Mixed reviews for tax system overhaul

Mixed reviews for tax system overhaul
Some members of the Washington business community are divided over the merits of a Senate proposal creating a state revenue task force to recommend a comprehensive overhaul of the state tax system. Photo: freepik.com

A Senate proposal creating a revenue reform task force is getting mixed reviews among members of the business community as to whether the state’s tax structure needs overhaul – and what areas should be changed or left alone.

The case for and against system reform was made at a Jan. 30 public hearing of the Senate Ways & Means Committee. The state’s chamber of commerce also expressed reservations about provisions in the bill exploring the idea of an income tax and a public bank.

“There are folks who want certain levels of adjustment, but we think that our tax structure in large measure is working for Washington,” Association of Washington Business Director of Government Affairs on Tax and Fiscal Policy Clay Hill said. “We have to look at some of the benefits that we’re getting.”

SB 5541 sponsored by Majority Caucus Vice Chair Bob Hasegawa (D-11) and cosponsored by three Democrats would create a task force composed of four legislators, two from each chamber – one  from each party. The task force would also have a representative from the governor’s office, and could include representatives for the state Department of Revenue, Association of Washington Cities and the Washington State Association of Counties. The task force would ultimately make recommendations by the end of the year “on a comprehensive state revenue reform plan to better serve the people of the state.”

During the public hearing, Hasegawa told colleagues that the topic is “one of the most important conversations that we can actually have as a state.”

The bill language reiterates complaints many have made of the business and occupation (B&O) tax, which is imposed on gross revenue. Originally created in the 1930s as a temporary source of revenue, critics say it harms high-revenue, low-profit margin employers. It also received the most flak from panel members at the public hearing.

“I think it’s important that we actually give a look to whether or not the B&O is actually fair to small businesses,” said Sen. Guy Palumbo (D-1), who also is a small business owner.

“I think all the business people I met and talked to have all complained about the B&O tax on gross income,” said Sen. Steve Conway (D-29). “We’re kind of unique in the world here of having a B&O tax on gross income.”

In support of the bill was Patrick Connor, Washington state director for the National Federation of Independent Business (NFIB). “We think that it’s high time the state takes another look at its revenue, it’s tax system, in order to determine whether or not it’s keeping pace effectively with the changing dynamics in our economy.”

He added that it’s time to “revamp, or at least revisit, a tax system that at least when it comes to the business community, is largely based on a relic from the depression.”

However, the bill language “puts the cart before the horse” by asking the task force to work on the premise that the current tax system is broken, argued Hill. This is in contrast to a 2002 state study on the tax structure that said the recommendations should be revenue neutral. “That’s absent from this,” Hill said.

Instead, SB 5541’s first sentence states that “the legislature acknowledges a need to reform the tax system,” citing a study by the Institution on Taxation and Economic Policy that ranked Washington’s tax system as the most regressive – though the study’s conclusions have been challenged. Although the state has experienced years of surplus revenue collection, with $8.8 billion more collected by the state in 2018 compared to 2010, Hasegawa called the tax structure “inadequate, it’s undependable, it’s volatile, and it’s unfair. Every time we do something, it’s always in a regressive nature.

“There’s no question that we are the most regressive,” he added. “What does that mean and what are we going to do about it? If we’re going to really be a state that has a long-term view of economic development, the current system is not going to work.”

Even if tax experts agree on the system’s regressive nature, there is still disagreement over what makes it so. One side points to the state’s lack of a progressive income tax and its reliance on a sales tax and property tax, while others highlight the state’s numerous high-rate excise taxes, plus the highest estate tax.

Connor argued that the small business community would prefer flatter taxes more broadly applied and with fewer exemptions. “We are not the primary beneficiaries of exemptions.”

While there appears to be common ground on both sides regarding problems within the B&O tax, Hill warned that there’s “a lot of uncertainty when you talk about comprehensive reform. This (bill) is looking at property, sales tax, potentially an income tax. That’s a broader look than just a B&O reform task force.”

When asked by Ranking Member Sen. John Braun (R-20) about the section of the bill related to an income tax, Connor said NFIB is opposed, but there are a “wide variety of topics to be discussed. We’re not afraid of having a discussion.”

Hasegawa noted that “this is not a proposal to create an income tax right away, although that is not prohibiting them from coming to that conclusion.”

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