A series of public meetings hosted by a state House work group highlighted the frustrations residents and businesses have with Washington’s tax structure. However, the discussions also emphasized ongoing disagreement over solutions, along with worries that any attempts to fix it could unintentionally make the tax structure even worse.
That sentiment was perhaps summed up best by House Finance Vice Chair Rep. Noel Frame (D-36) at the July 20 meeting in Yakima. “In Olympia, quite frankly we hear a lot of complaints about the tax structure, but not necessarily a lot of census on what to do about it. We really wanted to get out into the community, go around the state…to hear directly from you.”
Washington is heavily dependent on the state 6.5 percent sales tax, which is expected to generate half of total state revenue for the 2017-19 biennium. Local sales tax rates can be as high as 10.4 percent, while the average is 9.3 percent. There are 93 sales tax exemptions for products such as food, prescription drugs and manufacturing equipment.
Although the sales tax has received criticism for making the tax structure regressive, others have touted its strength against economic downturns due to the high number of transactions involved. They also point to a recent fiscal survey by the National Association of State Budget Officers, which reported that 33 out of 50 states in the nation are struggling with less-than-projected revenue streams. However, Washington is not among them.
Last year, a study by the Tax Policy Center found that Washington had one of the more stable revenue streams in the nation, and the best among the West Coast states.
Much of the focus at the July 20 meeting revolved around Washington’s status as one of the only states to have a business and occupation (B&O) tax, which is levied on a businesses’ gross revenue. The tax affects 365,000 businesses who file a report with the Department of Revenue. The tax rate ranges from .138 to 3.3 percent and has 190 exemptions for various industries.
Originally created in the 1930s as a “temporary” revenue measure, the B&O tax has been criticized by employers and industry members who say it hits companies with low-profit margins the hardest.
The tax’s different rates and many exemptions has also led to debate over its impact on certain industries such as manufacturing. In recent sessions, state lawmakers have unsuccessfully tried to get the B&O manufacturing tax rate lowered to that paid by Boeing.
Although some may see those tax incentives in a bad light, work group member Rep. Terry Nealey (R-16) said many businesses would be “forced to move out of state if you didn’t have some preferences. We don’t like that term (tax preferences), at least on our side of the aisle, because it’s necessary for a lot of businesses.”
“The B&O tax…is something we hear a lot about,” Frame said. “Again, not a lot of census on what to do about it.”
Darcy Kooiker is a CPA with Ryan, LLC. Speaking on behalf of a small group at the July 20 meeting, she said that a huge problem for businesses created by the B&O tax is that “it increases costs quite a bit” by taxing a product multiple times before it is actually put out onto the market, also known as “pyramiding.”
“Businesses do pay the predominant amount of the taxes going into the state of Washington,” Kooiker said. “We think that that’s a problem.”
Kooiker suggested that new online sales tax revenue as the result of a recent U.S. Supreme Court ruling could offset some changes to the tax code to rectify flaws in the B&O tax.
Also critical of the B&O tax was Tax Foundation Senior Policy Analyst Jared Walczak. In his written testimony to panel members, he noted that the state’s most recent B&O tax exemption study revealed “many of these exemptions are more narrowly tailored efforts to do what the different rates are supposed to accomplish: keep the tax from becoming an impossible burden for businesses with low margins or long production chains.”
He writes further: “Washington policymakers must ask themselves whether a particular (B&O) exemption is designed to enhance or undermine the tax’s neutrality. Is it designed to bring the taxation of one industry more in line with the taxation of other industries or to give it a particular tax advantage? Tax preferences which function as incentives merit close scrutiny, while those that attempt to rectify fundamental inequities may have greater justification. It is a balancing act.”
However, he adds that “the B&O’s shortcomings notwithstanding, however, Washington has a highly competitive tax code” and “relative revenue stability.”
Other testifying during public testimony told lawmakers to address what they believe is a regressive tax system by shifting the tax burden toward higher-income earners.
However, Washington Tree Fruit Association President Jon DeVaney cautioned panel members that changes to the tax code could have unintended consequences for fruit growers.
“Predictability is hugely important for agriculture,” he added. “They look at the tax code very carefully. They’re very nervous about potential changes to those rules after they’ve already invested in planting an orchard. If it’s a net increase to individual taxpayers in agriculture, that taxpayer does not have the ability to easily pass on those costs to their consumers.”
Similar concerns were raised by Vicki Baker, owner of Yakima Grocery Outlet. “Our (small) group felt that the current code is complex, and it is burdensome, but changes to it create quite a bit of uncertainty. The unintended consequences when you make changes can be very damaging.”
The House work group may report to House Finance and other committees upon request of their respective chairs.