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? 

Alternative proposals to the B&O tax, Part II

Last time, we talked about some of the alternatives to the B&O tax that were discussed in the Gates Commission report (if you’d like to read that please click here). A couple more recent examples of alternatives that were discussed, and one that was even voted on, was Initiative 1098 (I-1098) and a proposal made by the Washington Policy Center regarding a single business tax rate.

Bill Gates Sr.

Bill Gates Sr., who chaired the tax commission that I’ve mentioned a few times, was the driving force behind I-1098, which was actually made to implement a state income tax on folks who made over $200,000 or joint incomes over $400,000.  I won’t go into this in detail since other contributors will discuss the income tax at length, but the reason I brought this up is that I-1098 included a section that would increase the B&O tax credit to small businesses to the amount to $4,800, which would equal around 80 percent of small businesses in Washington State. It was said that this was included to sell the idea to small businesses to gain their support for the initiative; however, the effort was soundly defeated in November 2010 by a margin of 2 to 1.

While this was going on, the Washington Policy Center released their proposal on streamlining the B&O tax system. The Washington Policy Center describes their organization as “an independent, non-partisan think tank promoting sound public policy based on free-market solutions,”. They described their Single Business Tax proposal as revenue neutral (meaning that there was no increase or decrease in money received by the State), treating all business owners equally by using one flat rate, eliminating loopholes and special treatment, and simplifying administration of the tax to reduce compliance costs for business.

One can’t argue that this proposal would be much more simplistic than the current B&O system, but it looks like this idea wasn’t popular enough to survive during the last two legislative sessions since it was initially discussed. Looking through the bills that Governor Gregoire signed, there is only a handful during this time regarding the B&O tax and none of them included this idea. Bills passed related to clarifying or enacting deductions for certain industries. 

I hope that after these last few posts you have a better understanding of the B&O system in Washington State and the various ideas that have been discussed to modify or replace it. Before moving on to reviewing other taxes, I’d like to conclude this thread by looking at how cities implement B&O taxes and a recent effort by the State to streamline that process.