Washington Business Tax Reform Proposal Offered

Published June 18, 2010

This November voters in Washington State will likely be voting for the tenth time on an attempt to create a state income tax, in Initiative 1098. As evident in the lack of an income tax in the state, past attempts have not been successful at the polls (with the exception being in 1932; that tax was later ruled unconstitutional).

One interesting aspect of the new graduated income tax proposal is the attempt to sell it as relieving small businesses from the state’s unique and onerous Business and Occupation (B&O) tax. A local think tank, however, says there is a better way.

The Washington Policy Center (WPC), a nonprofit, nonpartisan policy research organization with offices in Olympia, Seattle, and Eastern Washington, has released a plan for replacing the state’s Business and Occupation tax. WPC proposes replacing the tax with a variation of the Texas Franchise Tax—a gross receipts margins tax based on total receipts.

Tax Sends Prices Higher
Although the B&O tax rates are low, Washington is one of only a handful of states with this type of gross receipts tax, largely because other states shy away from levying taxes on businesses that lose money. B&O taxes are levied on all businesses, regardless of profitability, and the tax intentionally pyramids, meaning consumers end up paying higher prices and don’t even know it.
Acknowledging the widespread dislike of the B&O tax, Gov. Chris Gregoire (D) last year challenged opponents, “If you want to come forward with an alternative to the B&O tax system in the state of Washington, the welcome mat is out from me.”

All Businesses Treated Equally
WPC modeled the impacts of various replacement taxes and found an income tax modeled the worst, causing the most economic distortions. With other options showing approximately the same impact, WPC analysts turned their attention to an alternative reform based on sound principles of taxation. The result is a Single Business Tax, or a gross receipts margins tax, a proposal that would:

  • be revenue-neutral;
  • treat all business owners equally by using one flat rate;
  • eliminate loopholes and special treatment; and
  • simplify administration of the tax to reduce compliance costs for business.

Doesn’t Hurt Purchasing Power
WPC’s Small Business Center Director, Carl Gipson, was coauthor (with this reporter) of the study.

“This proposal would radically simplify current business taxes by eliminating the confusing multiple rates on business activities and by repealing the special interest tax credits and exemptions for some industries that have built up over the years,” said Gipson.

The Single Business Tax could be phased in over several years to allow employers and public officials time to adjust to the new system.

“Quite often an income tax is presented as the only alternative to the B&O,” said Gipson. “But an income tax just shifts the burden, instead of levying it equitably. Moreover, a personal income tax hurts businesses in the long run by reducing peoples’ purchasing power. The long-term costs outweigh any benefits.”

Three Options Offered
Here is how WPC’s proposed new business tax would work. A business owner would be given three ways of calculating taxable income and would be allowed to use the one resulting in the lowest tax burden. The amount of taxable income could be based on any of one the following:

1.    Total gross receipts minus labor costs,
2.    total gross receipts minus all production costs except labor, or
3.    60 percent of total gross receipts

The business owner would then multiply this taxable income by the Single Business Tax rate for each taxing jurisdiction. The final amount owed for each taxing jurisdiction would be sent to the state in one payment, and then distributed by the state to local governments.

“Our goal is to offer a B&O tax reform that is not based on imposing an income tax on businesses or individuals, but to offer a way policymakers can constructively improve the business climate while collecting needed revenue for government,” said Gipson. “A solid set of tax principles must guide the adoption of any effective tax structure.”

Jason Mercier ([email protected]) is director of the Center for Government Reform at the Washington Policy Center.