Small businesses hurt most by Washington B&O tax

DAVE GALLAGHER

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The business community has complained for years about the Business and Occupation tax, and now it has data to back up those assertions.

The Washington Policy Center recently released a report about the tax, which is collected from a company's gross receipts, concluding that it is an unfair way of collecting revenue. What's worse, according to the report, is that it disproportionately harms small businesses, because the larger companies have more resources to devote to tax preparation. It estimates that the state B&O tax, when converted into the more commonly used corporate income tax, creates the second-highest business tax rate in the nation. The report was written by Carl Gipson, director of the Center for Small Business within the organization.

The policy center, which is a non-profit, non-partisan research organization, recommends lowering the overall rate across all regions, make B&O more transparent to consumers and businesses as well as create better incentives for new businesses.

Sounds logical, but as many business people have learned, sensible solutions can also mean hard choices for politicians. During the fiscal year 2007, the Department of Revenue estimated business owners paid about $2.6 billion in B&O tax, about 13 percent of total state revenues, according to the report. If the state were to start chipping away at that funding, it would either have to find another away to get back that lost revenue or make budget cuts. It's never popular to raise taxes on residents or chop programs in a slowing economy, so small businesses continue to shoulder more than their share of the tax burden.

You can see this B&O problem magnified on a local level. Bellingham has its own B&O tax, while other parts of the county do not. A slew of businesses have been moving out of Bellingham in recent years, finding themselves in new buildings just north of the city limits or in Ferndale. More are sure to follow, particularly if the big box stores in the Cordata area are serious about relocating in Ferndale. Last month, for example, it was reported that Costco was looking at property near Slater Road. There may be other reasons given for companies leaving Bellingham, but I'm sure the B&O tax is definitely a factor, based on how often I hear from business owners about the damage it does to the bottom line.

If this is happening on the local level, it's probably happening on the state level as companies ponder whether to enter the Washington market.

So why is the B&O tax so unfair? Part of the problem is the way it is implemented, according to the report. It creates pyramiding - a process that taxes the production of a product multiple times before it reaches the consumer, raising the retail price. The report uses a log as an example. It is taxed at a mill, then is taxed again when it goes to a distributor, then again when it goes to a contractor, then again for the consumer when they buy a house that was built with that log.

It leads to all kinds of crazy taxation hits. Food is taxed an average of 6.7 times, while aircraft parts are taxed 5.3 times. Legislators have tried to make the system more fair by issuing credits to certain sectors, but this creates a convoluted mess where the companies or industries with the best lobbyists can get the most credits.

"The economic consequences of this policy can result in larger companies vertically integrating their operations in order to avoid higher taxes. Pyramiding punishes companies that are small or unable to integrate. It also results in a lack of transparency, particularly for the consumer, as the cost of the many B&O taxes levied on the end product is indecipherable from the cost of the product itself," Gipson said in the report.

Another issue with this B&O system is taxing gross receipts. For new businesses, that is a tough bill to pay, because they are bringing in a lot of new product and selling it, but many times aren't profitable in the first year.

At some point, this will need to be changed, but what will it take? It's the small business owners that take the biggest hit, and they aren't going to get help from big companies or consumers on this.

To see the report, visit www.washingtonpolicy.org and hit the Research Centers link, followed by the Small Business link

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Sunday, Aug. 24, 2008

Small businesses hurt most by Washington B&O tax

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