Quick recap on the history of the B&O tax and why Washington hates it so much

When people think about the 1930’s they usually reference the Great Depression, FDR’s New Deal, or the build up to and beginning of World War II.  While it might not be ranked as high in terms of historical significance, this time period was pretty turbulent when looking at Washington State tax policy. In other entries, you’ve read information about the sales tax and our State’s numerous attempts to create an income tax.  Along with these, another outcome of this era was the creation of Washington’s B&O tax, which was supposed to help offset the failure of income tax proposals and help the State, which needed to find a revenue source that the State Supreme Court wouldn’t overturn.

Asahel Curtis, Courtesy UW Special Collections (Neg. CUR1641)

The current reliance on capped property taxes was becoming more inefficient as people moved to the cities. To fix this, the State passed the Revenue Act of 1935, which included the B&O tax. This law completely changed how State government collected money from Washington citizens and according to DOR, in Fiscal Year 2008, Revenue Act taxes generated more than three-quarters of all state tax receipts supporting the State general fund.
Over the next several decades, the Legislature authorized seven studies to analyze Washington’s taxes and recommend adjustments if necessary.  Most of these recommended reducing the B&O tax rates, however, these proposals weren’t enacted by the Legislature or were shot down by the voters. The lone exception was in 1993 when the State increased the tax rate for certain businesses to 2.5 percent but this was later repealed.
Fast-forward to present day and reactions to the B&O tax usually reference its complexity and desired change for reforming the current system. In 2010, the Seattle Times published a piece about the issues with the tax and quoted Governor Gregoire as saying "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." This sentiment is pretty common across the political spectrum. For example, the conservative organization, the Freedom Foundation, said “The B&O tax is harming our state. Washington has a proud history of ranking near the top of the nation in terms of new business startups. And yet, unfortunately, it also has a history of being on the wrong side of the national average for business failures. Undoubtedly this is due, at least in part, to the state’s onerous Business & Occupation (B&O) tax.”

Arguably, the largest issue with the B&O tax is what folks call the pyramiding of the tax as a product moves through the production process. For example, with wooden furniture, there are several steps in its production that involve multiple businesses that pay taxes. You have people who cut the wood, others who mills the lumber, companies that produce the furniture, and in some cases a fourth that sells it. Each company pays a tax at each step. This doesn’t negatively impact companies that control all aspects of production but it hampers many others.
While all sides agree that the current system for B&O taxes is flawed, there are a wide variety of answers on what the best options are to replacing the status quo would be. Next time I’ll discuss some of these options, their impacts, and which groups are advocating for them. Stay tuned…