In Focus: State needs to lift unfair B&O tax burden

January 10, 2014 

As we begin the 2014 legislative session, we will hear a lot about the values that separate Republicans and Democrats. Important differences will be highlighted as elected officials try to draw sharp distinctions for voters in the run-up to legislative elections later this year. Is there one issue, however, that will unite our lawmakers? Yes. It is the near-universal frustration with the state’s onerous business and occupation (B&O) tax, which taxes a business’s gross receipts rather than its profit. Too often, lawmakers tinker with the state’s hated B&O tax, introducing targeted credits, deductions and preferences to try to fix the unfair economic distortions the tax creates and anti-competitive position it puts Washington’s employers in, especially for small and start-up businesses. There is a better way — a simple, fair single business tax. While based on total receipts like the B&O tax, a single business tax would eliminate the current system’s unfair and confusing morass of tax rates and tax breaks and replace it with a simplified system that treats all business owners equally and uses one fair, flat rate. Any tax reform must be based on sound principles of taxation — not simply be used as an excuse to take more money from businesses to boost government spending. These fair tax principles include simplicity, accountability, economic neutrality, competitiveness, balance and reliability. Washington Policy Center believes replacing the B&O tax with a single business tax would meet these principles by: -- Being revenue neutral. -- Treating all business owners equally by using one flat rate. -- Eliminating all loopholes and special treatment. -- Ending favoritism by policymakers. -- Repealing all existing state and city business taxes. -- Centralizing administration of the tax to reduce compliance costs for citizens. Here is how the Single Business Tax would work: Each year, business owners could choose one of three ways to calculate their taxable receipts, allowing them to select the method that results in the lowest tax burden. Calculating the taxable amount would be based on the business’s total gross receipts minus labor costs, total gross receipts minus all production costs except labor, or 60 percent of total gross receipts. To find the dollar amount of tax owed, the business owner would then multiply the taxable receipts by the single business tax rate. Cities could levy their own business tax, but the same uniformity standard would apply — any local business tax would have to be based on a single rate applied equally to all business owners, with no political favoritism. The final amount owed to each taxing jurisdiction would be sent to the state in one payment. State officials would then redistribute the funds to different local governments. This proposal would eliminate today’s confusing multiple rates on business activities, repeal the special interest tax credits and exemptions that have built up over the years and provide relief to small businesses with low profitability. The single business tax could be phased in over several years to allow time to adjust to the new system. By embracing fair tax principles and meaningful reform, we can encourage jobs and economic growth. We hope our single business tax proposal will spark a meaningful conversation about ending the burdensome B&O tax and creating a saner tax for our state’s business owners, while providing reliable funding for core functions of government. Our state’s current and complex B&O tax favors special interests that are able to exert political influence in the Legislature and negotiate their own narrow tax benefits. Meanwhile, most small business owners don’t have time to go to Olympia, let alone the resources to hire their own lobbyists. “A fair field and no favors” is a good motto for a strong tax system and one Washington leaders should embrace. Enacting a Single Business Tax would help bring equity and fairness to the tax code, and that would help everyone in our state. Jason Mercier Washington Policy Center’s director of the Center for Government Reform and is based out of the Tri-Cities. To view WPC’s full Single Business Tax study, please visit www.washingtonpolicy.org.

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