Taxes are powerful tools that change behavior. Low taxes encourage, high taxes discourage.

For example, charities and nonprofit groups are alarmed by President Obama’s proposal to reduce tax deductions for charitable contributions by the wealthy. The charities say they could lose billions in donations.

According to a study by the Indiana University Center on Philanthropy, wealthy Americans donated more than $81 billion to charity in 2006 – 43 percent of all charitable contributions. Researchers say the proposal could cut charitable giving by $4 billion a year.

“Tax incentives do stimulate more giving,” notes Center Director Patrick Rooney, “and the challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional incentives, rather than reduce the value of the tax deduction….”

As this debate is raging in Washington, D.C., federal and Washington state lawmakers are proposing to increase cigarette taxes to fund health care and discourage smoking. They understand that high taxes are a deterrent to individuals. The same holds true for taxes on employers, since higher taxes mean less hiring and expansion for business. And that means current and future jobs could be at risk.

As state lawmakers look for ways to balance Washington’s $8 billion budget deficit, some are targeting business tax incentives such as the M&E exemption. Passed in 1995 to stimulate growth and jobs in manufacturing, it exempts manufacturing machinery and equipment (M&E) from sales and use taxes, along with investments in research and development, installation, repairs and replacement parts.

In its first 10 years, the M&E exemption created almost 285,000 new jobs and added $81.5 billion to the state economy. Through the next seven years, it’s projected to create an additional 45,000 jobs and add more than $49 billion to our faltering economy. Since its inception, the M&E exemption has always made a net “profit” for the state of Washington. Still, some suggest the exemption should be repealed.

If lawmakers want to know how the M&E exemption works, they should talk to Mark Sonderen in Spokane. Because of the exemption, he was able to rebuild and expand his packaging facility after a devastating fire in 1998. The M&E exemption not only helped Sonderen save the jobs of his employees in 1998, he has since more than doubled his workforce.

In Kent, Camillo Cheng of Golden Pheasant Foods says the M&E exemption has helped him “share the wealth” with his employees, many of whom are immigrants. The incentive helped Cheng and his wife update their processing facility, buy new equipment and hire new employees.

“When we first bought the company, 80 percent of our people were paid minimum wage; the other 20 percent a little above. We’re still not a high wage employer, but hourly wages now range from $10 to $15.75. In addition, our benefits to our employees are far better. We have health insurance, profit-sharing, and 401(k) contributions.”

Fortunately, Senate Majority Leader Lisa Brown (D-Spokane) is a strong supporter of the M&E exemption, saying, “…we clearly have no plans to end that tax exemption. If anything, we intend to expand the toolkit of incentives to spur investment now.”

As lawmakers seek to resolve our budget deficit, they need to look at the success of the M&E incentive. It proves that the best way to save jobs and increase state revenue is to keep money in the hands of families and businesses where it can stimulate purchases – purchases that support jobs and create sales tax and Business and Occupation tax revenue.

Raising taxes takes money away from taxable business transactions. The simple fact is if lawmakers really want to help the little guy and the entrepreneurs on Main Street, they should take a page from the success of the M&E exemption and implement tax incentives, not tax increases on employers and families.

Finally, legislators should go line-by-line through every state agency budget and continue the work of restructuring state government initiated by Gov. Gregoire late last year to find cost savings and deliver services more efficiently to taxpayers. Otherwise, we can expect more of the same conversations about deficits and taxes in the months and years ahead.

Don Brunell is president of the Association of Washington Businesses.