Raise the B&O

tax exemption

By Carl Gipson

The Business & Occupation (B&O) tax is widely referred to as a draconian tax that particularly punishes new and small businesses. Year after year, legislators try to find ways to fix this tax, and year after year, it remains an unrelieved burden to the business community.

The B&O tax is levied on all gross receipts of all businesses in Washington as a privilege of engaging in business. The term gross receipts means gross income, gross sales, or the value of products, whichever is applicable. The B&O tax is basically a tax on gross business receipts with no deduction for costs of doing business. However, there are myriad exemptions, deductions, and credits for specific types of business activities or industries. Firms whose annual gross income does not exceed $28,000 are relieved of the obligation to pay the B&O tax.

According to data from the Department of Revenue, raising the current B&O tax threshold to $100,000 would bring tax relief to almost 70,000 businesses. Raising it further to $200,000 would help an additional 38,000 businesses. But every business would benefit because even the businesses that grossed well over the threshold would have a smaller tax liability, because the first $100,000 or $200,000 of their total revenue would be exempt.

Washington Policy Center thinks the state should use a sliding scale aimed specifically to help new businesses. A brand new business could be totally exempt from the B&O tax liability. Gradually, as the new business finds its financial footing, the B&O tax would eventually phase in over time. This is a significant step towards leaving the business better able to adapt to market forces, instead of having to battle further government bureaucracy. Given that one-third of businesses close after only 2 years, new businesses should benefit from tax relief that hinders unprofitable businesses-a position in which new businesses often find themselves.

As a long-term strategy, legislators should begin to question the makeup of the B&O tax system. It is very uncommon in the United States and it can be difficult for businesses to master. There are over 130 special exemptions, deductions and credits, with several added each year (over 30 introduced into legislation so far this Session), which speaks volumes to the notion that it is not an especially popular tax system. It disproportionately harms new and struggling businesses. Very few lawmakers actively support the current system-neither does the public, per Washington Policy Center's Small Business Conferences. Local and municipal governments add local and city B&O taxes to further exacerbate the tax burden, potentially harming economic development.

Unfortunately, because of the state's heavily reliance on the B&O system, there is no easily identifiable substantive solution-which is why we have so many credits, deductions and exemptions. The existing B&O tax structure is a hidden tax that raises the cost of production to businesses-which then raises the cost to the consumer. Our current system also dissuades low profit-margin companies from relocating to Washington and gives profitable businesses a competitive advantage.

Lifting the filing threshold for all businesses and lessening the impact on newer businesses are two ways to help temporarily alleviate pressure on the small business community.

Washington state government coffers currently enjoy a $2 billion budget surplus. Raising the $28,000 Business and Occupation Tax filing threshold would go a long way towards convincing the public that lawmakers are serious about helping the state's entrepreneurs and looking out for the small businesses that make up our economic backbone.

Carl Gipson is a policy analyst and director of the Center for Small Business & Entrepreneurship.