With the state House proposed 2017-19 operating budget approved last week, eyes are now fixed on legislation needed to fund it. HB 2186 received a “do pass” recommendation from the House Finance Committee Tuesday, April 4 after a public hearing the day prior. House Democrats on the committee praised the bill as a needed revamp of the state’s taxing system that would provide relief to small businesses. However, Republican lawmakers and business leaders testifying during the April 3 public hearing opposed the bill, saying it could cause economic harm to communities and industries reliant on certain tax incentives that would be eliminated under the legislation. Senate Republicans also questioned whether the tax package can obtain the necessary House votes to clear that chamber.
Restructuring State B&O Tax
In addition to a 20 percent business and occupation tax surcharge for employers making more than $150,000 a year, HB 2186 would create a seven percent capital gains income tax and replace the state’s 1.28 percent real estate excise tax (REET) with a progressive tax rate. It would also require out of state retailers report taxes owed by Washington customers for online purchases, and swap the out of state resident sales tax exemption with a remittance program. The taxes are expected to generate $3 billion in the 2017-19 biennium and $4.3 billion in the 2019-21 biennium.
HB 2186 primary sponsor is Finance Committee Chair Rep. Kristine Lytton (D-40). She told colleagues April 4 that “the vast majority of” small businesses “will pay zero – zero – in business and occupation taxes.”
“A lot of the focus that went into this bill was to provide relief for our small businesses…how do I help the middle class? How do I help my next door neighbor who has a toy store downtown?” she said.
State Rep. Larry Springer (D-45) urged colleagues April 4 to recommend the bill, although “there is much in here I like and much in here I don’t like.”
“We have a budget to negotiate now,” he said. “This is the point at which we begin the real discussion here. Stay tuned, it’s a work in progress.”
Delaying Tax Burden For Small Businesses
State Rep. Ed Orcutt (R-20) was among the committee members who voted against it. He told colleagues that under the proposal, when small employers go to retire and sell off their business, “we hit them upside the head with a big tax on capital gains.”
“This isn’t really tax relief,” he added. “It’s temporary relief, but it’s not permanent tax relief. “
It was a point raised at the April 3 public hearing by Holli Johnson, Director of Government Affairs for the Washington Food industry. She told committee that many employers have their “life savings wrapped up in (the) businesses.”
“We would argue that this is not a fair system,” she said.
Orcutt also warned April 4 that the sales tax remittance program will only encourage businesses in the Longview-Keslo area to open up on the Oregon side of the Columbia River. “When those jobs go across the river and our people have to go across the river, our people have to pay (Oregon’s) income tax,” he said.
Similar concerns were raised at the April 3 public hearing about other tax proposals.
“Helping small businesses with a B&O tax deduction is a great idea, but tax credits deal with most of this already,” Gary Smith said. He is Executive Director of the Independent Business Association.
Insurance Industry Forced To Absorb New Tax Impact
Others such as Dale Kelley with the Professional Insurance Agents of Washington told the committee April 3 that “by adding a 20 percent B&O tax, that’s not a fee that we are able to pass on.”
“The capital gains tax of seven percent would just be a horrible burden on our small businesses,” he added.
The view was shared by Richard Ek with the National Association of Insurance and Financial Advisors of Washington. Because the industry’s rates are regulated by the state, “we can only charge what the companies have been approved and allowed to sell,” he said.
“We pay what results to be an income tax,” he said. “Nobody else does in the state of Washington, but we do.”
Although Lytton has referred to the capital gains tax as an excise tax, Committee Counsel Tracey O’Brien told lawmakers that capital gains is reported as income in the federal tax code.
“It’s unclear whether the court would consider capital gains as income,” she said.
However, Senate Majority Leader Sen. Mark Schoesler (R-9) told reporters at an April 3 press conference that “You can call it (capital gains tax) what you want, but it still quacks like a duck.”
“You have to file an income return to test how much gain you have,” he said. “It’s always been lumped together in federal tax code as an income.”
It’s a point also made by Jared Walczak, a policy analyst for the Tax Foundation.
The Search For Necessary House Votes
Republican lawmakers also expressed skepticism at the press conference whether the House will approve the bill. Top-ranking Senate lawmakers have vowed not pass any new spending proposed in the House budget until legislation funding is also sent their way.
House Minority Floor Leader Rep. J.T. Wilcox (R-2) told reporters “I think that people were far from unanimous in their support for that bill. We’ve got somewhere between 8-12 swing district Democrats…that have to unanimously vote for that bill.”
Schoesler said, “You can write all the talking points in the world, and if you actually believe in them, vote for them.”