Business Matters

A ten-part series on resolving Washington's anti-business climate

"We will do everything in our power to guarantee a thriving, environmentally-sustainable business climate." – Governor Gary Locke –

Part 4: Reducing Washington's Business Tax Burden

Washington state imposes one of the heaviest business tax burdens in the nation. Our onerous Business and Occupation (B&O) tax discourages the creation of new jobs, and may even be the cause of losing them. A recent report by the Washington Technology Center found that our state’s businesses pay the 4th highest tax burden in the nation.

It is not only high business taxes that cause Washington to lose its luster in the eyes of employers but the substantial tax burden placed upon individuals as well. If employees can barely afford to live in the state, little incentive exists to bring business to Washington. Onerous taxes are also putting existing small businesses and new start-ups in serious jeopardy of fading into a historical footnote during this current time of economic hardship.

During the 1998 fiscal year Washington residents paid $36.59 in property tax per $1,000 of personal income ranking us 17th highest across the nation. The U.S. average for this time period was $33.22. In terms of total state and local tax collections per $1,000 of personal income, Washingtonians paid $115, ranking us 17th highest nationally (national average was $111.70).

Though businesses and individuals in Washington currently pay no income tax, the state has implemented many other taxes to bring in revenue. Our state relies heavily on B&O taxes, retail/use taxes, and property taxes for funding.

B&O Tax

Washington’s B&O tax is not based on corporate profits, but instead is concerned with the gross receipts of business generated within the state. Four rates exist: manufacturing (.484%), wholesaling (.484%), retailing (.471%), and service and other activities (1.5%). For the 1998 fiscal year, $1.9 billion in B&O taxes was collected, representing 17.5% of the state’s general fund.

Manufacturing is classified as any product manufactured within the state, regardless of where that product is sold. The value of the B&O tax on manufacturing is determined by the value of the product, which generally is determined by the selling price.

Wholesaling refers to businesses that sell or resell products at a wholesale rate. Wholesalers are required to keep a resale certificate from every buyer to document all transactions made.

Retailing concerns products sold at a retail rate.

Service and other activities is a catch-all classification to ensure that no business escapes B&O taxes. Businesses that do not fall into one of the above three categories are in this group.

Since the B&O tax is not concerned with profits, new businesses are at a significant disadvantage when attempting to compete with existing businesses that already have a steady flow of profits. The regressive nature of the tax forces many to fold.

Retail/Use Taxes

The state collected $5.3 billion in retail taxes during the 1999 fiscal year. This accounted for almost 48% of the taxes deposited in the general fund. The state sales tax rate is 6.5%. Local retail tax rates are imposed by counties or cities and range from .5 to1.7%. While retail taxes capture all sales within the state’s borders, what most residents don’t realize is that Washingtonians are also responsible for use taxes.

Use taxes are levied on items not purchased in the state but used in the state. Such items can be anything from cars purchased in a state with lower sales tax to gifts that were not subject to sales tax when purchased.

Property Taxes

Until the 1930s, property taxes were the only major tax collected for state spending. Including state and local taxes, approximately 30% of the taxes collected are property taxes. The property tax rate is figured at 100% of a property’s fair market value. Gauging from the success of initiatives aimed at limiting property tax increases, voter sentiment in the state demonstrates a growing frustration with a property tax burden that has become onerous.

The high rates at which these three taxes are levied continue to contribute to Washington’s anti-business climate by affecting businesses and by creating an environment in which it is very difficult for individuals to afford housing. All three of the above-mentioned taxes need to be reduced. The B&O tax must have its rates immediately reduced and debate should begin on the merits of a formula that bases the tax rate on profits rather than gross receipts. We need to bring our sales tax in line with the rest of the nation and stop levying it on the construction of new plants. And unless property tax increases are controlled, our initiative system will continue to be flooded by citizen attempts to reign them in.

The state of Washington is in danger of supplanting Washington D.C. as the tax-and-spend capital of the nation. To significantly improve our economic situation and roll out the welcome mat to businesses, immediate reduction and reform of our tax structure must occur.

This is part four in a ten-part series on resolving Washington’s anti-business climate.

Intro | Part 1 | Part 2 | Part 3 | Part 5 | Part 6 | Part 7 | Part 8 | Part 9 | Part 10

Contact: Jason Mercier, Deputy Communications Director, (360) 956-3482 or jmercier@effwa.org.

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org