Washington State Economic Nexus: Equalizing Taxes or Soaking Out-of-Staters?

May 11, 2010

Last week I criticized Washington State revenue officials for boasting about how the state’s adoption of “economic nexus” will shift tax burdens to out-of-staters. Given that the Constitution came about in large because states were harming interstate commerce by shifting tax burdens to out-of-state, I found the official’s admission to be telling.

State Rep. Ross Hunter, Finance Committee Chairman, has a different take. I regret that we don’t permit commenting on our blog just yet, but Chairman Hunter wrote in this reply that I’m happy to post:

Regardless of how the Governor’s office chooses to portray the bill, the new law in Washington state applies the B&O tax evenly to in-state and out-of-state businesses performing service activities in Washington. This doesn’t seem unreasonable to me, but then again, I’m one of those “politicians” you write about so disdainfully.

I fail to see why a business located outside the state and performing services inside the state should be able to avoid paying taxes on their activity. When the B&O tax was created, the only way a business could perform a service for a customer was over a handshake. This clearly hasn’t been true since Al Gore invented the Internet. Imagine two businesses are set up 50 miles from each other, but one is across the border in Oregon. They both perform services for customers in Washington state. Why would they have different tax treatment?

Putting aside our criticism of gross receipts taxes like the B&O tax, this highlights a key debate in state taxation. What should matter more: that all products face the same tax, or that state powers are limited and prevented from harming interstate commerce? That debate plays out over and over again among experts and officials.

Proponents of economic nexus say that it equalizes the tax on otherwise identical products and transactions. But such goods and transactions occur at least in part in other states, which risks multiple taxation of interstate commerce since each state always seems to think that the tax should go to them.

Washington State needs serious fiscal reform; its revenues and expenditures are not in balance. Soaking out-of-staters is not the right solution, as it will only exacerbate the free-lunch mentality of using services that someone else pays for.

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