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Inslee vetoes tax break for manufacturers; Republicans cry foul, say it was part of budget deal

OLYMPIA, Wash — (AP) — A plan to give manufacturers the same tax cut that the Legislature previously gave to Boeing was vetoed by Gov. Jay Inslee Friday, drawing outrage from Republicans who said the measure was part of an agreed-to deal on the overall state budget.

The tax break was one of two Inslee, a Democrat, used his veto pen on: In addition to nixing the lower manufacturing business and occupation tax rate, he also vetoed sales and tax use exemptions for TransAlta as it converts its coal plant to natural gas.

He signed the overall bill that included several other tax incentives, including one to encourage more film and television industry projects to the state.

But the manufacturing rate exemption was the largest of the group, reducing state coffers by about $64 million over the next four years. The Department of Revenue said that about 20 percent of the tax cut would benefit oil refineries, something Inslee noted after the veto.

"This was a bad provision," Inslee said. "It was grossly unfair to taxpayers, it was done in the middle of the night, it has zero accountability, there's not a single job that they can prove will be produced from this and, as a result, I exercised my constitutional duty."

The rate would have lowered manufacturer's rate from .484 percent to .2904 percent. The Legislature first approved that lower rate for Boeing and the aerospace sector in 2003 and in 2013 extended the rate until 2040 as part of a nearly $9 billion tax break to ensure that the 777X was produced in Everett.

Republicans argued that the manufacturing tax break was part of an overall state budget deal that ultimately avoided a partial government shutdown. That budget deal included the repeal of the sales tax exemption on bottled water, repeal of tax preference on extracted fuels that benefited oil refineries, and expansion of online sales tax collection — which was also signed by Inslee Friday. Inslee said he was never directly asked about — and never agreed to — the tax cut for manufacturers.

"We never offered any assurance that there would be no veto," he said.

Senate Majority Leader Mark Schoesler said that small manufacturers across the state "were just slapped down by this veto that would have put them on a level playing field with other industries."

He said that the tax break was part of a carefully brokered deal, and that its veto has "jeopardized the credibility of dealing with this administration."

The bill that included the manufacturing tax rated passed with bipartisan support in both chambers late last week, clearing the Senate on a 33-16 vote and the House on a 83-10 vote.

“The legislative process is based on trust,” said state Sen. Doug Ericksen, R-Ferndale. “Today, Jay Inslee violated that trust by reneging on a deal that was worked out over the course of our regular legislative session and three special sessions.

“These vetoes demonstrate Jay Inslee has no respect for the working men and women of Washington state – the people these incentives were designed to benefit. At the same time, he has lost the respect of the Legislature. I am confident we will be able to override these vetoes because of the overwhelming support this bill received in the House and Senate.

“In the Legislature, we believe a deal is a deal. But when the governor vetoes an agreement reached by his own party, how can we trust that any compromise will be upheld? When you break trust, you don’t get it back, and Jay Inslee has lost the trust of the entire Legislature.”

The Association of Washington Business issued a statement that said in part, “The governor’s decision to veto part of a bill that was agreed upon in good faith by a bipartisan group of legislators, and passed with a bipartisan super-majority in both chambers, is a missed opportunity to help small- and medium-sized manufacturers in rural parts of the state that are still struggling, such as marine manufacturing in communities like Colville, Clarkston and Port Townsend....

"We hope the lawmakers who passed this legislation by wide margins in the House and Senate will now act to override the governor’s veto and give Washington’s rural manufacturers the support they need to bring economic prosperity to all parts of the state."

On Monday, 23 House Democrats wrote to Inslee encouraging him to veto the section, saying that "the politics of policy of giving the business community a massive tax cut, while hiking property taxes on middle-class individuals to fully fund public schools, is unacceptable and dangerous."

In turn, House Republicans in a letter Thursday said that "future negotiations would become impossible if parties to the deal were allowed to unilaterally reconstruct the deal on terms more favorable to their party's base by pressuring you to veto isolated terms of a comprehensive agreement."

Inslee signed the $43.7 billion state operating budget last week less than an hour before a partial shutdown would have begun, and on Thursday signed into law a plan that increases the statewide property tax to try to bring the state into compliance with a state Supreme Court mandate to increase state dollars to basic education.

"At a time when homeowners will have to pay more in their property taxes for our children's education, this part would mean that businesses paid less," Inslee said. "There is a fairness question here that cannot be ignored."

Democratic House Majority Leader Pat Sullivan, who was part of the budget negotiations, said that while Democratic budget negotiators stuck by what they negotiated with Republicans, the veto is the governor's prerogative.

"If there's a lesson to be learned from all of this, we have to get things done more quickly so that the public can see it and there's an opportunity to weigh in on the final product," he said.