Last Friday, the Washington State Senate passed its version of the 2013-15 operating budget of $33.2 billion by a vote of 30-18, with nine Democrats voting with all but one Republican.  The Senate budget does not raise taxes but does use fund transfers to balance and spend more on education.  You can read more about the Senate budget here: http://www.leg.wa.gov/Senate/Committees/WM/Documents/SOSummary0403.pdf 

The Senate budget increases spending by $2.1 billion over the 2011-13 budget, with the bulk of the increase going to K-12 at $1.5 billion and an additional $300 million for higher education.  A few days earlier, Gov. Inslee released his budget “priorities”, which you can find here: http://www.ofm.wa.gov/budget13inslee/full_budgetpriorities.pdf 

Gov. Inslee proposes to spend $34.4 billion and calls for $1.2 billion in new taxes, closing “loopholes” and extending the B&O rate surcharge of .3%, keeping it at 1.8% for service businesses.  

The most ill-advised component of the Governor’s tax package is placing sales tax on custom software.  This was first introduced 3 years ago when the legislature raised taxes to balance the state budget.  WTIA led the charge against it and it was eventually dropped.  We are prepared to again lead the charge if this idea ends up in a legislative bill. 

The House of Representatives, http://www.leg.wa.gov/house/Pages/default.aspx, will introduce its budget on Wednesday, April 10.  It will likely look more like the Governor’s than the Senate’s.  We can anticipate at least $1 billion in new taxes or reducing tax incentives.  We fully expect there will be efforts to end the R&D tax incentives widely used by the IT and life sciences industries. 

There has been a great deal of scrutiny of the R&D tax incentives, especially since the Joint Legislative Audit Review Committee or JLARC, put out its tax preference study that took a very detailed, but flawed, examination of the impact of the R&D incentives.  The study found that the B&O credit, in and of itself, created a mere 454 jobs.  What the study did not do is look at the impact of the $7.7 billion in R&D is done in Washington, how many jobs that created, how much tax revenue was generated from that activity and other spinoff benefits. 

As anyone in economic development will tell you is that tax incentives are only one criteria for attracting and retaining companies and jobs.  While WTIA is certainly willing to entertain changes to the R&D incentives, we will firmly defend them as an important economic development tool that keeps Washington competitive with other states and regions. 

The JLARC report is here:  http://www.leg.wa.gov/JLARC/AuditAndStudyReports/2012/Documents/2012TaxPreferenceReviewsProposedFinalReport.pdf.  The biggest problem is the flawed economic model they used to measure the impact of the B&O credit (the report ignored the impact of the sales tax deferral).  See page 97 and forward for the discussion of the R&D incentives. 

For an alternative view, see the Washington Research Council’s brief on the high-tech industry: http://www.researchcouncil.org/docs/PDF/WRCEconomics/VibrantTechSectorFinal.pdf.  This provides a more comprehenisve view than the narrow JLARC report. 

In other legislative developments, HB 1472, the WTIA-supported AP Computer Science bill, got a favorable vote in the Senate Ways and Means Committee this afternoon.  Unfortunately, the Committee Chair, Sen. Andy Hill, http://www.leg.wa.gov/senate/senators/Pages/hill.aspx, stripped a couple of key sections from the bill relating to grants for schools to expand AP Computer Science and setting up a task force to deal with at the computer science professional shortage. 

We are still very supportive of the bill and appreciative that it is still moving through the legislature but will try to restore those two sections as the bill winds its way through the Senate.  You can read the bill and other information here: http://apps.leg.wa.gov/billinfo/summary.aspx?bill=1472. 

Another interesting bill is SB 5211, http://apps.leg.wa.gov/billinfo/summary.aspx?bill=5211, dealing with passwords for social networking sites.  The orginal bill prohibited an employer from asking for an employee’s or prospective employee’s social networking site password.  Amendments were sought by the industry for narrow exemptions where an employer was conducting an investigation of a data breach or fraud or potential illegal activity. 

A fair amount of confusion, along with opposition from the ACLU, prevented the amendments from passing, although the bill still passed the House Labor and Workforce Development Committee, http://www.leg.wa.gov/house/committees/LWD/Pages/default.aspx.  WTIA will keep its eye on this bill to make sure it works for both employees and employers.