The state legislature last year enacted E2SHB 2158, which imposes the business and occupation (B&O) tax surcharge on certain businesses to pay for higher education programs. However, in November the state Department of Revenue (DOR) reported that the tax is expected to collect $164 million less over the next four years than originally expected. Now legislators are proposing to replace those surcharges via SB 6492. Introduced on Jan. 20, the bill cleared the state Senate on Jan. 30 in a 28-21 vote and is scheduled for executive action today in the House Finance Committee. Although some higher education advocates back the legislation, other private industry stakeholders offered mixed testimony at a Feb. 3 public hearing in the Finance Committee.
E2SHB 2158 created a three-tiered surcharge: 20 percent for service activities, 33.33 percent for advanced computing businesses with gross revenues between $25-100 billion and 66.66 percent for computing services with revenue greater than $100 billion. The revenue from the tax goes into workforce investment programs, however, the law requires that spending must meet the demand from these programs.
SB 6492 would replace the existing three-tiered surcharges with a trio of new B&O taxes, beginning in April, as follows:
- A 1.75 percent B&O rate for most service activities;
- A 1.5 percent B&O service activities tax rate for hospitals and taxpayers subject to the advanced computing surcharge; and
- A 1.22 percent B&O surcharge on advance computing services and income.
Bill sponsor Sen. Jamie Petersen (D-43) told the committee that the change will significantly reduce the number of businesses affected by the tax. “The number one goal was to make sure that we had enough money…to fulfill our promises.” He added that another bill objective is to simplify the revenue system and make it easier for DOR to oversee and enforce.
While bill supporter Washington Education Association lobbyist Simone Boe argued that the bill will fund workforce training in industries experiencing shortages, Washington Medical Association lobbyist Roman Daniels-Brown said the tax would lead to increased health care costs. “This is a shift of money that would be going into health care services into higher education. While we appreciate that higher education is a priority for the state, we also think that the cost of health care continues to soar. It’s especially troublesome in this small group market…we’ve seen a lot of them going out of business.”
Offering another perspective, Patrick Connor, Washington state director for the National Federation of Independent Business (NFIB), said “Small businesses across the state absolutely hated HB 2158. Not just was the surcharge a topic of contention but so too was the complexity of the bills that passed the legislature last year. This bill is an improvement at least on the ease of administration…. for the tens or hundreds of thousands of small businesses across the state subject to its provisions.”
Connor added that some of the changes in the bill provide “a fair amount of relief for a whole lot of small business owners across the state.” However, he added that if additional bill language were included “we might actually be here today testifying in support of the tax bill for a change.”