Even though legislative spending choices are the cause of the projected operating budget problem, former Gov. Inslee proposed major new tax increases as part of his 2025–27 operating budget proposal. Similarly, several “revenue options” from the Senate Democratic Caucus (SDC) were made public last month.

These proposals would significantly increase business taxes. Businesses already pay about half of all state and local taxes in Washington. Further, state revenues are already expected to increase by 7.6% in each of the next two biennia.

(This post is about the business and occupation tax proposals; I’ll write about the other tax proposals in separate posts.)

Former Gov. Inslee’s Proposal

Inslee’s B&O tax proposal has been introduced in the Legislature as HB 1320. The bill would make both temporary and permanent B&O tax increases.

First, the B&O tax rate for businesses in the service and other activities category is currently 1.5% for businesses with gross income of less than $1 million and for businesses subject to the workforce education investment account (WEIA) advanced computing surcharge. Other businesses in this category (except international investment management services) are currently subject to a B&O rate of 1.75%.

Under HB 1320, the 1.75% rate would increase to 2.1% (a 20% increase) beginning Oct. 1, 2025. This rate would be in effect through Dec. 31, 2026. Beginning Jan. 1, 2027, the rate for these businesses would be 1.925% (10% above the current 1.75% rate).

Beginning Jan. 1, 2027, HB 1320 would permanently increase all B&O tax rates by 10%. For example, the 1.5% rate on services would increase to 1.65% and the 0.484% rate on manufacturing would increase to 0.5324%.

The bill would not change the WEIA surcharge, the additional tax on financial institutions, or the timber and wood product surcharge.

There is not yet a fiscal note for the bill, but Inslee’s budget proposal assumed that these increases would increase revenue to funds subject to the outlook (NGFO) by $1.045 billion in 2025–27 and by $1.580 billion in 2027–29. Compared to the Nov. 2024 forecast of B&O tax revenues, Inslee’s proposal would increase revenues by 6.9% in 2025–27 and by 9.6% in 2027–29.

Senate Democratic Caucus Revenue Options

The SDC’s revenue options include imposing an additional 1% B&O surcharge on businesses with taxable income over $500 million (excluding financial institutions, which are already subject to a 1.2% additional tax). One version would apply the surcharge only to the portion of income above $500 million. This would increase revenues by an estimated $849 million in 2025–27 and $4.3 billion in 2027–29. Compared to the Nov. 2024 forecast of B&O tax revenues, this proposal would increase revenues by 5.6% in 2025–27 and by 26.2% in 2027–29.

An alternate version would apply the surcharge to all taxable income from these businesses. It would increase revenues by $1.1 billion in 2025–27 and by $5.2 billion in 2027–29. Compared to the Nov. 2024 forecast of B&O tax revenues, this proposal would increase revenues by 7.3% in 2025–27 and by 31.7% in 2027–29.

Another SDC revenue option would be to change the WEIA advanced computing surcharge. Currently, the amount imposed by the surcharge is capped at $9 million a year for members of an affiliated group. The SDC option would remove the cap, which would increase revenues by $231.3 million in 2025–27 and by $404.5 million in 2027–29. An alternative proposal would increase the cap to $15 million, which would increase revenues by $22.4 million in 2025–27 and by $38.9 million in 2027–29.