Many Washingtonians loathe the business and occupation (B&O) tax, and they’re not finished giving their thoughts on how to improve the state’s tax structure. Those were two major takeaways from a newly-released report approved by the House Tax Structure Work Group at its Dec. 3 meeting.
The report is the culmination of four public meetings in Seattle, Vancouver, Spokane and Yakima involving small group discussions and public testimony from state residents, small business owners and industry associations on possible ways to make the tax code better, or whether it should be changed at all.
Among the four recommendations in the report is to keep the discussion going; 94 percent of survey respondents said they wanted more meetings, and more than half of them believed that four meetings were insufficient. The report recommendation calls for extending the work group for the next two years, while adding members from the state Senate, low profit margin businesses and those who pay the standard B&O tax.
“People were hungry for the conversation,” Chair Noel Frame (D-36) said at the Dec. 3 meeting.
At all four public meetings, the B&O tax got the most shellacking from the small groups. A levy on gross revenue, the B&O tax was originally created by the state legislature and upheld by the state Supreme Court as a temporary source of revenue. However, critics at the various public meetings pointed to its complexity thanks to the dozens of separate rates for different industries and how it negatively affects smaller businesses with lower profit margins. Another downside is that it creates a “pyramid” effect in which a single product is taxed multiple times – though larger companies can sometimes keep most if not all the production internal before it reaches the market.
A small group report from the Spokane meeting suggested the legislature change it so that the tax is levied on net, rather than gross revenue. Another recommendation made in Vancouver was to make a lower rate for startup businesses. However, other testimony at that meeting noted that the B&O rates have been created to reflect the different industry operating models and is easier for employers to determine what they owe.
The work group report recommends the legislature examine “the negative impact of business and occupation tax on small, low-margin and/or start-up businesses.”
However, tax experts have previously noted that one of the major hurdles for eliminating the B&O tax is a lack of consensus on what to replace it with. Some people testifying and small groups at each meeting suggested some form of an income tax, including a capital gains tax that is officially classified by every state revenue department and by the Internal Revenue Service (IRS) as an income tax.
The report recommends replacing the B&O tax “an alternative taxing mechanism such as corporate income tax or margins tax,” though it leaves room for other possible replacements.
Although state residents pay taxes to the feds for capital gains, Washington has neither an income tax nor a capital gains tax, which one official from the state Department of Commerce has called a “selling point” for attracting businesses. Though an individual offering testimony at one of the meetings argued that people don’t consider a state’s tax structure when deciding where to live, a recent Redfin report concluded that national migration trends have been impacted by that factor.
One of the arguments in favor of replacing either the sales tax or the B&O tax with a progressive income tax is that it would make the state’s tax structure less “regressive.” Aside from some arguments that the charge isn’t entirely accurate, one of the problems with that claim is knowing what it means to be “regressive” – one of the report’s recommendation is coming up with a working definition of that word.
Yet some argue that as far as the state coffers are concerned there’s nothing to fix except enacting a sales tax reduction due to surplus revenue. One person at the Spokane meeting argued that “Washington’s current tax structure already works. Washington is an economic leader in the United States. People and businesses continue to move to Washington, which indicates our tax structure is not broken. Changes to the tax code could put our economic vitality at risk and negatively impact some local industries. We need to look for ways to improve the tax burden for industries that are not thriving.”