A draft bill is being circulated that would replace Washington’s business and occupation (B&O) tax with a margin tax. Like the B&O tax, a margin tax is a type of gross receipts tax. Unlike the B&O tax, the draft margin tax would allow the taxpayer to deduct the greater of (a) 30% of the taxpayer’s total revenue, (b) a $1 million standard deduction, (c) the cost of goods sold, or (d) compensation.

Gross receipts taxes fail several key principles of good tax systems, such as economic neutrality and transparency. Consequently, Washington and Texas (which currently has a margin tax that is the model for the Washington proposal) are ranked by the Tax Foundation as having, respectively, the fourth- and fifth-worst corporate taxes in the country.

In moving from the B&O tax to a margin tax, the state would be making only a marginal improvement in business tax policy. It would not make Washington’s tax structure significantly more competitive, and it would create winners and losers in the business community.

If the personal income tax survives the ballot and the state Supreme Court, a corporate income tax could be an alternative option to the margin tax. Although that would also create winners and losers, it seems premature to change the business tax structure without considering it fully.

Read the report here.