Taxes – voters’ #2 concern – under discussion in Olympia; several ideas floated, but no clear direction yet

In the short 60-day session with close majorities in both legislative chambers, little change in tax policy was expected.  Revisiting past actions on which lawmakers had reached agreement seemed like the most promising path to tax relief, as demonstrated by the momentum for reinstating the manufacturing tax relief adopted by bipartisan majorities last session, but vetoed by Gov. Inslee. 

And, yes, the governor proposed a substantial new carbon tax — a proposal in part prompted by the state Supreme Court’s directive to accelerate school funding under the McCleary order.

Voters, ever wary when the Legislature is in session, told the Elway Poll that taxes were their No. 2 concern this year. But they also doubted lawmakers would make “significant progress” on taxes (or much else) this year. Of course, your “progress” may lead in a different direction than mine, which helps explain modest expectations.

Still, in addition to the carbon tax and manufacturing tax relief, there are a couple of other proposals to watch. The Association of Washington Business calls our attention to one of them

House Finance Chair Rep. Kristine Lytton, D-Anacortes, has proposed a major change to the state’s B&O tax structure. The bill would eliminate B&O tax liability for the smallest businesses and pay for it by increasing B&O taxes on larger businesses.

House Bill 2940 would exempt the smallest businesses (those with a gross marginal revenue of under $250,000) from any liability for B&O tax. Businesses with gross marginal revenue (gross receipts minus costs of employees and goods sold) would pay the current B&O tax rate on their gross receipts. Businesses with a gross marginal revenue of more than $1 million would see a B&O tax rate increase of about 6 percent.

In essence, the bill would increase taxes on one group of employers to pay for a tax cut for another group of employers.

For more on the proposal, see this Tax Foundation report that identifies some concerns with the bill as drafted.

Chairwoman Lytton is right to note the inequities imposed by the B&O’s non-neutrality and to want to address the burden it places on low-margin businesses. Unfortunately, the relief offered by HB 2940 is poorly targeted, and for many taxpayers—including low-margin businesses—it makes the B&O even more burdensome. If the goal is to provide small business tax relief, a better approach might be to raise the threshold and turn it into an exemption.

The discussion continues with a hearing in the House this afternoon. Rep. Lytton has also introduced HB 2967, a new capital gains tax. Here’s one section:

Beginning January 1, 2019, a tax is imposed on all individuals for the privilege of selling or exchanging long-term capital assets, or receiving Washington capital gains. The tax equals seven percent multiplied by the individual’s Washington capital gains.

It’s all early days, but stuff to watch.