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Home / Washington Business - May/June 2005 / Taxes Stymie Competitiveness |
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Taxes Stymie Competitiveness |
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Written On: May/June 2005 |
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Written By: Tom McBride - Tom McBride is AWB’s director of tax and fiscal policy. |
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Washington ranks 8th highest of all the states in the cost of doing business, Oregon ranks 30th, and Idaho ranks 46th, according to a 2003 Milken Institute report. Washington’s businesses pay approximately 46 percent of the total state and local tax burden (Washington Tax Structure Study Committee, November 2002)— 50 percent if you add unemployment insurance costs, according to Ernst & Young (2005).
The Utah State Tax Commission notes that among the seven western states, the average share of taxes paid by business is 29 percent. Similarly, in the November 2002 Economy.com Index, overall business cost index comparisons among the states rank Idaho at 89.6, Oregon at 93.6 and Washington at 99.8. In comparing annual per capita state and local taxes in western states, U.S. Bureau of the Census data indicate that Idaho comes in at $2,546, Oregon at $2,751 and Washington trails at $3,178. Washington businesses cannot compete in this cost environment.
The causes are many, including Washington’s tax structure. Washington has a punitive gross receipts tax (business & occupation tax), a modest property tax and a high sales tax. Neighboring states typically offer a lower or no sales tax, a property tax and an income tax. The significant difference is that Washington substitutes the gross receipts tax for the more common income tax. However, Washington’s gross receipts tax is typically higher than neighboring states’ income taxes because it is calculated on gross rather than net income. As a result, Washington’s business taxes are higher than most other states.
The gross receipts tax is productive, stable and predictable. On the other hand, it places a heavy burden on companies that have yet to make a profit. Moreover, the gross receipts tax pyramids, is complex (multiple tax rates), and deters business investment.
Washington’s property tax is predictable, has an element of local control and is about average in comparison to nationwide assessments. The Washington Department of Revenue notes that Washington’s property taxes rank 20th on a per-capita basis and 28th in relation to personal income. The property tax downsides are that it has no relationship with income and is frequently the subject of voter challenges by initiative.
Washington’s sales taxes (maximum 8.9 percent) are a broad-based revenue source, but these are regressive, volatile and deter business investment. Sales tax collections in Washington are the highest in the nation calculated on a per capita basis according to the Washington Department of Revenue. Oregon has no sales tax and Idaho’s maximum sales tax is 7 percent.
These tax inequities create an unfair climate for Washington businesses and generate extraordinary pressures in border counties. High business taxes take a toll on competitiveness and also cost the state’s economy. When costs are low, businesses invest in capital and hire workers. When investment and employment increase, business output climbs, personal income grows, demands on social programs decrease, and tax revenues expand. Moderate and reasonable business taxes contribute to companies’ willingness to remain and invest in Washington.
There is growing momentum to review Washington’s current tax structure as a way of addressing these inequities. In part, this is due to greater awareness of the state’s reliance on business for its tax revenue. It is also a result of the Legislature’s 2005-07 operating budget. While revenues are anticipated to increase during the next biennium by 7.1 percent, state general fund spending will increase at a rate in excess of 10 percent. We spend more than we have, and this budget is not sustainable.
In two years the Legislature will again be back in Olympia to fill another budget shortfall. The question is whether we settle for a short-term fix or demand a long-term solution requiring fiscal restraint and a careful review of the state’s tax system.
The opportunity to consider tax reform will begin this summer. Please contact Tom McBride at TomM@awb.org if you would like to participate.
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