Washblog

The B&O as structured now has various rates for various businesses and exempts some others (like retail of motor fuel).  There are B&Os in more than 30 Washington cities that are similar, but different, making the whole B&O panoply difficult for business to comply with.  The tax is levied on gross sales, which does not take into account the cost of doing business, particularly paying for inputs.  A business buying $50 worth of stock to sell $60 retail pays the same tax as a business buying $10 worth of stock and selling for $60, even though the profit is $10 for the first and $50 for the second.

The variable rates are a way of roughly accounting for these different costs of doing business.

What could work

If businesses were allowed to deduct inputs purchased inputs, the resulting quantity would be "value added."  Value added is a good measure of ability to pay.  It would be comparable across businesses, from retail to services and manufacturing, so only one rate would be needed.

Value added is a broad base, so the rate can be very low.  Compliance would be easy, since the accounts in question are those every business has at its fingertips.  Such a state tax could provide the mechanism upon which the cities could ride, much as they do with the current local option sales tax.

Why it could work politically

The B&O favors large businesses.  Since it is levied on sales, it is levied at each step of the production process.  A company that sells a candle that is transported by an independent trucker from an independent warehouser/distributor who got it from the candle-maker who bought her wax from another supply chain gets nicked for the B&O at each step, say here five or six or more.  WalMart which ships its product from its own warehouse in its own truck pays the tax only once, on the final sale.  So there is a ready-made set of small businesses who would benefit from a more equitable tax.

Plus, the current downturn should make the current B&O, because it is not based on ability to pay, deservedly unpopular.

If the deduction were restricted to other tax-paying entities, then the value added produced outside the state could be hit at the same rate as that inside.  As above, inside Washington the B&O is paid at every step.  All activity outside gets a free ride until it is imported.  The same activity across the Columbia that is sold into Vancouver, for example, gets a lighter B&O than that produced in Everett.

But we are getting long here.  It's an idea that works economically, and ought to work politically in the sense it is good for a lot of people.  A broad-based, low rate, based on essentially income.  A sturdy tax that could generate new income from the big boys who are able (and deserve) to pay.

There are other aspects I'll put up in a future diary entry.  

But another reason it could work:  It is not an income tax and doesn't have to lift the laod of past income tax failures.