Basic Training 2

The Current B&O is a bad tax. Why? Reason 1: It is not related to ability to pay.

The base of the B&O is gross receipts. Receipts are divided into three broad categories: returns to workers, return to owners and costs of inputs. Returns to workers and owners reflect ability to pay. This is income. Cost of inputs are costs. The B&O taxes the costs of doing business. Costs are not any kind of reflection of ability to pay.

To attempt a rough approximation of fairness, the current B&O employs a myriad of rates. Because the B&O is not based on ability to pay, but on top line receipts, it has had to accommodate its rates to minimize distortions and unfairness. It is patently obvious that a lawyer without any real inputs to purchase has a different cost structure than a retailer whose margins may be quite small. So the B&O has a different rate for services than for retailers, and manufacturers, and certain manufacturers, and wholesalers, and on and on.

It is a statistical fact that the larger the business, the greater the value added of that business, within its sector. (“Value added” refers to these returns to owners and workers.) Which means -- since the B&O taxes gross, not net returns – that the effective tax on larger businesses and corporations is lower than on smaller, in general.

The current B&O is a bad tax. Why? Reason 2: Its rate is deceptive.

The nominal (face value) rate of the tax is very low. But this is not the effective rate. For two reasons. One, as above, the rate is applied to a bad base, so the effective rate on the ability to pay is much higher. That is, once costs have been deducted, and the tax burden calculated against returns to workers and owners, that rate goes up.

Second, because one businesses costs are anothers revenue, the effective tax multiplies. That is, Business A sells its product to business B, pays the tax and that tax is part of the sale. Business B sells to Business C (or customer C) and the tax is imposed on the full sale – including that portion of the product which was bought from Business A. Thus the part of the product or service that is related to the first purchase is taxed again. This can go on for several steps. It is referred to as “pyramiding,” and can generate an effective tax that is many times the nominal rate.

Fairness is a question, too, when you realize that it is only businesses which sell in the Washington market which pay the B&O. So suppliers to Company C which operate in Washington pay the B&O, but suppliers which operate in Oregon, or China, do not. Thus it is like a reverse tariff. It costs you more to operate inside the state than outside in terms of B&O. Theeffective B&O rate at WalMart is lower than at your neighborhood grocery or convenience store. The more home-grown your business, the higher B&O you pay.

As the economy goes up and down, the B&O does not go up and down so much, because of this taxation of embedded costs. It instead becomes more onerous. If a business needs to cut its prices to attract or retain customers, it must do so at the cost of returns to owners or workers. The tax does not go down proportionally to these returns, because it is still taxing the costs of inputs.

The current B&O is a bad tax. Why? Reason 3: Compliance

While the bookkeeping for the B&O may seem easy, some businesses have several operations going on, manufacturing , wholesaling, retailing under one operation. The revenue has to be divided between these categories and then the appropriate rate applied.

More burdensome, however, are the myriad of municipal B&O’s. Many cities impose B&O taxes that are not related to the state’s B&O, and these systems are all different from each other. So if you operate in several jurisdictions, your business has to figure out several tax returns. A simplified B&O at the state level could serve as the platform for these municipalities and greatly reduce compliance costs and avoidance.

The current B&O is a bad tax. Why? Reason 4: It does not generate enough revenue.

Because of the above limitations, the current B&O’s revenues cannot be raised without causing significant unfairness. Thus the rate cannot be adjusted because the burden is not shared equally, but in fact, falls heavier on the smaller and more stressed businesses. Further, it does not apply to all value added, but only to that from the private sector.