City B&O tax and the effort to streamline it

So far we’ve looked at how the state of Washington implements the B&O tax, but it’s also important to know that cities (but not counties) can also levy this tax on top of what the state collects. Currently, 39 cities require businesses to pay a city B&O tax and the tax rates vary by type of business and are different in each city. If you are a business owner in one or more of these cities then you’re probably well acquainted with this model and the variety of funding that each city requires.

Governor Gregoire asked the Legislature to streamline this process during the 2012 Legislative Session to help address this complex issue. This request came in the form of Senate Bill 6176.  In its original form, the bill would have centralized this process for businesses by having all payments go through the Department of Revenue instead of the cities. The Washington Policy Center, the State’s chamber of commerce, and the Association of Washington Business have  endorsed this idea.

Something else that this bill had going for it was that it was sponsored by Senators Derek Kilmer (Vice Chair) and Joe Zarelli (Ranking Minority Member) from the Ways and Means Committee, which is the primary fiscal committee for the Senate. You’d think that having high-ranking committee members from both political parties would make this process somewhat easier, however, this bill never made it out of Ways and Means.

Seattle

So, what happened? The biggest hurdle came from the Association of Washington Cities (AWC), which represents city interests before the Legislature, and the City of Seattle. The AWC argued that this bill would result in: loss of local control of this revenue stream; loss of revenue; and the possibility of future legislative changes that would be adverse to city interests.  Also, Seattle officials believed that they would lose up to $43 million per year if the bill passed.

In an effort to compromise, the Governor offered to shift this to an opt-in program, which did not sit well with the AWB. At a Ways and Means Committee hearing, this revised proposal was added to the agenda because the Chair, Senator Ed Murray, believed that the cities and the Governor had reached an agreement. However, Seattle testified against the bill claiming that it was more complicated than current law and the bill was put on hold pending a resolution from stakeholders, which never came.

It’s unknown if this issue will be discussed in the future since there will be a new Governor in 2013 and possible changes to the composition of the Legislature. This debate was a classic example of city versus state interests and brought to light a complex issue about the B&O tax structure.  As we’ve seen, the B&O tax is somewhat complicated and not well liked by folks of different political and professional persuasions. Quite a few policy alternatives have been discussed but the timing and circumstances haven’t been right to implement change.  Which ideas do you support? Are there new ideas that people aren’t considering?