UPDATE April 10,2010: 43% of Revenue Agreement is Temporary
UPDATE: On Saturday night, a sizable portion of the proposed $794 million revenue package was passed in the State House of Representatives. The approved bill -- a new version of SB 6143 -- includes many of the revenue enhancements discussed below and would raise about $668 million in the coming fiscal year. Details of the agreement can be found here.
The Senate will likely pass the measure on Sunday. If enacted, the new revenue package will prevent severe cuts in basic state services like health care and education. It is important to remember that these services and others already weathered some $3.6 billion in budget cuts last year.
In the next few days, both bodies are expected to approve additional measures such as increasing the cigarette tax by $1.00 per pack, which will generate the remainder of the $794 million package that is currently under consideration.
News outlets including the Seattle Times and the Everett Herald are reporting on a new $801 million package of revenue proposals that would prevent even deeper cuts in public services than those already under consideration.
It’s important to note (as shown the graph below) that a large share of the package -- $342 million (43 percent) would only be temporary -- allowing the state to maintain priorities like education, public safety, and health care while the economy recovers. The temporary measures would expire at the end of fiscal year 2013. Temporarily raising revenue is a reasonable approach given the depths of the recession and the $3.6 billion cut in last year’s budget.
Temporary tax actions in the latest revenue proposal include:
- A B&O tax surcharge for service-industry businesses ($246 million per year): This action would increase the B&O tax rate from 1.5 percent to 1.8 percent for most businesses in the service industry and would expire on June 30, 2013.
- Increasing the beer excise tax by $0.50 per gallon ($58 million per year): For large beer manufacturers – those that sell more than 60,000 barrels of beer in Washington State each year – this action would increase the overall beer excise tax rate from $0.26 per gallon to $0.76 per gallon, expiring on June 30, 2013. Small microbreweries that sell fewer than 60,000 barrels each year would be exempt from the increase.
- Imposing a new tax on soda pop of $0.02 per 12 ounces ($38 million per year): This two-cent per can tax on soda would expire on June 30, 2013. An exemption is provided for small bottlers with sales of less than $10 million each year.
Permanent measures
The latest proposal also contains a number of permanent revenue enhancements. These permanent measures include -- eliminating wasteful business tax preferences; expanding the sales tax base to include currently untaxed bottled water, candy and gum; increasing taxes on cigarettes and other tobacco products; and other actions.
If approved, these actions would help mitigate the recession’s impact on the current state budget while making Washington’s overall revenue structure more adequate and equitable in the long run. Major business tax and sales tax actions included in the proposal are described below.
Business tax reforms:
- Fixing the “Dot Foods” decision ($155 million): A recent State Supreme Court ruling greatly expanded a B&O exemption that was originally intended to apply only to businesses like Avon and Mary Kay that sell products solely through door-to-door sales persons. This action would eliminate and retroactively clarify this exemption.
- Adopting economic nexus ($82 million): Under current law, numerous out-of-state businesses avoid paying B&O taxes in Washington State. Under this proposal, out-of-state firms with more than $250,000 in in-state sales would be liable to pay B&O taxes on the portion of their business conducted in Washington.
- Reducing tax avoidance and eliminating wasteful exemptions ($31 million): The current proposal would give the Department of Revenue greater authority to crack down on businesses that engage in abusive tax avoidance transactions. It would also close a number of smaller business tax loopholes, exemptions, and other tax preferences.
Sales tax expansions:
- Extending the tax to include purchases of bottled water ($35 million).
- Removing the exemption on candy and gum ($29 million): In additional to extending the sales tax to include purchases of candy and gum, the current proposal would also provide a $1,000 per employee jobs credit to offset costs for local candy manufacturers.
