Basic Training 3

Reforming the B&O creates a good tax

A flat rate B&O has a low rate, a broad base, and it is directly connected to the ability to pay. A flat rate B&O is easy to comply with, and difficult (as well as expensive) to avoid. And a flat rate B&O is the only clear alternative at a time when the state needs to raise significant new revenues.

Low Rate:

By deducting the cost of inputs from other tax-paying entities, the a flat rate B&O would still have the lowest rate possible, because it has the broadest base possible that is related to ability to pay. The equivalent revenue neutral rate (the rate that would be charged while leaving the tax burden the same) has been estimated roughly 2.0 – 2.5 percent.

Broad Base:

The base of the B&O is deceptive, being many times the actual gross product of the state. This can be because of the pyramiding. The current B&O is taxing the same real activity over and over.

The Flat Rate B&O actually has a larger effective base, because it can now tax the value added from out-of-state companies selling into Washington at full value. In addition, it extends the tax to the public and non-profit sector, to the compensation of employees, which in itself is approximately a 25 percent increase to the base.

Connected to Ability to Pay:

The Flat Rate B&O is connected directly to the broadest measure of ability to pay. It is a fair, flat tax on value added.

Easy to Comply with, Difficult to Avoid

Most of the bookkeeping required to compute this tax is a normal part of doing business. Since the purchases of one business are the sales of another, there is an internal self-reported compliance tool.

The Reformed B&O Generates Significant New Revenue Without Distortions

Because the flat rate B&O expands the base to the public and non-profit sectors and extends the reach to out-of-state companies operating in Washington, the effective base is larger. Significant revenues can be realized with a rate that is revenue neutral to the aggregate of current payers. Beyond this, a fair, equally shared tax can be raised without distorting markets or buying decisions of consumers. A very small increase in a flat rate B&O can generate far more than a much larger increase in the retail sales tax.