Published December 2004

B&O tax: unfair burden
on small business

By Eric Montague
Guest Editorial

With the election season having drawn to a close, many of us are relieved that political attack ads and rancorous debates are a thing of the past. Now it is time to get on with the business of government, both at the state and national level.

Foreign policy, the rising cost of health care and the state of the economy have dominated political discourse at the national level. Here in Washington, candidates for state and local office are largely focused on ways to improve our struggling economy.

No issue is more important to economic growth than a fair and effective tax system. As new legislators head to Olympia and our new governor develops a transition team, tax reform will be a key component of any new legislative strategy. Top on the list of small-business tax concerns is the burdensome and complicated business and occupation, or B&O, tax.

This tax on gross receipts, which is unique to Washington state, affects all but the tiniest businesses. The B&O tax does not distinguish between big businesses and small businesses, new businesses and experienced businesses, profitable businesses and those just struggling to get by. As a result, many start-ups, small businesses operating at a loss and mom-and-pop shops feel it is unreasonable they should have to pay the same tax rate as larger, more established businesses and those operating at a high profit.

These concerns are quite real, but the state is faced with few options. Replacing the B&O tax with a state income tax would require an unacceptable tax rate of 12 to16 percent. Implementing a value-added tax, like that imposed on Canadian and many European companies, would do little to reduce the complexity or financial burden placed on the most vulnerable businesses.

But there is another option — one that would avoid a wholesale change in the state’s tax system while providing relief to the state’s smallest businesses. According to the Washington state Department of Revenue, over 170,000 businesses in the state (or almost 70 percent of all businesses) each generate less than $250,000 in sales revenue each year. Together, they pay just $90 million in B&O tax (less than 5 percent of the more than $2 billion in total B&O tax collected each year). By providing an exemption from B&O tax for only those businesses, state policymakers can significantly reduce the paperwork burden and total tax liability for more than 170,000 businesses in the state, sending a strong signal that Washington is open for business.

Washington has over 250,000 registered businesses. Of those, more than 95 percent are considered small businesses, or businesses with less than 100 employees. The vast majority of those businesses have 20 or fewer employees.

They are auto-body shops, small Internet companies, coffee shops, specialty manufacturing facilities and independent contractors. They are the engine that drives our economic growth. The U.S. Small Business Administration estimates that 70 percent of all new products and up to 80 percent of all new jobs are generated by small businesses.

Providing the smallest of those businesses with an exemption from B&O taxes would spur innovation and job creation throughout the state. Reducing the tax burden for small businesses also opens new opportunities for low-income entrepreneurs and new immigrants just getting started in America. A tax system that encourages new businesses, especially small businesses, will benefit the entire economy — providing new jobs, new products and services, and new contracting options for large businesses and governments.

The B&O tax exemption is just one component of a tax system that is fair and effective. By implementing other important reforms, policymakers can offset the relatively small cost of this modest business tax proposal. Through sensible reforms like competitive contracting, regulatory reform and reducing tax complexity, the cost of government can be reduced and entrepreneurs can continue to lift us up and out of our recent economic downturn.

Eric Montague is the director of small-business policy for the Washington Policy Center, a nonprofit research and education organization. For more information on the center, visit online at www.washingtonpolicy.org or call 888-972-9272.

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