The speed and ease by which Boeing acquired new and extended tax breaks in November demonstrated how relatively malleable our state’s tax system can be when the legislature is motivated.
Sadly, over the years, state policymakers, as well voter initiatives, have been more successful at punching holes in our tax system than they have been in building a more equitable and efficient system.
And the more holes that get punched in the system, the harder it is to achieve comprehensive reform.
This point was made in last month’s House Finance Committee in Olympia during an exchange between Rep. Ed Orcutt (R-Kalama) and Jason Mercier, Government Reform Director of the Washington Policy Center. Mercier was presenting his organization’s proposed reform to our state’s much reviled Business and Occupations (B&O) tax.
The B&O tax is the primary way state and local governments tax businesses in Washington. It’s a flawed tax. The tax applies to the gross revenues of a business. This means that whether a company makes a profit or not is irrelevant to the tax. As a result, the tax tends to fall hardest on those companies who are just starting up and operating at a loss, and those companies who do a high volume of business but have low profit margins–companies, for instance, that might be significant employers. Our state does not have a corporate profits tax.
While there is agreement that the tax is onerous, the question is how to replace a tax that generates about 20 percent of the state’s general fund revenues. To its credit, the Washington Policy Center has proposed an alternative that would allow businesses to deduct their labor costs (under one option) yet would still overall generate the same amount of revenue.
“Any time you change a system and you keep it revenue neutral and give somebody a reduced amount of tax burden, does that not then increase the amount of tax burden on someone else?” Rep. Orcutt asked rhetorically.
Appearing to agree, Mercier noted the hurdles he confronts. “With tax reform, especially on a revenue neutral basis, repealing (tax) credits, exemptions, lowering rates, there are going to be winners and losers in that system. When we went through stakeholder meetings on this, not surprisingly the small businesses and those that felt like the current system wasn’t working for them were very excited about this and those that had those current exemptions and (tax) preferences were less excited about seeing changes to the system.”
In short, the constituency against tax reform grows with each exemption approved, which is why the national Tax Foundation called the Boeing tax breaks “a red flag for state legislators” that a more comprehensive solution is needed.
According to Mercier’s white paper on the proposed business tax reform, there are over 161 special B&O tax exemptions. In fact, there are so many tax breaks through our tax code that the legislature created a special commission to analyze each tax break with a rigorous audit. In seven years of operation and after 338 audits, the commission has recommended that less than a dozen expire when their sunset dates hit and that only five other tax preferences be terminated. To date, the legislature has not terminated any of those five preferences.
It’s no wonder that the chair of the House Finance Committee, Rep. Reuven Carlyle (D-Seattle) says reform is a multi-year endeavor.