B&O, capital gains tax bills back on the table in Olympia
Two new bills involving capital gains and B&O taxes were introduced relatively late in the legislative session. Both are opposed by AGC.
B&O tax bill
House Finance Chair Rep. Kristine Lytton, D-Anacortes, has proposed a major change to the state's B&O tax structure. The bill would eliminate B&O tax liability for the smallest businesses and pay for it by increasing B&O taxes on larger businesses.
House Bill 2940 would exempt the smallest businesses (those with a gross marginal revenue of under $250,000) from any liability for B&O tax. Businesses with gross marginal revenue (gross receipts minus costs of employees and goods sold) would pay the current B&O tax rate on their gross receipts. Businesses with a gross marginal revenue of more than $1 million would see a B&O tax rate increase (a “surcharge”) of about 6 percent. (See full bill here; see summary here.)
The Tax Foundation makes the point that Increasing the de minimis requirement makes a certain amount of sense, as the tax imposes substantial compliance burdens that are likely to be out of proportion to the liability of small businesses. However, by using a threshold rather than an exemption, the bill exacerbates the existing tax cliff. A business that grosses $125,000 has no B&O tax liability. A business that grosses one dollar more owes taxes on the full $125,001. This problem, although not new to HB 2940, is far more significant when the threshold is $125,000 than when it stands at $28,000.
A business’s margin is determined by subtracting (a) the cost of labor and (b) the cost of goods sold from its gross revenue, mirroring the way that net corporate income (for purposes of a corporate income tax) is calculated in other states. If that margin is less than $250,000, a credit is offered wiping out the business’s B&O tax liability.
This approach, however, isn’t very well tailored to low-margin businesses. A business with $1 million in gross revenue could have an incredibly high 25 percent profit margin and qualify for the credit; a large grocery store, meanwhile, could have a margin of just over 1 percent and not make the cut.
Construction businesses often have significant gross income, but much lower margins once you consider not only the cost of labor, but also the cost of all the material and equipment that goes into construction. It wouldn’t be hard for such a business to face the 6 percent surcharge even if its margins were quite low.
Since the bill aims for revenue neutrality, moreover, the Department of Revenue is granted the authority to change the surcharge rate by rule (before it goes into effect) if it determines that projections will be missed by at least 1 percent in either direction. Then, during the first year in which the surcharge is in effect, the Department is authorized to adjust the surcharge again by emergency rule to keep revenue on track.
Not only do many businesses get a tax increase, but they won’t even know how big of a tax increase they’re facing until well after the bill is adopted.
HB 2940 was recently passed out of the House Finance Committee (all Democrats for, all Republicans against) and awaits further action in the Appropriations Committee.
Rep. Lytton has also introduced a bill establishing a statewide capital-gains income tax while reducing the state property tax burden on certain state residents. The proposal comes after Governor Jay Inslee left it out of his proposed 2018 supplemental budget and Senate leaders indicated early in session that no major tax overhaul is planned this year.
HB 2967 would impose a seven-percent tax on adjusted capital gains. Although the bill calls it an “excise tax” “for the privilege of selling or exchanging long-term capital assets, or receiving Washington capital gains,” the departments of revenue for every state with a capital-gains tax classify it as an income tax. Also, every state with a capital-gains tax also has an income tax.
The bill itself seems to tacitly acknowledge this fact; Section 109, subsection 2 requires that Washingtonians who owe state capital-gains tax must also file those gains with a federal income-tax return. This all but guarantees a legal challenge if the legislature votes in favor of it.
HB 2967 was referred to the Finance Committee, but no action has been taken. Click here to see the bill.