0251 1935
Cemeteries (Property Tax) 84.36.020 1854
Endowment Funds (B&O Tax) 82.04.4282(8) 1935
Joint Utility Services (Public Utility Tax) 82.16.050(3) 1935
Leases Under $250 per Year and Short Term Leases (Leasehold Excise Tax) 82.29A.130(8)-(9) 1976
Minimum Income Threshold (Public Utility Tax) 82.16.040 1935
Municipal Utilities (Public Utility Tax) 82.16.050(1) 1935
Products Shipped Out-of-State (Litter Tax) 82.19.050(1) 1992
Professional Employer Organization Wages (B&O Tax) 82.04.540(2) 2006
Nonresidents' Personal Property (Use Tax) 82.12.0251 1935
Public Utilities (B&O Tax) 82.04.310(1) 1935
Public Utility Operating Property (Sales and Use Tax) 82.08.0256; 82.12.0257 1935
Sales for Resale (Public Utility Tax) 82.16.050(2) 1935
Sales or Use Tax Paid in Another State (Use Tax) 82.12.035 1967
Sales Subject to Public Utility Tax (Sales Tax) 82.08.0252 1935
Sewerage Processing and Disposal (Public Utility Tax) 82.16.050(13) 1987
Timber (Property Tax) 84.33.040 1971
Source: 2023 expedited tax review