“Back to the Future” with tax structure study

“Back to the Future” with tax structure study
The state Department of Revenue plans to model what revenue would look like if alternative taxes had been adopted back in 2003. Photo: freepik.com

Despite year after year of surplus revenue, Washington state’s tax structure continues to receive scrutiny from legislators – the latest coming from the Tax Structure Work Group in conjunction with the state Department of Revenue (DOR).

The group was extended by the state legislature via ESHB 1109 during this year’s legislative session following a report last year that highlighted  strong dissatisfaction with the state’s business and occupation (B&O) tax. However, the report also noted that survey respondents almost unanimously desired further discussions.

Work group member and Pierce County Councilmember Derek Young suggested at the Dec. 4 meeting to host public meetings during the 2020 legislative session.

“(It’s) best to engage as many people as possible,” he said. “If you’re looking for early outreach to members of the public, that would be the ideal way.”

Also, DOR plans to explore the possibility of replacing the B&O tax with a corporate income tax or margins tax. The agency’s study will also include modeling a la “Back to the Future,” projecting what the state’s revenue would have looked like in the 2017-19 biennium had alternative revenue sources been adopted from a 2002 Washington State Tax Structure Study Committee starting in 2003, and what rates would be required to match actual revenue for the biennium. Among those alternatives were replacing the one percent property tax increase cap with a population growth-based limit.

Advocates for maintaining the existing tax structure point to the enormous revenue increases since 2010. Revenue is also expected to reach $51.7 billion for the 2019-21 biennium. That’s an increase of $300 million – and 12.3 percent from the prior two-year period. It’s also a $20.6 billion increase from the 2010 and 2011 fiscal years.

However, others have highlighted problems associated with the state’s B&O tax, one of which is the “pyramiding” effect in which a single product is taxed multiple times. As a result, the state has dozens of different B&O tax rates depending on the industry. The tax structure work group’s 2018 report noted the B&O tax’s detrimental effect on startup businesses and low profit margin employers.

Among the 2002 work group’s alternatives to be included in DOR’s modeling is a graduated personal income tax, and a capital gains tax. Constitutional issues aside, one of the questions to be answered is how that would apply to Washington residents who work in Idaho or Oregon – both of which have personal income taxes.

“I look out my back window and I can look across the river and see the state of Oregon,” Rep. Ed Orcutt (R-20) said. “I know they have a different tax structure than we do. I also know that many of our citizens work in Oregon and when they do, they are charged Oregon income tax. How are you going to model the income tax proposal with that issue in mind? Would Washington start collecting income tax on those people who work in Oregon?”

DOR Research and Fiscal Analysis Assistant Director Kathy Oline said that while they’ve started preliminary modeling on the alternative taxes, “we have not yet begun a lot of that work. We will be working with a big, long list of technical advisors who hopefully will help us take into consideration all of those factors.”

The work group’s preliminary findings are due to the legislature by Dec. 1, 2020.

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