The House Finance Committee continued its important interim work discussing the state’s tax structure by holding a work session yesterday on ways to reform the B&O tax. Earlier this year the Committee discussed what the principles of the state’s tax system should be.

I had the opportunity yesterday’s to give a presentation on WPC’s proposal to modify the state’s current B&O tax to a Single Business Tax, or gross-receipts margins tax.

Here is video of my presentation (click here).

WPC’s Single Business Tax would be:

  • Revenue neutral
  • Treat all business owners equally by using one flat rate
  • Eliminate and prohibit tax preferences
  • Simplify administration of the tax to reduce compliance costs for business

The Single Business Tax would be computed by subtracting from an employer’s total gross annual receipts the cost of either production or total compensation to determine the amount of money against which the tax rate is applied. The taxable base could not be more than 60% of total gross receipts.

A uniform tax discount would be provided to reduce the impact of the Single Business Tax on small businesses and startups with low profitability.

Credits and exemptions that give special tax breaks to some industries would be eliminated. The exact legal definitions of production costs and of compensation cost would be defined by the Legislature.

Among other comments it provided, the Tax Foundation submitted this statement for the work session:

“While the Tax Foundation encourages state and local governments to avoid gross-receipts taxes, the WPC Single Business Tax is preferable to the existing B&O tax or replacing it with a corporate/personal income tax. The ultimate goal, however, should be full repeal of the B&O. Short of that the WPC Single Business Tax is worth exploring.”

As for full repeal of the B&O, since it accounts for a significant portion of the state’s tax base (23% or $6.8 billion in 2011-13), a replacement strategy is needed. If not WPC’s Single Business Tax another option to consider would be full repeal of the B&O while expanding the state’s sales tax base on a revenue neutral basis while exempting business inputs to avoid pyramiding.

The downside to this is that even if extending the sales tax base to services the state rate (before adding the local rates) would likely be around 10%. This would be problematic for border communities. One potential way to buy down that 10% rate would be if Congress approved some variation of the Marketplace Fairness Act. Rather than earmark the revenue realized from collecting sales tax on online purchases for new spending, the revenue could instead be used to keep a revised sales tax rate low while repealing the B&O.

Back to WPC’s Single Business Tax proposal, how would things be different? One tangible example is that if the Legislature ever held a Special Session to provide tax relief it wouldn’t be done for just one industry but instead for all businesses in the state since the rates and discounts would apply uniformly to everyone.

[Reprinted with permission from the Washington Policy Center blog]