Here’s Everything That Would See a Tax Increase Under a New Washington State Tax Bill

New legislation from the chair of Washington’s House Finance Committee would create a 7 percent capital gains tax, but that’s not all. House Bill 2186, just released, also imposes a 20 percent surcharge on a wide range of goods and services subject to the state’s Business & Occupation (B&O) tax, a gross receipts tax. Here’s the list:

• Retail
• Wholesale
• Services (general)
• Manufacturing
• Hospital Services
• Insurance
• Real Estate Brokerage
• Day Care
• Digital Products and Services
• Resource Extraction and Processing
• Nonprofit Research & Development
• Internet Access (subject to federal restrictions)
• Printing and Publishing
• Highway Contracting
• Warehousing
• Broadcasting
• Interest on Loans
• Royalties
• Chemical Dependency Services
• Grocery Distribution Cooperatives
• Salmon Inspection, Testing, and Labeling
• Custom Software
• Games of Chance
• Professional Employer Organizations
• Radioactive Waste Cleanup

Outside the surcharge, it also raises the B&O tax on:

• Warehousing and Reselling Prescription Drugs
• Bottled Water (newly taxed)
• Self-Produced Fuels
• Aerospace Product Development Services

The bill also increases the state’s real estate excise tax (REET) rates. Currently, real estate is taxed at a rate of 1.28 percent. This would be replaced by a progressive tax structure beginning at 0.75 percent and peaking at 2.5 percent on transactions worth more than $5 million.

One of the legislative findings in HB 2186’s preamble is that “our tax system is the most upside down and regressive in the nation, allowing those who earn the most to pay the least in taxes.” This statistic comes from the Institute on Taxation and Economic Policy (ITEP) report “Who Pays?” which inaccurately classifies the B&O gross receipts tax on businesses as a sales tax by following classifications from the U.S. Census Bureau, which does not have a separate line for gross receipts taxes. This makes Washington’s sales tax collections look much higher than they are and causes ITEP to allocate more taxes than it should to lower-income earners.

This is notable because, by increasing the rate of the B&O on all of the above-mentioned goods and services, not only would the legislature increase tax costs across all income classifications, but it would actually increase regressivity as measured by ITEP.

The legislation provides B&O deductions for small businesses, allowing a business to deduct up to $250,000 if its gross proceeds were less than $250,000 the previous year, and to deduct $100,000 if the prior year’s proceeds were between $250,000 and $500,000. It would also modify the exemption so that businesses with less than $150,000 of gross income are exempt from taxation. Even for small businesses, these are modest figures, because they are on gross, not net—before expenses, compensation, and the like.

Additionally, the bill requires out-of-state retailers to report how much each Washingtonian owes in use taxes based on transactions (chiefly online purchases) with that retailer. And finally—though it is certainly no afterthought—the bill imposes a 7 percent tax on capital gains income. Washington does not currently impose an income tax, and faces constitutional impediments to doing so.

Although some Washington policymakers have expressed a desire to challenge an old state supreme court ruling prohibiting the state from imposing an income tax that is not uniform or is imposed at a rate exceeding 1 percent, prior capital gains tax proposals have been framed as a tax on the privilege of engaging in certain transactions, attempting to skirt the prohibition. This proposal, notably, requires those with qualifying capital gains income to file a federal income tax form with the state—seemingly conceding that it does indeed constitute a tax on a class of income.

(Here’s an explanation of the legal challenges surrounding capital gains taxation, and here’s our most recent discussion of the volatility associated with a capital gains tax.)

A stated goal of HB 2186 is a more progressive tax code, but included in this laundry list of tax increases are an awful lot of goods and services consumed by Washingtonians across the income spectrum. The bill doesn’t increase taxes on everything subject to the B&O—but it might have been easier to enumerate the categories it leaves alone.