Article by Erik Smith. Published on Thursday, February 25, 2010 EST.

Tax Plans Give Lawmakers Only a Few Days to Consider Sweeping Changes to Tax Code

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Feb. 25.—Not that anyone in the state’s business lobby wants to see a tax hike in the middle of a recession, but if the state has to raise taxes, they say Democrats are going about it the wrong way.

            Majority Democrats in the state House and Senate right now are considering a complicated package of proposals that would repeal business tax exemptions worth anywhere between $400 and $500 million. Some of the proposals would make radical changes in the state’s tax code, lobbyists complain, and there isn’t time in the two weeks that remain of the 2010 legislative session to fully gauge their impact.

            One provision is of particular concern, they say – a plan by the state to expand tax collections on out-of-state companies doing business in Washington, by redefining the concept of ‘nexus.’ Another would allow the Department of Revenue to decide whether a tax maneuver is a tax dodge, and give it the ability to declare otherwise legal actions to be illegal. And the list goes on.

“It’s bad for business, it will hurt jobs, and it creates a lot of uncertainty,” said Amber Carter, lobbyist for the Association of Washington Business, the umbrella organization representing the state’s chambers of commerce and business groups. “It will create a lot of litigation and a lot of appeals of Department of Revenue decisions.”

That spells trouble in an immediate way, she warned. Just before the session started, state Treasurer James McIntire warned the governor and lawmakers that without a steady and sure source of revenue, a cash-flow crunch would emerge by September, and the state might not have money to pay its bills.

All of which might make a sales-tax increase a better option – if lawmakers really have to raise taxes, that is.

Business Walks Fine Line

It’s not that anyone in the state’s business community wants a tax increase. The state’s business groups have been firmly aligned with the minority Republicans this year in calling for a budget that doesn’t raise taxes. But the state right now faces a $2.8 billion shortfall, and Democrats say there’s no way around a tax hike of some sort. Balancing the budget with spending cuts alone would require deep cuts in social service programs, they say, and elimination of some of the state’s signature programs, like Basic Health.

House and Senate are both calling for nearly $1 billion in new revenue. The Senate is counting on at least $500 million by ending tax exemptions, plus a modest sales-tax increase of three-tenths of a cent. The House hasn’t released its proposal yet, but it’s a safe bet that its so-called “loophole bill” will be a part of that package as well.

The trouble is that the House and Senate proposals hit individual businesses in dozens of ways, some of which are not fully understood at this point, Carter said. And lawmakers might want to rethink the whole thing. AWB isn’t endorsing a tax increase, mind you, she said, but there is some talk in Democratic circles of a one-cent sales tax increase that could raise $1 billion a year and avoid most of the troubles.

“Lawmakers seem bent on raising taxes,” she said. “We’re not in favor of that. We feel the state should live within its means. But if taxes are raised, we feel that they should be broader-based and should not just place the burden on a few industries.”

           Hits Wide Variety of Industries

The two tax-exemption bills – House Bill 3176 and Senate Bill 6373 – are lengthy and detailed. The Senate version is the more all-encompassing, repealing some 26 tax breaks, many of them targeted at specific industries.

            One of the Senate’s proposals already is stirring a storm among the state’s auto dealers, for instance – a repeal of the trade-in tax exemption that has become a cornerstone of the car business since it was imposed by voters with an initiative in 1984. And the car dealers are not the only targets – the plan also hits gold-coin and bullion dealers, interstate trucking companies, aircraft owners, the windpower industry, the state’s lone coal-fired electric plant, public utility districts and others. Each of those is already howling and trying to make the case for special tax treatment.

Other proposals hit business as a whole, and those are just as troubling, Carter said.

‘Nexus’ is a Problem

Take the ‘nexus’ issue: Both bills would allow the Department of Revenue to collect business and occupations taxes from out-of-state companies that do not currently pay, because they do not have a physical presence in the state. Under the plan, the department would be able to collect from businesses that have $50,000 in property in Washington, $50,000 in annual payroll or $500,000 in gross receipts. Net revenue to the state from the change is estimated at $73 million.

Bankers say the plan is a slap at the out-of-state financial institutions on which local community banks depend for credit. At a hearing Wednesday before the Senate Ways and Means Committee, lobbyist Denny Eliason of the Washington Bankers Association said the legislation would have a “boomerang effect.” Said Eliason, “We think it would make credit in this state more expensive and potentially less available, and we think it would hurt consumers, retailers and small businesses.”

Carter said many key questions are not addressed in the bill, like the apportionment of B & O tax revenue to the 37 Washington cities that impose their own gross-receipts taxes. Although about 30 other states have adopted similar rules, she said most of them are states that impose income taxes, unlike Washington, which does not, and that might create inequities in taxation. So interstate businesses based in Washington might face retaliation by other states.

Some groups have already promised litigation, she said, and that means it won’t do a thing to ease the state’s cash-flow problems, she said. AWB is suggesting that the Legislature instead launch a study when the session concludes. “This is a huge departure from our tax code. It is untested, and we believe it to be unconstitutional,” Carter told the Senate committee. “This kind of policy deserves adequate stakeholdering with the affected taxpayer community, because this will be a substantial change that creates winners and losers in our state.”

            Power to Department of Revenue

Another disturbing element, business groups say, is a provision that would allow the Department of Revenue to disregard legal business maneuvers aimed solely at reducing taxes. After July 1, the department would be allowed to review past transactions and decide whether they are appropriate. Business interests argue that the department is an interested party and not the fairest judge.

“It is supposed to raise $11 million, but the heartache it will bring to business will eliminate any advantage,” Carter said.

Another provision would allow the Department of Revenue to go after corporate officers for unpaid taxes if a business fails. That provision is supposed to raise $4.5 million. Said lobbyist Brad Tower, representing the Community Bankers of Washington, “I would be terrified to be the CFO of a community bank where my assets could be tied up should the bank fail.”

            How About That Sales Tax?

Right now the debate in the Legislature seems to be focusing on a choice between two major taxes – a sales tax increase of some sort, or a proposal favored by the state’s environmental community that would permanently triple the state’s hazardous-materials tax and eventually generate money for stormwater-runoff cleanup projects.

The Senate’s current proposal includes the three-tenths-of-a-cent sales tax increase, and it rejects the stormwater plan. But if the Senate were to forego the tax-exemption bill, it would have to find another $500 million somewhere. Senate Majority Leader Lisa Brown said the Senate would likely be reluctant to seek an even greater increase in the sales tax.

“Going higher than that, I don’t think would have the same level of support,” she said in a meeting with reporters Wednesday.

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