Gates panel's value-added tax a dud, users say
Gillie and Joseph Turner; The News Tribune
Olympia, WA - Michigan business leaders can't believe Washington
state may soon consider imposing a new business tax like one Michigan
"The tax that they want to replace had better be one bad tax,"
said Barry Cargill, vice president of government affairs for the Small
Business Association of Michigan.
Cargill was referring to news that a high level tax study committee
created by the Washington Legislature is recommending Washington replace
its business and occupation tax with a value-added tax similar to
"The Single Business Tax (Michigan's name for its value-added
business tax) taxes all the wrong things," Cargill said. "It
punishes all the things the state should want businesses to do.
"If you give your employees a raise, you'll pay more taxes. If
you hire more employees, you'll pay more taxes. If you want to pay
your employees' health care cost, it'll raise your taxes."
Cargill said the tax also scared away companies considering moving
"Our SBT was absolutely the worst thing we could have imposed
if we wanted to attract new businesses," he said. "When
consultants advise companies about places to expand, the SBT is always
in the negative column."
Michigan is scheduled to phase out its SBT by 2009.
But the Washington State Tax Structure Study Committee, headed by
William H. Gates Sr. (father of Microsoft's co-founder), says the
value-added tax would be an improvement over Washington's 70-year-old
business and occupation tax.
That tax was first imposed by the Legislature in 1933 as a stand-in
for the graduated income tax while the income tax was undergoing state
Supreme Court scrutiny.
Ever since, it has been consistently criticized by businesses as burdensome
and unfair, particularly for new and struggling businesses.
Indeed, when the Legislature imposed the business and occupation tax
during the depths of the Depression, lawmakers never contemplated
the tax would play a permanent role in Washington's taxation plan.
B&O tax gets poor reviews
The business and occupation tax, a tax on the gross revenues of Washington
businesses, was to be a temporary money raiser that would be replaced
by an income tax.
But when the state Supreme Court said the income tax was unconstitutional,
the B&O tax became a permanent fixture of the state's tax structure.
Over the years, the B&O tax has regularly earned poor critical
reviews, but every effort to replace it with a more stellar tax has
The committee's report recounts again the B&O tax's numerous problems:
•The tax unfairly burdens new, unprofitable companies because it taxes
the business' revenues, not its profits.
•The B&O tax hits high volume, low margin companies more heavily
than low sales, high profit companies.
•Vertically integrated companies, which produce and market what they
sell, bear a smaller tax cost burden than companies that buy from
others the goods they sell.
•The B&O taxes pyramid (that is, businesses pay taxes again on
goods already taxed) as goods move from raw materials to consumers.
•B&O taxes are invisible to consumers because businesses raise
their prices to pay them, but don't specifically itemize the taxes
in the prices of goods they sell.
"Washington state imposes one of the heaviest business tax burdens
in the nation," claims the Evergreen Freedom Foundation in a
special report on taxation in Washington. "Our onerous business
and occupation tax discourages the creation of new jobs, and may even
be the cause of losing them."
The Legislature could simply abolish the B&O tax, but doing so
would leave an additional $2 billion-a-year hole in Washington's already
overstressed state budget.
And simply raising other taxes to compensate for the loss of the B&O
isn't realistic or desirable, the committee said.
"The business and occupation tax is the second largest source
of state tax revenue, and it would be difficult for the state to raise
this revenue by increasing the unpopular state property tax or increasing
the retail sales tax rate, which is already one of the highest in
the nation," the study said.
The study, in fact, recommends a flat rate personal income tax to
replace part of the sales tax and eliminate the state portion of the
The case for VAT
The committee's recommended alternative, the value-added tax, or VAT,
would tax businesses not on their gross revenues, but on the value
they added to goods they purchased.
A value-added tax would require businesses to pay taxes only on the
incremental value they add to a product. Under the existing B&O
tax, taxes are compounded because each company pays taxes on the total
value of a product as it moves through the production or service chain.
For instance, the company that harvests timber pays tax on the value
of trees; the company that turns the timber into lumber pays a tax
on total value of the product; a cabinetmaker pays tax on the total
value of the wood cabinet.
