Alternative proposals to the B&O tax, Part I

So what are some alternatives to the B&O tax in Washington? I’ll discuss some of the alternatives that came out of the latest study on Washington taxes, the Gates Commission report.  Their major recommendations included two around the idea of a Value Added Tax (or VAT) and a goods and services tax. A quick example of VAT is to use the wooden furniture scenario from last week. Instead of taxing the entire item at its different stages in production, VAT would only tax the ‘value added’ at each step, which would reduce the amount of taxable business revenue.

The first option that the report looked at was called a ‘subtraction method business VAT.’  This alternative included completely eliminating the B&O tax and replacing it with a 2.2 percent subtraction method business VAT. The main benefit of this included the removal of any pyramiding. However, some of the downfalls are that it would have been harder to administer than the B&O tax and would probably be easier for businesses to evade the tax. Also, Michigan use to have a VAT in place but ended up phasing it out in 2009.  In 2002, The News Tribune asked business organizations in Michigan to comment on the Gates proposal. Some comments included: "The tax that they want to replace had better be one bad tax," and "The Single Business Tax (Michigan's name for its value-added business tax) taxes all the wrong things." Also the complexity of the Single Business Tax was one of the reasons for its demise, said Tricia Kinley, director of tax policy and economic development for the Michigan Chamber of Commerce. The Commission ended up endorsing this over the other VAT model, the progressive VAT.

For the progressive VAT, the Commission’s alternative was to institute a 3.9 percent tax, reduce the sales tax to 3.5 percent, and eliminate the B&O tax. A progressive VAT is similar to an income tax, since employed citizens would pay a tax on their wages (the study described employees as value-adding entities in their own right), companies would also pay the same rate as employees. The benefits are the same in terms of pyramiding and leveling the playing filed, however, this idea hasn’t been tried in the United States. Combined with appearing as an income tax, it’s likely that gaining traction for implementing this would be a tough battle.

The last proposal discussed by the Commission was a goods and services tax (or GST), which they didn’t end up endorsing.  For this option, there would be a 9 percent GST and no sales or B&O tax. The tax base would be equal to sales at every stage of production, including wholesale and retail transactions, with a credit for taxes paid on intermediate goods and services purchased by registered taxpayers. The biggest benefit of this choice would be the streamlining of Washington’s tax system. However, there is no example of this being done by a sub-national government and considering how connected we are to other states, there would most likely be problems implementing this and dealing with cross-border and online transactions.

Even though this report was widely discussed upon its release, it did not lead to any tax policy changes in the Legislature or the ballot box. As you’ve read in numerous entries on this site, changing our tax code has been a slow process that usually ends up in dead ends for ideas like the three listed above. Next time, we’ll look at some recent proposals that have been discussed in the Legislature regarding the B&O tax and also mention how the cities use this tax.

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