In its impact statement for Initiative 1098, the Office of Financial Management estimates that the initiative’s expansion of the small business credit would eliminate the business and occupation tax obligation for 118,000 Washington businesses. What fraction of Washington businesses would this represent?

There is a lot of confusion as to the answer to this question. See, for example, this Seattle Times article.

The issue is the number of businesses in the state–the denominator to the fraction. The logical starting point is number of “active” business tax accounts with the state’s Department of Revenue (DOR). At the beginning of September 1, DOR had 801,260 active accounts. Of these, 331,333 have been granted active non-reporting status by DOR, because their B&O obligations are fully offset by the existing small business B&O credit and their business activities do not require the collection of retail sales tax. The remaining 469,927 businesses are required to file tax returns with DOR.

Estimates for 2012

The OFM estimates that in 2012 there will be 478,000 businesses obliged to file tax returns with DOR, that 342,000 of these businesses will file returns. and that 317,000 of the filers will show positive B&O taxable income. The 25,000 businesses that file tax returns without positive B&O taxable income are exempt from the B&O for various reasons, but have other tax obligations to the state. OFM estimates 136,000 businesses will fail to file a required return. As OFM does not provide an estimate of the number of businesses with active non-filing status in 2012, we will assume that there are 331,000 of them, the current number.

Adding up the numbers gives an estimate of 809,000 businesses with active DOR accounts in 2012. Of these businesses, 342,000 (42%) are expected to file tax returns. Some of the non-filers will be businesses that are not economically active, even though their accounts DOR accounts are administratively active. Others, however, do not file because they owe no B&O due to the existing small business credit.

OFM estimates that the existing small business B&O credit would fully offset the B&O 136,000 of the 317,000 businesses reporting positive B&O taxable income in 2012, so that under current law only 181,000 businesses would actually pay B&O to the state. This represents 22 % DOR’s active businesses.

I-1098’s expanded credit would relieve another 118,000 businesses from the payment of B&O. This represents 15 % of the 809,000 accounts classified as active by DOR, and 35% of the 342,000 businesses expected to file returns in 2012.

Because DOR’s list of active list includes some businesses that are not economically active, the 15% figure understates the fraction of businesses that would be relieved of B&O obligation. Because a significant number of economically active state businesses are granted non-reporting status, the 35% figure overstates the fraction. The correct answer lies somewhere in between.