That compounding of taxes is called pyramiding, and the task force
estimates the total taxes collected increase 2.5 times as a product
moves through the chain to market.
If a value-added tax is to raise as much money as the existing B&O
tax, the tax rate would have to be adjusted upward because the goods
and services will only be taxed once, not several times as under the
That means the tax bite would be redistributed among existing businesses.
Some businesses would pay less tax, others more.
The committee's proposal has not been sufficiently detailed for most
businesses to know whether a change would put them on the winning
or losing side.
"They've got to do a lot more work and a lot more study,"
said Carolyn Logue, state director of the National Federation of Independent
Business. "There's a great fear of an unknown tax. That's something
we should not leap lightly into."
The federation has about 17,000 members in the state, with an average
of six employees and annual gross income of $300,000 to $350,000,
Logue said the NFIB has not surveyed its members to see how they feel
about a value-added tax, noting such taxes exist primarily in European
Boeing didn't like VAT tax
Former legislator Dan Grimm of Puyallup is well aware of the political
complications of proposing new taxes, particularly unfamiliar ones
like value-added taxes.
As chairman of the House Ways and Means Committee, Grimm proposed
replacing the B&O tax with a value-added tax in 1985. The measure
passed the House, but failed in the Senate, Grimm recalled.
Grimm said he was motivated to propose replacing the B&O because
of the uneven cost to businesses of the B&O tax.
"We figured that with some high volume, low margin retailers
like grocers, they were paying the equivalent of a 25 or 30 percent
tax on profits," he said.
But the B&O tax was preferable to some companies like The Boeing
Co. that produced much of their own components.
"If they paid a tax based on the value they added by turning
a piece of aluminum sheet into an airliner, their taxes would have
been much higher," Grimm said.
Boeing told Grimm's committee that if it had to shoulder higher taxes,
it would be uncompetitive with its out-of-state and foreign competitors.
"Boeing lobbyists pointed out that grocers generally were competing
only with other local grocers who had to pay the same taxes, while
Boeing was competing with companies who didn't," Grimm said.
Faced with the prospect of losing high-paying Boeing jobs or keeping
high tax burdens on high volume retailers, the Legislature elected
to stay with the status quo, Grimm said.
Boeing spokesman Chuck Cadena said the company is still studying the
tax committee's new report.
"We appreciate the effort they made in making the study,"
he said. "We're still studying its recommendations."
Logue said that the B&O tax is not without some redeeming qualities.
"The B&O is not a great tax, but it certainly is simplistic
for a lot of businesses. The paperwork is easier than it would be
under a VAT or a state income tax."
In Michigan, the complexity of the Single Business Tax was one of
the reasons for its demise, said Tricia Kinley, director of tax policy
and economic development for the Michigan Chamber of Commerce.
Little momentum for change
Though the Washington tax study committee's report has enjoyed extensive
media exposure, there's no stampede in Olympia to implement its recommendations.
"This is probably not the year to upend our tax system,"
Logue said. "Let's get through this recession and work at ways
to get the (state) budget under control, then have a very needed discussion."
Don Brunell, president of the Association of Washington Business,
agreed much more study needs to be done before changing the state's
The association has about 3,700 members, including 80 chambers of
commerce, 120 professional organizations and 3,500 businesses. They
include Boeing, Microsoft, Safeco, Bank of America and other large
"We're going to be meeting in the next couple months to bring
our tax people together - folks in the tax departments of major corporation
and tax attorneys," he said. "Whether the value added tax
is a better tax, we don't know yet."
The task force said Washington businesses pay 46 percent of state
and local taxes, in contrast to the 30 percent average paid by businesses
in seven Western states.
State Sen. Jim Honeyford (R-Sunnyside), who will become chairman of
the Senate Commerce and Trade Committee next month, said he's sure
the Legislature will look at changes to the state's tax structure.
"Replacement of the B&O tax is possible, but I don't know
if we can get any traction on that," he said. "It may get
discussion, but I'd be surprised if any legislation is pass on that.
"We've got enough headaches."
John Gillie: 253-597-8663
Joseph Turner: 253-597-8436