Washington's B&O tax is so bad that lawmakers won't touch it for fear it will fall apart completely.
The Business & Occupation Tax is a gross sales tax, meaning it is charged on the full value of every transaction, regardless of anything. Regardless of cost, so the effective tax on income is different for every business. Regardless of how many times the product has already been taxed, so this pyramiding overtaxes in-state companies and undertaxes out-of-state and large, vertically integrated companies. Regardless of investment or market position, so new and developing and investing companies are penalized, as well as small, homegrown companies. Just the thing for economic development, don't you think?
The first recommendation in the 2002 Washington State Tax Structure Study (Gates Commission) was to scrap the B&O entirely and replace it with a subtraction method value added tax. This recommendation preceded the much-ballyhooed call for a personal income tax. The Washington State League of Women Voters' State Tax Reform Update calls for a switch from gross sales to net sales. Both are designed to eliminate the pain and economic problems of taxing gross sales.
This can be done. It can be done in the context of reforming the B&O. It can be done and result in a relatively painless net increase in revenue of perhaps $1 billion per year. It can be done without major new bureaucracy. It can be done in a way that could eliminate the current special tax exemptions, or at least the rationale for them.
A full and detailed outline of just such a plan, developed by yours truly and Don Hopps, of the Institute for Washington's Future, is available online at the Effective Fiscal Policy Project. I wish I could tell you it was a work of genius, but it is really just the shortest distance between two points. The reason it hasn't been picked up in Olympia has more to do, I think, as much with the radioactive nature of the word "tax" as anything.
The B&O is a business tax. This reform makes it a rational business tax. As a business tax, it ought not to be as vulnerable to attack from the Eyman vigilantes. This would make the weakest link in Washington's tax structure into the strongest. It would be pro-competitive for Washington-based businesses. It would raise revenue largely by closing down the advantages now enjoyed by out-of-state suppliers and vertically integrated megaretailers like WalMart. And believe it or not, it is simple, as simple as significant tax reform can be. We simply subtract purchases from other tax-paying businesses from the current gross sales base. The six different rates of the current tax become one. The tax becomes rational. We don't even have to change the name.
Progressive Candidate Alert! This plan is good for small business. The current form includes a $100,000 standard deduction that would drop most small businesses from the tax rolls. Being independent would no longer mean having a higher effective tax rate.
Currently small business groups seem to be captive to the anti-tax conservative right that really serve larger businesses. Under this proposal tax incentives would be available for beneficial activities, not to the actors who are able to marshal political backing in Olympia.