Excerpts from Tax Exemptions 2000, published by the Washington State Dept. of Revenue

From Retail Sales/Use Tax Exemptions: Farm Products

82.04.050(8) FERTILIZER & CHEMICAL SPRAY

Description: Fertilizer and chemical spray used in the commercial production of agricultural commodities are exempt from retail sales/use tax.

Purpose: To assist an economically distressed industry. Also, it can be argued that fertilizer and spray are similar to component parts, if they are actually absorbed into the product that is being produced.

Category/Year Enacted: Agriculture; 1943.

Primary Beneficiaries: Agricultural producers.

Conflict With Other Programs: None evident.

Tax Savings ($000):	FY 2000	FY 2001	FY 2002	FY 2003
State taxes	41,430	43,500	45,680	47,960
Local taxes	8,920	9,370	9,840	10,330

If the exemption were repealed, would the estimated revenue be realized? Yes.

From Overview of Exemption Impacts (Table 3 and the accompanying text above it)

Categorical Analysis

Exemptions are established for a variety of reasons. In an attempt to develop more meaningful data for the various types of exemptions, 13 categories were developed and each of the exemptions was assigned to the category which most closely represents its general purpose or type of beneficiary. A brief description of the categories is provided below:

Tax Base

This category includes activities which were not intended to be included in the original tax base. For example, the state B&O tax is intended to tax the privilege of engaging in business. Working as an employee is not considered as engaging in business. Thus, there is a specific statutory exemption (RCW 82.04.360) to assure that employees are not subject to B&O tax, even though it was never the intention that the tax apply to salaries and wages.

Government

Governmental jurisdictions include the federal government, the state of Washington, local governments, and foreign countries. In some instances these entities may be taxed, e.g., state and local governments pay sales tax on the acquisition of tangible personal property. Even the federal government is indirectly taxed through the use tax liability of contractors who install tangible personal property pursuant to federal construction contracts. However, for some other taxes, subjecting publicly owned property and governmental activities to tax would simply amount to a transfer of funds among jurisdictions. Particularly in the case of property taxation, valuation of public property would significantly increase the cost of administering the tax.

Commerce

The U.S. Constitution prohibits direct taxation of interstate commerce. As a result, certain exemptions have been enacted to assure that Washington does not violate this requirement.

Intangibles

Wealth that is represented by intangible assets, such as money, stocks, bonds, deposits and other securities is exempt from property taxation. Because of its unique nature and the difficulty of distinguishing between intangibles that are owned by individuals and businesses, a separate category has been assigned to this major exemption.

Services

A major exclusion from the base of the retail sales tax is represented by services. Initially, the sales tax applied only to tangible personal property (i.e., goods) but over the years the base has been extended to certain other activities such as construction and repair services. If the sales tax is considered as a broad-based tax upon consumption, then purchases of services by individuals and businesses could logically be subject to tax. However, this would represent a major new direction in state tax policy.

Nonprofit

There are a variety of property, B&O and sales tax exemptions allowed for nonprofit organizations. The exemption report further categorizes these exemptions according to the specific type or function of the organizations:

"H" - health or social welfare organizations;

"C" - charitable or religious organizations;

"A" - arts or cultural organizations;

"O" - all other nonprofit organizations.

Individuals

These exemptions generally benefit people, as opposed to businesses or other entities. Some exemptions in this category are directed toward a certain group of people, e.g., the senior citizen property tax exemption.

Economic

This category of exemptions, which generally benefit businesses, is denoted as "economic development." Some preferential tax programs are clearly intended to stimulate the economy and create new employment opportunities in designated areas, e.g. the sales tax deferral for new/expanded manufacturing facilities in rural areas. Others simply attempt to enable a particular industry to be more competitive, e.g. preferential B&O tax rates.

Agriculture

Many tax exemptions are directly oriented toward the agricultural industry, so a separate category is included for such exemptions.

Other

A final "catch-all" category contains various other exemptions.

Table 3 summarizes the 1999-01 biennial impact estimates for the 13 categories of exemptions. The largest category is represented by property tax exemptions for intangibles with 29.8 percent of the total impact. The exemptions for individuals as a group represent over one-quarter of the total savings to all taxpayers. Included in this category are such exemptions as household goods (property tax); food, motor vehicle fuel, nonresidents' tangible personal property and trade-ins (sales tax); and inherited property (real estate excise tax). The share for individuals would be greater if their portion of the services and intangibles exemptions were included.

Exemption categories over which the Legislature has the least discretion are tax base and commerce; exemptions in these categories are either required by the Constitution or would involve a significant departure from current tax policy to eliminate them. Those in the government category, likewise, have little potential for repeal. Taken together, the exemptions in these three categories account for about one-quarter of the combined state and local impact.

Two classes of exemptions represent long-standing and fundamental tax policy: property tax exemption for intangibles (29.8 percent of the total) and sales tax exemption for services (8.3 percent). Significant revision in either category would involve a major change in tax policy. Likewise, most of the exemptions benefitting individuals reflect major policy decisions, such as the sales tax exemption for food.

Preferential tax treatment for business activities, including agriculture and the "economic development" exemptions, accounts for 7.2 percent of the total tax savings and represents legislative policy developed over many years. This leaves nonprofit organizations with only 1.0 percent of the total tax savings and the all-other category with the remaining 0.2 percent.

TABLE 3

EXEMPTION IMPACTS BY CATEGORY

Tax Saving for 1999-01 Biennium, Dollars in Thousands

Category	Exemptions	State/Local Impact	Percent of Total
Tax Base	50	$3,393,973	7.40%
Government	64	3,762,233	8.2
Interstate commerce	16	4,777,540	10.4
Intangibles	1	13,698,095	29.8
Services	2	3,814,469	8.3
Nonprofit organizations:
health or social welfare	27	194,153	0.4
charitable or religious	13	95,026	0.2
arts or cultural	5	23,619	0.1
other organizations	25	123,849	0.3
Individuals	33	12,633,753	27.5
Economic development	131	2,735,353	5.9
Agriculture	42	603,276	1.3
All other	22	85,726	0.2
TOTAL EXEMPTION IMPACT	431	$45,941,065	100.00%