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Wednesday, June 9, 2010

What can we do to fix Washington State revenues?

Pardon an interruption in the normal style of Demand Side. We're promoting a solution to Washington State's dreadful tax structure and got caught without a good resource link, so -- thinking slowly -- we gave out this one.

A relatively simple adjustment to the B&O tax can turn it into a tax on value added.

This has virtues of its own in terms of equity and sturdiness, as well as relieving the burden on small business, but it also would allow the tax to be extended to the government sector, and is the least painful way to completely fill the budget hole.

The B&O is now a very low rate tax levied on gross receipts (gross sales). It is considered by many to be as regressive as the retail sales tax. By allowing the deduction of purchased inputs, and thus changing the base from gross receipts to value added, the many current rates could be reduced to one, and this one rate could be extended to government payrolls - a proxy for value added.
If, say, that rate turned out to be 2% (probably a low number), applying it to the public sector would yield between $600 and $800 million and by itself cover nearly half the essential deficit.

(Similarly, the revised tax could be extended to other currently exempt areas.)

It cannot be an option for state government to fail. The budget proposed by the governor amounts to a failure. If it or anything like it is enacted, it amounts also to a failure of leadership. Aside from simplifying and making the B&O more fair to small business, such a change would have one other, perhaps greater advantage - it would fill the budget hole.

There are no other good options. The sales tax is effectively maxed out. The property tax is off the table. Sin taxes, and special-purpose taxes and fees are nickels and dimes when we need tens and twenties.

Following is a detailed paper produced in 2005 describing the first half -- the transformation of the B&O from a gross receipts tax to an "enterprise tax" (name chosen to avoid confusion regarding value added).

B&O Reform 032105 rev 0610

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