Tax Preference Performance Review: Beef Processors Proposed Final Report

1. Tax Preference Performance Review: Beef Processors Proposed Final Report Joint Legislative Audit & Review Committee March 21, 2007 Lizbeth Martin-Mahar

2. Presentation Overview • Background • Answers to Tax Preference Review Questions • Recommendation and Responses • Legislature should retain the current law expiration date • Citizens Commission on Tax Preferences endorsed the JLARC recommendation • DOR and OFM both concurred in the JLARC recommendation JLARC Tax Preference Performance Review

3. Beef Processors Tax Preference • HB 2929 (2004): temporary tax deduction on the business and occupation tax • Due to foreign import bans on U.S. beef in response to the discovery of BSE in WA state • Concern over negative impact from bans • Need to have both slaughteringand wholesaling activities to qualify • Effective March 31, 2004 • Specific expiration date of December 2007 was added in 2005 (HB 1407) B A C K G R O U N D JLARC Tax Preference Performance Review

4. Pre Beef Import Ban Post Beef Import Ban Value of WA Beef Exports ($ millions) Source: WISER Trade Data. Dollars not adjusted for inflation. Industry Health: Washington Beef Exports ($ millions) $241 million (16% of gross receipts) $19 million $92 million Year JLARC Tax Preference Performance Review Report p. 38

5. 1000 Pre Beef Import Ban Post Beef Import Ban 750 Value of WA Red Meat Production (millions of pounds) 500 250 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Industry Health: Washington Red Meat Production (millions of pounds) 750 million pounds 598 million pounds Source: USDA National Agricultural Statistics Service Washington State 2006 Annual Agriculture Bulletin. JLARC Tax Preference Performance Review Report p. 44

6. Pre Beef Import Ban Post Beef Import Ban Average Employment Report p. 35 Industry Health: Washington Employment in Beef Processing Industries 4,101 employees 3,782 employees Year * 2006 employment based on first quarter Source: Washington Employment Security Department Covered Employment Data. JLARC Tax Preference Performance Review

7. Public Policy Objectives - Questions and Responses What are the public policy objectives that provide a justification for the tax preference? • Compensate beef processors from the negative impact from foreign import bans placed on U.S. beef exports • Targeted at beef processors slaughtering their own beef in Washington • Temporary business and occupation tax relief JLARC Tax Preference Performance Review Report p. 11

8. Public Policy Objectives - Questions and Responses What evidence exists to show that the tax preference has contributed to the achievement of any of these public policy objectives? • Utilized by beef processors slaughtering their own cattle in Washington State • Does achieve the objective of providing temporary tax relief JLARC Tax Preference Performance Review Report p. 12

9. Public Policy Objectives - Questions and Responses To what extent will continuation of the tax preference contribute to these public policy objectives? • Continuing the tax preference will only partially fulfill the public policy objectives outlined in law • Will violate the “temporary” nature of the public policy objective • Negative impact from foreign import bans on beef has diminished over time JLARC Tax Preference Performance Review Report p. 15

10. Beneficiaries - Questions and Responses Who are the entities whose tax liabilities are directly affected by the tax preference? • Businesses slaughtering their own beef and selling at wholesale • Six beef processors claimed the tax deduction in 2004 and 2005 and five beef processors in 2006 JLARC Tax Preference Performance Review Report p. 17

11. Revenue and Economic Impacts - Questions and Responses What are the past and future tax revenue and economic impacts of the tax preference if it is continued? • Estimated B&O tax loss was $1.1 million (three quarters in 2004) and $1.62 million (2005) • Estimated future B&O tax loss would be $1.1 million • Total employment of those claiming the deduction was 2,416 in 2005 (64% of the employees in beef processing industry) • Decline in employment from the firms claiming the deduction (-9%) is nearly the same as industry wide JLARC Tax Preference Performance Review Report p. 20

12. Other States Similar Tax Preferences • No other state has enacted this type of tax preference for beef processors JLARC Tax Preference Performance Review Report p. 21

13. Recommendation: Beef Processors Tax Preference The Legislature should retain the current law expiration date of December 31, 2007, on the beef processors tax preference • No legislation is required with this recommendation • Revenue impact from this recommendation is $0 since there is already an expiration date in current law and the revenue impact is already incorporated into the state forecast JLARC Tax Preference Performance Review Report p. 21

14. Tax Commission and Agency Responses • Citizen Commission for Performance of Tax Preferences endorsed the recommendation in the JLARC report • Office of Financial Management and the Department of Revenue also concurred with the recommendation in the report JLARC Tax Preference Performance Review

15. Contact Information Lizbeth Martin-Mahar 360-786-5123 Martin-Mahar.Lizbeth@leg.wa.gov JLARC Tax Preference Performance Review