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Washington State Debating Tax Increase Options

3 min readBy: Joseph Bishop-Henchman

In 2007, Washington State voters passed Initiative 960, which requires a two-thirds vote of the legislature to raise taxes, along with public information requirements in ballot guides about past taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. legislation. On February 24, Governor Chris Gregoire (D) signed a bill repealing Initiative 960.

With that out of the way, House leaders yesterday announced a dramatic tax increase package:

  • Eliminate the sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for nonresidents. Washington’s neighbor to the south, Oregon, has no sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . In an attempt to encourage Oregonians to shop in the Evergreen State, Washington has exempted nonresidents from the sales tax. This would end that tax preference, presumably resulting in a steep drop in Washington state sales to nonresidents.
  • Extend Washington’s destructive and tax-pyramiding B&O gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. to businesses with no physical presence in the state. Aside from being unconstitutional and a violation of the “benefit principle” in taxation, the change will rightly be seen as discouraging investment and business activity in the state. A similar proposal to repeal a B&O tax exemption for in-state representatives of out-of-state sellers claims to raise $155 million in the current budget and $199 million in the next budget, but admits that the exemption currently costs just $5 million a year in revenue. How eliminating a $5 million exemption will raise $75-$100 million a year is beyond me.
  • Subjecting corporate board member compensation to the B&O tax. Washington State may not have an income tax, but they seem to be finding ways to tax income, at least income from people disfavored by the powers that be at the moment.
  • Hike penalties on tax avoidance schemes. It’s unclear whether these are penalties on activities that distasteful as they may be are technically legal. The revenue estimate seems overly optimistic.
  • Luxury license tax on private jets. The tax wouldn’t apply to commercial aircraft but is described as an extension of the luxury license tax on private boats. As we noted in a similar New York proposal last year, such narrow-base taxes are usually gimmicks that raise little tax revenue while appealing to class warfare sentiment. A 10% federal luxury excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. imposed in 1990 devastated the yacht industry, and employees thereof. Because yacht sales fell sharply after imposition of the tax, revenues were far below projections. Ultimately, Congress responded by repealing the tax.
  • Subject foreclosure sales to real estate transfer taxes. The effect of this will be to gum up property transfers from delinquent homeowners to new buyers.
  • Make corporate officers liable for company tax debts. This isn’t really tax policy but I suspect people may resist becoming corporate officers with this hanging over their heads.
  • $1 increase in the cigarette tax. This increase would push the tax over $3 a pack and make Washington’s already-high cigarette tax the second-highest in the country, after Rhode Island.
  • Extend the sales tax to bottled water, cosmetic surgery, candy and gum, custom software, and janitorial services. It’s always interesting for me that the service industries with powerful lobbies (legal, health, housing) never seem to be on these lists. The big tax increase in this package is custom software; the others are relatively minor.
  • 0.5% B&O tax increase on lawyers, accountants, agents (not real estate), marketing, and management consultants. Guess I spoke too soon. I’ll be curious to see how this one survives. And it never seems to hit the real estate agent lobby.
  • “Additional actions” that will raise $164 million.

The Senate bills thus far introduced include the $1 cigarette tax increase, a 0.3% sales tax increase, and a 133-page bill repealing exemptions for business inputs. The debate seems to be whether to do a whole bunch of small tax increases or one sales tax increase.

A big driver behind all of this is the state’s Basic Health program, where the state pays 85% of health care costs for enrollees. The dramatic subsidy has resulted in a popular and hugely expensive program where tens of thousands are on waiting lists to enroll.

More on Washington State here.