The 2019–21 operating budget passed by the Legislature April 28 reauthorizes the tax structure work group that was created in 2017 and issued a report in December.

Under section 137(2)(c) of the budget bill, the Department of Revenue (DOR) is required to facilitate the work group. The work group is to include two members from each of the two largest caucuses in both the Senate and House and one member representing the governor’s office. The budget bill says that these are nonvoting members, but that seems to be a typo. (This proviso is pulled from HB 2157, which didn’t pass. That bill described these members as “nine voting members.”)

The budget bill adds representatives of DOR, Association of Washington Cities, and Washington State Association of Counties as nonvoting members. The work group must meet at least once by Dec. 1, 2019.

The proviso requires DOR and a technical advisory group to update the data used in the 2002 Washington State Tax Structure Study Committee report and make several estimates related to what revenues would look like now if Washington had implemented the committee’s recommendations.

The 2002 report considered several alternatives and adjustments to Washington’s tax structure at the time. Replacement alternatives were to:

• Replace the B&O with a value added tax (a subtraction method business VAT, a goods and services tax, or a progressive VAT) and
• Impose an income tax (a flat rate personal income tax, a graduated rate personal income tax, flat rate personal and corporate income tax) in order to reduce sales and property taxes.

Additionally, the 2002 report provided incremental alternatives that could be adopted within the contemporaneous tax structure. These incremental alternatives were to:

• Extend the sales tax to consumer services;
• Extend the 0.5 percent excise tax on watercraft to motor homes and travel trailers and increase rate to 1 percent;
• Review tax exemptions every 10 years;
• Avoid dedicated taxes;
• Create a constitutionally mandated rainy day fund;
• Streamline the sales tax;
• Simplify local B&O taxes;
• Increase the small business B&O tax credit from $35 to $70 a month, index to inflation;
• Exempt construction labor from sales tax; and
• Continue to impose an estate tax.

In addition to updating the data in the 2002 report, the 2019–21 budget proviso requires DOR and the technical advisory group to:

• Estimate how much revenue would have been generated in 2017–19 if all the revenue replacement alternatives from the 2002 report had been implemented;
• Estimate what tax rates would have to be to implement the 2002 replacement alternatives and generate the same amount of revenues as were actually collected in 2017–19;
• Estimate the impact to taxpayers of implementing the 2002 replacement alternatives, including “tax paid as a share of household income for various income levels, and tax paid as a share of total business revenue for various business activities;”
• Estimate how much revenue would have been generated in 2017–19 if the incremental revenue alternatives in 2002 had been implemented;
• Analyze replacing the B&O tax with a revenue-neutral alternative (“such as corporate income tax or margins tax”) and estimate the impact on taxpayers (“such as tax paid as a share of total business revenue for various business activities”);
• Estimate 2017–19 revenue if the 1 percent property tax growth limit had been replaced with a population plus inflation limit back in 2003;
• Estimate 2017–19 revenues and impact on taxpayers (“including tax paid as a share of household income for various income levels, and tax paid as a share of total business revenue for various business activities”) if Washington had the tax structure of Oregon or Idaho;
• Compare effective tax rates of the current tax structure and various alternatives, “as they compare to other states and the federal government, as well as consider implications of recent changes to federal tax law;” and
• Analyze the incidence of the alternatives under consideration to account for tax shifting (like “business taxes passed along to consumers and property taxes passed along to renters”).

The report from DOR and the technical advisory group including their findings must be prepared by Dec. 1, 2020. By May 1, 2021, the work group must hold at least one meeting with stakeholder groups (to include small, start-up, or low-margin businesses and taxpayers with income at or below 100 percent of area median income); review the report; and present the report to legislative committees. After the 2021 legislative session, the work group must hold at least five public meetings around the state and submit a final summary report to the Legislature.

HB 2157 had also described an agenda for the work group in 2022, including finalizing policy recommendations, and the bill stated that the Legislature would consider the proposed recommendations in 2023 or 2024. A final report would have been due from the workgroup by Dec. 31, 2024, so work group members were required to be available through that date. The budget proviso also requires that work group members commit to serve through Dec. 31, 2024, but it does not include a description of activities for 2020 on.