UPDATE 3/5/15: HB 2150 referenced below was just scheduled for a public hearing on 3/13/15 8 AM in Olympia. You can also submit email comments in support of this pro-small business legislation here: email comments
The state legislature is dealing with some very serious and complicated policy decisions in the 2015 legislative session. I am concerned that with all of the heavy issues on the legislature’s plate, another session is going to come and go without anybody focusing on policies that will actually support small businesses in this state. Small businesses are once again taking a back seat to other priorities.
The state is under court order to provide funding for mental health so we stop warehousing the mentally ill in emergency rooms. It is under another court order to fully fund basic education under the McCleary case. There is a new $15 billion transportation revenue package in the works, the first significant investment in our infrastructure since 2005. These multi-billion dollar policy issues are in addition to the normal work to pass an operating budget and a capital budget. Then throw in around 200 other policy bills that are making their way through the legislature. There are also a number of bills that are designed to address the problem of income inequality. The House just passed a new $12 minimum wage bill which is now headed to the Senate. The House also passed a paid sick leave bill.
Putting aside the merits of any one of these policies, the fact is that many of them are going to raise costs for small businesses disproportionately. A large multinational shipping company can absorb the costs of a gas tax increase more easily than a small business that relies on sending trucks to clients’ homes, or a contractor who has to drive to job sites. A company that makes $24.7 billion in profits per year like Walmart can afford a $12 min wage more easily than a mom-and-pop dog kennel can. A company like Microsoft that made $22 billion in net profits last year can afford 2 weeks of paid sick leave for employees more easily than the nail salon down the street.
One easy way to help true small businesses would be to reform our arcane Business and Occupancy (B&O) tax. Unfortunately, that is not on the docket again this year. First a little background on this tax.
The B&O tax is a tax on the gross sales of businesses in the state. It does not tax businesses based on their net profits which makes infinitely more sense. Washington is one of only eight states in the country that have a version of a gross sales tax. This gross B&O tax accounts for 20% of state revenues each year.
Another reality of our B&O tax is that we have over 650 special tax exemptions in our tax code. Much like the federal IRS tax code, the B&O tax is starting to resemble Swiss cheese. Businesses and industries that are profitable enough to afford expensive lobbyists and campaign donations get special treatment. The mom-and-pop businesses that make up the fabric of our communities get no such special treatment. The following quotes from Rep. Reuven Carlyle’s blog explain the problem more eloquently than I can:
“I maintain my personal philosophical conviction that the best state tax structure is low rates, broadly and fairly applied to everyone with few special breaks. We have the diametric opposite with high rates, narrowly and unfairly applied with hundreds of special tax breaks. It’s unfair to those without lobbyists and campaign cash.”
“When a tax break (i.e. tax preference, tax exemption or tax incentive) is adopted by the Legislature for a given company or industry, it is essentially a “tax shift” more than an actual reduction and in most cases the real philosophical losers are at least small businesses–the vast majority of our state’s 345,961 total registered businesses that earn $250,000 per year or less in revenues that don’t receive the preferential treatment.”
Most small businesses lose money in the first three years. During that time, they are still creating economic development in their communities. They are paying retail sales tax on equipment and hiring subcontractor labor. Some are lucky enough to be creating new jobs. They are paying for advertising and a whole host of other goods and services which feed the 47.2% of state revenues that come from retail sale tax. For businesses like mine that require large physical properties, we are paying into the 12% of revenues that come from property tax. It is during these critical start-up years that mom-and-pops need all the support they can get to be successful. Instead, we tax them on gross sales while handing out tax exemptions to highly profitable corporations and industries. It’s just wrong.
The obvious solution to this fairness gap is to tax businesses on net profits, not gross. For a number of reasons, most of which are bad, the idea of a net tax is a third rail of politics down in Olympia. Obviously any business or industry which currently enjoys special tax breaks will fight the idea. Any lobbyist who makes a living by procuring tax exemptions for clients will fight the idea. I hope one day we can get there but it’s not even part of the political discussion at this point. It will take courageous leadership to make it part of the discussion. If we have to stick with the unfair gross B&O tax, there are other ways we can make it fairer for small businesses.
The state has a small exemption up to $25k in gross sales for business that choose to take it. In 2014, Governor Inslee requested HB 2678 that would have raised the threshold up to $50k. I took the time to go testify for it because it’s a great idea. Despite having the backing of Republicans and a Democratic Governor, the bill didn’t pass. You can see how many businesses that would have impacted on the following chart provided by the Department of Revenue for fiscal year 2014:
Another fix for the B&O was sponsored this year by Rep. MacEwen, HB 2150. It’s a well thought out model that addresses the issue of fairness for small businesses. It’s a complicated policy that is best explained here: https://www.washingtonpolicy.org/blog/post/bo-tax-reform-bill-would-exempt-nearly-286000-small-businesses-tax
Unfortunately, this bill didn’t even get a hearing this session. It does have some bipartisan support (co-sponsored by Rep. Reykdal) so perhaps it will get more attention in the 2016 session.
In summary, we need to start supporting small businesses in this state. One meaningful way to do that is to fix the B&O tax. We need leaders who are going to speak out on this topic regardless of the political ramifications. And we all need to remember that true small business owners are a forgotten part of the middle class. A business that grosses less than $500k, and makes far less on a net basis, should not be equated with multinational corporations that make billions in profits.