The budget hole facing Washington and its local governments is immense. State revenues have not recovered from the 2008 financial sector collapse. Washington's elected legislature is paying $100,000 per day for being in contempt of court as it continues to evade its responsibilities to fully fund education. It is essential to find an answer as big as the problem. An income tax has been repeatedly rejected by the voters. There is another answer. One that is more fair than the current tax system, more efficient, and able to fill the revenue gulf the state now faces.The Business & Occupation tax is a broken tax that can be fixed, made sturdy and generate revenue from a very broad base. Fixing it would benefit the smallest businesses, spread the burden to all, and let government provide the services citizens are entitled to expect. We contend there is no other option available.
Restructure the current B&O to the form of a subtraction method value added tax, as recommended by the 2002 Washington State Tax Structure Study
The change is simple, and can be done by the legislature under current law, then be ratified by the voters. The B&O can become a truly universal business and occupations tax, not the onerous gross sales tax that it is now. The change comes basically in one step:
Second steps make the B&O truly universal, applying equally to all citizens and businesses.
- Extend the new tax to government and nonprofit employees.
- Offer a 100,000 standard deduction to remove tens of thousands of small businesses from the rolls.
- Recognize the unique situation of the state's large exporters, including farmers, aerospace and software with equitable adjustments.
Can it address the enormous state budget shortfall?
Yes. This reform can fill the budget gap. As it is now structured, the B&O is constrained, its distortions as a gross sales tax mean it cannot be raised without harming vulnerable small businesses. It becomes a tax based on value added, the source of income, a tax based on ability to pay that is shouldered across the economy. By adjusting to a rational base, a single low rate can be spread across a very wide base.
For illustration, a rate that is revenue neutral (does not produce any more net revenue) would produce lower B&O bills for a large majority of Washington's businesses -- even without the proposed $100,000 standard deduction -- A few larger businesses which benefit from the current unfair B&O structure would pay more. The great majority of businesses would pay less.
And because deductions are allowed only from "other tax-paying entities," the favoritism to out-of-state producers who sell into Washington would disappear. Currently Wal-Mart and other big out-of-state corporations pay an effective that is far less than that paid by home-grown companies.
Further, the extension to the public and nonprofit sectors brings in substantial economic activity that is currently outside the scope of the current B&O. While public employees would pay more, their job security would be greater and their wage freezes would end.
The revenue from the B&O could be increased to produce an additional $4 - $6 billion per biennium and materially impact only relatively few of its current payers.
Yes. This reform can fill the budget gap. As it is now structured, the B&O is constrained, its distortions as a gross sales tax mean it cannot be raised without harming vulnerable small businesses. It becomes a tax based on value added, the source of income, a tax based on ability to pay that is shouldered across the economy. By adjusting to a rational base, a single low rate can be spread across a very wide base.
For illustration, a rate that is revenue neutral (does not produce any more net revenue) would produce lower B&O bills for a large majority of Washington's businesses -- even without the proposed $100,000 standard deduction -- A few larger businesses which benefit from the current unfair B&O structure would pay more. The great majority of businesses would pay less.
And because deductions are allowed only from "other tax-paying entities," the favoritism to out-of-state producers who sell into Washington would disappear. Currently Wal-Mart and other big out-of-state corporations pay an effective that is far less than that paid by home-grown companies.
Further, the extension to the public and nonprofit sectors brings in substantial economic activity that is currently outside the scope of the current B&O. While public employees would pay more, their job security would be greater and their wage freezes would end.
The revenue from the B&O could be increased to produce an additional $4 - $6 billion per biennium and materially impact only relatively few of its current payers.
This reform affects the B&O tax in two basic ways:
First, it revises the way the B&O would be calculated by allowing the deduction of inputs purchased from other tax-paying entities. This changes the tax base from gross receipts to net receipts, or value added. It allows the many rates of the current B&O to be collapsed to one rate, transparently equal for everyone.
Second, this proposal extends the B&O to the compensation of government and nonprofits. Only occupations in the private sector are subject to the current B&O. The value added of these others further expands the base and shares the burden, allowing a lower base and higher revenues.
Is this a brand new idea?
No. It combines two old ideas.
- One is reform the B&O. This tax is the only example of a gross sales tax levied by any state in the nation for good reason. It was proposed as a stop-gap in the 1930s and lingers to this day.
- The second idea is a subtraction method value added tax. This was studied closely during the process of the Washington State Tax Structure Study (the Gates Commission), and received very strong support, second only to a new personal income tax. The idea to expand the B&O to all occupations is embodied in all personal income tax proposals.
The current B&O is dysfunctional.
- The burden of the tax "pyramids" as products go through the supply chain, creating an effective rate that is different for virtually each business, and a larger burden on smaller businesses.
- The tax falls most heavily on in-state businesses and gives out-of-state businesses a free ride because of this pyramiding.
- Wal-Mart pays a lower effective tax on goods made in China than a home-grown business pays on its goods made in Port Townsend.
- The B&O as it is now constructed the is not based on ability to pay. It is levied no matter whether your business makes money above its supply costs or not.
- Unlike the sales and property taxes, the B&O excludes a large part of the state's economy -- public and nonprofit entities.
The out-of-state companies who would become liable for taxes comparable to in-state companies would likely try to pass the burden on to their customers. To the extent they are successful, it means higher prices for consumers. But it also levels the playing field for in-state producers of these products.
Compensation in the public and non-profit sectors would be affected, meaning lower take-home pay. Public employees are already shouldering an outsized share of the load through wage and salary reductions and restrictions. The reform would dramatically reduce the budget squeeze, enabling the state to return to its normal payroll operations.
The large Washington-based companies who benefit from the B&O's current distortions would pay more. It is important to note that there are adjustments in the proposal that relate to exporting companies, and not just because they are politically influential, but because it is fair. Income from products sold outside Washington -- exports -- needs to be treated differently. These exports are a valuable source of Washington jobs, and the buyers of the exports do not benefit from Washington's economy or public services in the same way as workers and consumers within the state benefit.
Is it technically do-able?
There are complexities to every tax. The reformed B&O has to adapt to the details of many kinds of businesses and to a Byzantine web of tax regulations. There are parallel "sister" taxes, like the public utilities tax, and there are gray areas as in the case of property rent. But at its foundation, the restructured B&O will be much simpler than the current gross sales B&O.
Because of the stipulation proposed that deductions are allowed only for "other tax-paying entities," there is no need to fight the battles of closing even the relatively few exemptions allowed under the current B&O. For example, Agriculture is excluded from paying the B&O. It would also be excluded under the reform. But because the sale of its product is not deductible to the next business in the supply chain, the tax is captured at the next stage.
Is the reform politically pragmatic? Can it find political support?
The extension to government and non-profits has political pluses and minuses. On one hand, the private sector will welcome an equal participation by government and nonprofits. On the other, the public sector has already suffered substantial austerity. (Since it is the occupations and not the governments themselves that are taxed, it does not run afoul of prohibitions on one governmental stratum taxing another.)
Yes, the reform good for the great majority of Washington citizens and businesses. But yes, there is an entrenched and powerful big business lobby which will oppose it. At the bottom line is the recognition that a state government which is slashing its services, laying off its workforce and failing to meet its constitutional obligations to fund education is a government that is failing. It cannot be an option for the state to fail.
This reform has the single most important attribute -- It is adequate to the revenue challenge. We cannot expect a patchwork of soda, tobacco, and other boutique taxes to produce the kind of revenue that is needed.
There is no politically viable alternative.
