Below are details of the $757 million revenue package that passed out of the State legislature on Monday evening. While tax increases enacted this year and in 2009 represent barely eight percent of total actions taken to balance the state budget over the course of the current 2009-11 biennium, the additional revenues have averted a number of damaging cuts in essential public services like health care and education.
Business Tax Actions ($513 million)
- A temporary, 0.3 percentage point B&O tax surcharge for service-industry businesses ($242 million): The B&O tax rate applied to realtors and many other types of service-oriented businesses will be increased from 1.5 percent to 1.8 percent for three years, expiring at the end of fiscal year 2013. Hospitals and certain research firms will be exempt from the increase. For small businesses impacted by this action, a B&O tax credit will be permanently doubled, rising from $35 to $70 per month.
- Addressing 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. To recoup this lost revenue, this exemption will be eliminated and retroactively clarified.
- Adopting economic nexus ($85 million): Currently, numerous out-of-state businesses avoided paying B&O taxes in Washington State. The adoption of economic nexus means that certain out-of-state firms with more than $250,000 in in-state sales will be liable for B&O taxes on the portion of their business conducted in Washington.
- Reducing tax avoidance, eliminating wasteful exemptions, other actions ($31 million): Legislators passed a number of smaller business tax actions. These actions include:
- Giving the Department of Revenue greater authority to crack down on businesses that engage in abusive tax avoidance transactions ($8.5 million).
- Limiting a B&O tax exemption claimed by property management companies for payment of wages and benefits to on-site personnel ($6.9 million).
- Addressing the “Agrilink” decision ($4.1 million): A recent State Supreme Court ruling expanded a preferential a B&O rate that was originally intended only for perishable meat packers and fruit and vegetable processors.
- Addressing the “Homestreet” decision ($3.6 million): A recent ruling from the State Supreme Court expanded a B&O deduction for interest earned on first home mortgages loans. The Court expanded the deduction to include certain fees retained by banks after selling the loans on a secondary market.
- Eliminating a B&O exemption on fees paid to members of corporate boards of directors ($2.1 million).
- Limiting a B&O tax deduction for sales taxes remitted on debts that are deductable as worthless under the federal income tax ($1.7 million).
- Suspending a sales tax exemption for equipment used for handling livestock nutrients at dairies ($1.3 million). This suspension will expire at the end of fiscal year 2013.
- Clarifying the PUD Privilege Tax ($1.2 million): Public utility districts (PUDs) pay the PUD Privilege tax in place of the property tax. The tax is levied on income received from the sale of electricity. A recent court ruling found that PUDs that separate electricity (kilowatt per hour) charges from other charges are entitled to refunds for taxes paid on income derived from these other charges. The legislature clarified the law so that the PUD privilege tax applies to income from all charges for electricity.
- Collecting delinquent business tax debts ($1.1 million): For companies that have been terminated or have become insolvent, the Department of Revenue now has the authority to hold former executives or chief financial officers liable for uncollected taxes.
Sales Tax Actions ($64 million)
- Temporarily extending the sales tax to include purchases of bottled water ($33 million): Purchases of bottled water will be subject to the state sales tax until the end of fiscal year 2013. Washingtonians who do not have ready access to potable water will be eligible for rebates on sales taxes associated with purchases of bottled water. Patients who have been prescribed bottled water for medical purposes are also eligible for sales tax rebates. (A separate bill heading to the ballot would permanently extend the bottled water tax to pay for energy efficiency projects at public schools.)
- Removing the sales tax exemption on candy and gum ($31 million): Washington-based candy manufacturers will be eligible for a $1,000 per employee jobs credit to offset added costs associated with the expansion.
Excise Tax Actions ($194 million)
- Increasing taxes on tobacco products ($101 million): The cigarette tax will be increased by $1.00 from $2.025 to $3.025 per pack. The tax on other tobacco products will be increased from 75 percent to 95 percent of the sale price; for large cigars the tax is capped at $0.65 per cigar. Moist snuff will be taxed at the larger of 95 percent of the sale price or $2.526 per 1.2 ounces.
- Increasing the beer excise tax by $0.50 per gallon ($59 million per year): For large beer manufacturers – those that sell more than 60,000 barrels of beer in Washington State each year – beer excise tax will rise 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 will be exempt from the increase.
- Imposing a new temporary tax on soda pop of $0.02 per 12 ounces ($34 million per year): This two-cent per can tax on soda will be effective until June 30, 2013. For every bottler, the first $10 million in soda sales in Washington State will be exempt from the tax.
Tax Cuts ($-12.3 million)
In addition to measures that will increase general fund revenues, the legislature enacted a number of measures that will reduce revenues by some $12.3 million in the current biennium. The largest of these measures – extending a sales tax deferral program for certain manufacturers located in rural counties with high unemployment rates – will reduce revenues by $7.8 million through the end of fiscal year 2009-11 biennium.
The legislature also provided $1.2 million in funding to continue setting up the Working Families Tax Rebate (WFTR) program. Enacted in 2008, the WFTR is a tax rebate program for working families with children based on the federal Earned Income Tax Credit. This funding will allow the Department of Revenue to continue setting the infrastructure necessary to administer the rebate in future years. For more information on the WFTR, click here.
* Previous estimates of the size of the revenue package did not reflect the tax breaks. They also included $15 million in state lottery receipt dedication and $10 million from the Convention and Trade Center Account.