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Simplified B&O tax proposed

February 25, 2015

The state’s Business & Occupation (B&O) tax draws nearly universal scorn in Olympia yet soldiers on decade after decade. It may be unpopular, but replacing this gross receipts tax on businesses would require raising other taxes, which always garners swift opposition from those affected. Because of that, the B&O tax’s survival is ensured by inertia and a lack of consensus on alternatives.

Rather than eliminate the B&O tax, Rep. Drew MacEwen (R-35) is proposing to reform it instead, based on the idea of a Single Business Tax. MacEwen’s bill would simplify the B&O tax into ten categories and three rates while giving broad exemption thresholds that would eliminate B&O tax for many small businesses.

Under the proposal, every business in the state could deduct its first $500,000 of gross receipts. MacEwen estimates that 286,000 small businesses would owe no B&O under his proposal. Non-profits would also be totally exempt under his bill.

Businesses with gross receipts over $500,000 would have the option of taking one of three alternative deductions. These businesses could instead deduct their employee compensation costs, 30% of company revenues, or the costs of goods sold.

After those deductions, businesses would pay the following rates based on their classification:

  • Retail, wholesale, manufacturing, and banking: 1.6%
  • Services: 3.75%
  • Telecom: 1.2%

MacEwen says his bill would be revenue-neutral and simpler than the current system. “My plan would make Washington’s B&O tax fairer, flatter and more flexible,” he said.

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If you live near the Idaho border or have ever picked up a bottle of rum on vacation, you may have been pleasantly surprised when your total flashed up on the register. The difference is noticeable – why is liquor so much cheaper elsewhere?

Nation’s highest liquor taxes
That’s no mystery, of course. Washington has the highest liquor taxes in the nation – by far. Consumers pay a 20.5% spirits sales tax and a volume tax of $3.77 per liter.

While liquor taxes are difficult to compare precisely across state lines – some states, including Washington, tax on price, so the effective rate changes based on what you buy – the Tax Foundation estimated average liquor taxes around the nation, including distribution fees and consumer taxes. Washington’s effective rate? $35.22 a gallon.

Not only are Washington’s liquor taxes the highest in the nation, they’re higher by a long shot. Neighboring Oregon is #2 in the nation, but its effective rate is $22.73 a gallon. Idaho’s liquor taxes are high enough to put it in the top 10, but its effective rate of $10.92 is less than a third of Washington’s.

Why are liquor taxes so high?
Washington’s old state-run liquor store system was viewed as antiquated by many. Two competing privatization initiatives in 2010 aimed to change that, but both failed. Proponents thought voters were swayed by opposition ads claiming that public safety budgets would be cut if liquor sales were privatized.

Retailers came back in 2011 with a new initiative, this one with higher taxes that they estimated would produce similar amounts of tax revenues as before. This time the initiative, I-1183, passed easily with 58.7%. Consumers were excited to purchase liquor at many more locations, but the rise in prices surprised many.

Hope for the future?
Some legislators in both parties have shown interest in bringing down Washington’s exorbitant liquor tax rates. A bill introduced last year garnered attention but went nowhere. Two companion bills this year aim to slowly lower liquor taxes over several years, and each has bipartisan sponsors. So far, neither has received a committee hearing.

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How does a business choose where to locate or expand? That’s a question pondered not just by CEOs but also by chambers of commerce and government leaders looking for that magic formula that attracts capital and new jobs to their area.

Every state has its advantages and disadvantages, including how and what it chooses to tax. Washington state government relies on a Business & Occupation tax and a sales tax for the bulk of its revenue.

Washington’s top advantages for attracting businesses include its inexpensive hydropower, its quality universities, and its lack of income taxes, including capital gains taxes. Manufacturing businesses choose Washington specifically for those cheap power rates. BMW’s carbon fiber facility in Moses Lake, for instance, is located there because of abundant, low-cost energy.

For the tech and biotech firms sprouting up around South Lake Union in Seattle, proximity to the University of Washington and the lack of state income taxes are major factors in attracting them to set up operations here.

Gov. Inslee and some legislative Democrats, calling Washington’s tax system regressive, want to institute a 7% capital gains tax in the state, in part to make the tax system more progressive.

Some have declared the proposed capital gains tax Dead on Arrival. With the state Senate’s new self-imposed 2/3 rule for passing new types of taxes, the tax faces a threshold that it likely cannot surmount. Some question whether a progressive capital gains tax, if instituted, would even be constitutional.

More to the point, is a capital gains tax a good idea? Washington is one of seven states with no capital gains tax and one of nine without an income tax. If that is helping us attract businesses here and helping established ones grow, should we willingly give up that advantage? Policy makers would do well to think hard about that question.

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What is Washington State doing to help all businesses grow and hire new employees? More than a year after the “Boeing special session,” the answer seems to be, “not much.”

Legislators were called back for a brief special session in November 2013 to pass a tax incentive package to keep Boeing manufacturing jobs in the state. The Legislature will do just about anything to keep Boeing jobs here, and that’s no surprise. Boeing production means billions flowing through Washington, and jobs at the company pay well.

The tax package passed with little debate, but some legislators were asking their colleagues: What can the state do to help all businesses in every area of the state? How can we grow the economy in every county in Washington? Rep. JT Wilcox of Yelm, especially, was a leader in asking these important questions.

So, 15 months later, what’s been done to ease the regulatory burden, encourage economic growth, and remove barriers for small businesses? Any candid assessment would have to conclude, very little.

Sure, there have been bills at the margins, changes that help a few industries. But what about any broad efforts to improve the economic outlook for all types of employers in every corner of the state? We’re still waiting on that.

In fact, the trend has been in the opposite direction. To name a few:

Washington is a great state with many advantages. There is no reason it can’t continue to grow and prosper – but if some get their way, their pet causes will bump up against economic reality. The people paying the price for that will be all the rest of us.

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Why, that is, besides “money”

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In Olympia and around the country, state officials are considering new taxes on e-cigarettes, which many smokers are seeking out as an alternative to cigarettes. After decades of raising cigarette taxes to high levels, it’s easy for lawmakers to fall into taxing e-cigarettes and vapor products, as well.

Public health reasons – still applicable?
The justification for tobacco taxes always centered on public health. State governments said they wanted the funds to pay for higher health care costs from smoking, and for cessation programs.

The proposals to tax e-cigarettes raise a fundamental question: if tobacco taxes are about public health and health care budgets, then what justifies punitive taxes on e-cigarettes?

The situation in Washington
Last year lawmakers in 15 states proposed new taxes on e-cigarettes, but customers beat back those attempts in 14 of them.

Here in Washington, Gov. Jay Inslee is proposing a 95% tax on e-cigarette supplies. He also wants to ban online sales, which would mean layoffs at growing businesses such as Mount Baker Vapor. His proposal would also ban flavors other than those commonly found in cigarettes, such as menthol.

Back to that fundamental question: What justifies a whopping 95% tax on these products? It isn’t about health. It’s clear in Olympia and capitols around the country, state governments are addicted to tobacco tax revenue and are nervous about how the replace the mountains of money collected from cigarette taxes.

“Sin” taxes are easy targets for lawmakers, but they may have a hard describing what the “sin” is in e-cigarettes. State budget writers see e-cigarette taxes as an easy way to back-fill lost revenue from tobacco taxes – just don’t let them tell you this tax is about public health.

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