Washington State levies the nation’s oldest 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. , first implemented in 1933. The 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. in practice illustrates the harmful economic pyramiding and other damage that comes from these harmful taxes. In 2006, we quoted from a 2002 study commission:
Neutrality requires that a tax system minimize the opportunities and incentives for taxpayers to alter their decisions in order to take advantage of differential tax treatment of economic activity.
The finding for the Washington State tax system is that it causes sub- stantial nonneutralities for both businesses and households. The pyramiding of the B&O tax creates the main non-neutralities for businesses. Pyramiding of taxes is the payment of taxes by different companies on the same goods or services. This occurs when goods or services of one company are inputs for another’s production and/or sales. Thus, a tax is paid multiple times on a product as it moves through the pro- duction chain.
The B&O tax pyramids an average of 2.5 times, but this rate varies considerably across industries. The B&O tax on many services pyramids at about 1.5 times, whereas for some types of manufacturers the rate of pyramiding is over five or six times. This causes effective B&O tax rates (the rate paid on the value added to goods and services by an enterprise) to vary considerably from industry to industry.
Since gross receipts taxes are based on receipts instead of profits, and levied on every layer of production, such taxes result in taxes imposed on earlier taxes (pyramiding) and are especially harmful to low-margin, high-volume industries like grocery stores and newspapers.
Washington State has recognized this destructiveness, but rather than convert their tax into a VAT or repeal it completely, they’ve introduced industry-specific tax rates. Each industry, depending on some combination of analysis about their profit margins and political pull, pays a different B&O tax rate. And they change pretty frequently.
The latest change is about to be signed into law: the struggling city newspaper industry has obtained a cut in the B&O tax rate on newspapers, from 0.484% to 0.2904%. This popular tax cut will benefit both struggling and successful newspapers, but illustrates how arbitrary and harmful Washington’s B&O tax currently is.
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