Treading lightly on tax reform

Treading lightly on tax reform
A panel at the Association of Washington Business’ 2018 Summit highlighted the need for Washington policymakers to tread lightly on any new proposals to change the state’s tax structure. Created by Iconicbestiary - Freepik.com

A state House work group has held public meetings this year to discuss problems with Washington’s tax structure and potential regulatory changes. While those discussions may lead to recommendations to the House Finance and other committees, legislators should be cautious about any new tax proposals they make, as tax policy is such a key factor in a states’ business climate.

That was one of the takeaways from a Sept. 19 panel at the Association of Washington Business’ 2018 Policy Summit in central Washington. The panel consisted of Tax Foundation Senior Policy Analyst Jared Walczak, state Department of Commerce Managing Director for Business Development Allison Clark and Professor Jeffrey Gramlich at the Washington State University’s Hoops Institute of Taxation Research and Policy.

“There is a lot that Washington has going for it,” Walczak said. “For some it’s very affordable, it’s very attractive.”

That includes aerospace; a study published earlier this year named Washington the best place for design and manufacturing, a fact stakeholders have highlighted as part of an ongoing effort to entice Boeing into building its new airplane in the state.

At the same time, Walczak said he’s “not sure they (businesses) always have that certainty here in Washington” due to frequent tax discussions and debates. “Most of them go nowhere,” but “each of these I think is a concern for businesses. Will my sector be targeted? How do you plan for this level of uncertainty, which doesn’t exist for most states?”

Another drawback for Washington is that one of the few states with a business and occupation (B&O) tax. Created in the 1930s and upheld by the State Supreme Court as a “temporary” revenue source, Walczak says it “is economically inefficient” and creates “lots of incentives to consolidate businesses.”

If Washington wants to improve its tax structure it can create greater “tax neutrality” by broadening the base while keeping rates low, he added. It’s an approach taken by states such as Indiana, Utah and North Carolina.

However, taxes aren’t the only thing employers look at when deciding whether to open shop in a state, he added. The presence of an educated workforce, low cost of doing business and high quality of life are also factored in.

Clark voiced similar observations, noting that a company has a very complex set of variables and criteria they’re looking at” when deciding to relocate or open an office. “When a company is making a decision …they don’t tend to put their stock all in one category.”

One positive change that can be made is greater tax transparency, Gramlich argued. That includes releasing more Board of Tax Appeals decisions to the public.

“We do live in largely a voluntary compliance setting,” he said. “When people don’t know how much the other guy gets, it creates distrust and causes real problems that way. There’s a natural inclination to believe the worst, when in fact it’s probably not.”

While Seattle has positioned itself as the “second Silicon Valley,” Walczak warned it can only take one or two companies leaving to change that. Also, companies are less concerned with closeness to related industry, he added.

“Cities and states need to be competing on this playing field as well” and “look more broadly on how you keep the competitiveness the state has,” he said.

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