Part 2 in a series on revenue options under consideration in the 2013 Legislature
Following Governor Inslee’s lead, last week leaders in the State House of Representatives sensibly proposed to end costly and ineffective tax breaks to generate additional resources for schools and other investments that grow the economy and help middle class families prosper.

Both the Governor and House leaders propose to rein in preferential business and occupation (B&O) tax rates, many of which have remained in place for decades at the expense of investments in education, health care, and safe communities.

There are 31 special B&O tax rates on the books in Washington state that give an advantage to certain businesses, costing hundreds of millions of dollars each year (see graph below). For example, while most wholesale businesses pay the standard B&O rate of 0.484 percent, companies that sell prescription drugs at wholesale pay less than one-third of that.

Governor Inslee wants to generate about $70 million in additional resources for the state by increasing most of these preferential tax rates by 25 percent, except those for aerospace firms and businesses that clean up toxic waste. That means, for example, the tax rate for prescription drug wholesalers mentioned above would increase to 0.1725 percent, still far below the standard wholesaling rate.

House leaders want to take a slightly different approach. Instead of trimming the tax breaks by the same amount, their plan would eliminate the B&O tax breaks that fail to create jobs or that no longer make sense in the modern economy. Here’s what they propose and the amount of revenue that would be generated in the 2013-15 budget cycle:

• Travel agents and tour operators ($15 million): The standard B&O tax rate for service businesses is 1.8 percent, but in 1975, policymakers gave a lower tax rate to travel agents and tour operators of 0.275 percent. Although the preference was intended to make sure travel agents weren’t paying higher taxes than airlines on ticket sales, changes in the travel industry and state and federal policy changes since 1975 have corrected the underlying problem. Because of this, a Citizen Commission that reviews tax breaks recommended that this preference be terminated, as it is no longer needed.
• Insurance agents ($46 million): Real estate agents, stock brokers, and other service providers are subject to a 1.8 percent B&O tax rate, but in 1983, policymakers gave a lower rate to insurance agents and brokers and have further lowered it over the years to just 0.484 percent, less than a third of the standard rate. State auditors recently found that there is no justification for this tax break.
• Prescription drug wholesalers ($29 million): In 1996, to encourage prescription drug wholesalers to build warehouses in Washington state, policymakers gave these businesses a B&O tax rate of 0.138 percent, compared to the 0.484 percent paid by other wholesale producers in the state. However, this preferential rate is poorly targeted since it is available to all prescription drug wholesalers that do business in Washington state, whether they have warehouses located here or not. As a result, this preference is not helping to increase the number of prescription drug warehouses located in Washington state and should be repealed.
• Stevedoring ($28 million): Businesses engaged in stevedoring (loading or unloading cargo from ships) are given a B&O tax rate of just 0.275 percent, which is far below the tax rate of 1.8 percent paid by most other service businesses. State auditors found no evidence that it makes Washington state ports more competitive with those in other states. Furthermore, no competing West Coast ports provide a tax break for stevedoring services. Because of this, the Citizen Commission recently recommended that the state end this tax break.

House leaders should move forward with closing these ineffective tax breaks that are making it hard for our state to invest in the building blocks of Washington state’s economy. These small but sensible changes are the responsible thing to do.

Check out part 1 of this series,  which explains proposals to make two temporary tax increases on service businesses and breweries permanent.

Up next, an overview of sales tax breaks that would eliminated under proposals from the Governor and House leaders. Stay tuned to schmudget.