A stand-alone corporate income tax would need to be set at a rate of 15.8% to replace the B&O tax

By: Emily Makings
1:48 pm
December 9, 2020

The Tax Structure Work Group (TSWG) met on Friday to review tax modeling work that has been done in preparation for a preliminary report that will be released later this month. The presentation is available here.

A 2019 budget proviso required the Department of Revenue (DOR) to include in the report various specified tax alternatives. These include estimating how much revenue the state would have had in 2017–19 if the recommendations of the Gates Committee in 2002 had been implemented, and what tax rates would be necessary to implement revenue alternatives so that they are revenue neutral. The report must also consider household and business tax burdens.

(After the 2021 legislative session, the TSWG must hold at least five public meetings around the state to present the findings of the report.)

Business and occupation (B&O) tax collections totaled $8.59 billion in 2017–19. DOR estimates that in order to collect the same amount if the B&O tax is replaced with a corporate income tax, the corporate income tax rate would have to be 15.8%. (Note that only C-corporations would be subject to the corporate income tax, not S-corporations, partnerships, sole proprietors, or non-profits. Also, the analysis is not dynamic, so it doesn’t consider whether companies would restructure in response to such a high rate.)

The revenue neutral tax rate would be 2.36% if the B&O tax were replaced by a value added tax or 2.70% if the B&O tax were replaced by a margins tax.

If a personal income tax were implemented in addition to a corporate income tax, DOR estimates that a tax rate of 4.75% (for both personal and corporate income) would collect $24.82 billion in revenues, which would allow the state to eliminate the B&O tax and the state property tax and reduce the state sales tax rate to 3.5%.

Finally, DOR estimates that Washington’s 2017–19 revenues would have been $1.761 billion higher if we had Oregon’s tax structure and $11.588 billion higher if we had Idaho’s tax structure.

Of course, any changes to the tax structure would have distributional impacts. DOR provides some analysis of that in the presentation. For reference, in 2018, we wrote about Washington’s tax structure and tax burdens.

Categories: Tax Policy.