State's Business & Occupation tax could get a look from Legislature as new-revenue source

The fact that it will take a two-thirds vote to get any new-tax measure through the state Senate this year could prompt lawmakers to take their first serious look in years at potential new dollars from the business and occupation (B&O) tax, the state's primary source of revenue from business.  

And if that happens, not only might some lawmakers be surprised at the disparity scattered among the nearly 30 categories of the B&O Tax -- Washington's unusual tax on gross receipts -- but it would also emphasize how out of sync the imposition of that tax is with the current-session's legislative mantra of "fairness."

After all, we have House Democratic Leader Ross Hunter, D-Medina, on the record with "when we are done, our tax system should move toward fairness." So lawmakers could decide there's some logical opportunity for new revenue from some of these categories while getting credit for looking to create fairness

Seeking revenue-producing changes in the B&O could be an attraction because

This column's focus on the B&O tax is a topic that came to mind for me as a consultant who, with attorneys and accountants, pays a B&O tax under the "services" category, of .015 percent, basically $15,000 on $1 million of gross revenue, while our clients pay a tax of maybe $2,500, as the manufacturers' .00275 percent rate would impose. As publisher of Puget Sound Business Journal, I paid $3,500 for each $1 million of revenue.

An honest look at a tax structure where an attorney, accountant or consultant could pay a rate two or three times as high as a client they are advising might well provide additional tax revenue as part of creating tax fairness for all businesses.

But across the state tax spectrum, the fairness issue should also be weighed against the reality of why some tax breaks legitimately came about. Thus lawmakers need to evaluate, and perhaps restore at least some of the 20-year-old high-tech B&O tax credit, a tax break for five categories of tech business that expired as of January 1 this year.

It would be a mistake for the lawmakers to succumb to the temptation to merely pocket the nearly $50 million in revenue that the tax break cost the state, rather than seek to evaluate the changing value of the tax break to some of the five tech sectors to which it applied.

The challenge for legislators in evaluating either the B&O tax disparity or the tax break for high tech is in being able to understand the difference between tax breaks important to the economy and tax breaks that are merely the result of good lobbying.

And the manner in which the tax credit came about for high-tech research and development for advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology is an example of what was once viewed as an important-to-the-economy tax break.

The tax breaks for high-tech companies, both B&O and sales tax credits, were created by a Democratic legislature responding to the goal of creating jobs that came from a Democratic governor, Mike Lowry.

 "We were coming out of what was, at that time, the state's worst recession and we needed to attract industries that would produce good-paying jobs," Lowry recalled of the proposal he came up with and pressed through the 1994 Legislature as a way to lure new business to Washington.

And for Democratic lawmakers who have since sometimes come to refer to such tax breaks as "tax loopholes," Lowry still responds with his view that they are "incentives" that have permitted high-tech companies to avoid paying state sales tax on new facilities, including equipment.

"We were absolutely correct to come up with policies to lure companies to the state that would create high-paying jobs that were basically the jobs of the future," Lowry said.

And among those "jobs of the future" that still deserve nurturing is the biotech category, an industry that by all rights should be a third-leg of this state's economic stalwarts but that has lagged for several reasons. Removing the tax incentives on new facilities and equipment would be one more reason.

So back to the B&O tax, which actually came into existence in 1933 after the state Supreme Court threw out the income tax that lawmakers had passed in an effort to find new sources of revenue for a financially struggling state. The '33 Legislature adopted the gross receipts tax as a temporary, stop-gap move to balance the state budget.  

But the temporary, as in most legislative "temporary" moves, became permanent, though the rationale for creating B&O special treatment for one industry over another is lost in the antiquity of legislative deal making. But once that bridge was crossed, crafted from some handshake deal between one or more lawmakers and a lobbyist or two, the following special deals were somewhat like kisses: once the first one is bestowed in a relationship, the rest come much more easily.

Now, in a sense, some lawmakers are toying with what would likely be considered a form of tax on income with Democrats expressing an interest in taxing capital gains, saying it would make the state's tax system less regressive, and more fair (that word again).

Sen. Andy Hill, the Republican who chairs the Senate Ways and Means Committee as is thus the upper chamber's chief budget writer, has put down the capital gains idea, branding the phrase "regressive tax code" as a code-word for getting an income tax.

Voters have consistently rejected the idea of a state income tax, but it doesn't take too clever a legislative mind to realize that, even though any tax increase would almost certainly be sent to the voters, there might be a significantly different view of state residents about taxing capital gains than for taxing their own income.

And savvy lawmakers have a sense that a far more liberal State Supreme Court faced today with the question of whether a state income tax was unconstitutional or not, might well have a different answer than the one 82 years ago.