This November voters will likely have the opportunity to vote for the tenth time on an attempt to create an income tax in Washington. As evident by the lack of an income tax in the state, past attempts have not been successful at the polls (with the exception being in 1932 though the tax was ruled unconstitutional).

What is interesting about the new income tax proposal being discussed is the attempt to sell it as small business relief from the state’s unique and onerous Business and Occupation (B&O) tax. There is, however, a better way.

Last year Governor Gregoire said, “If you want to come forward with an alternative to the B&O tax system in the state of Washington, the welcome mat is out from me.”

The Washington Policy Center decided to take her up on her offer and modeled the impacts of various replacement taxes. Not surprisingly an income tax modeled the worst, causing the most economic distortions. With other options showing approximately the same impact, we turned our attention to reforming the B&O based on sound principles of taxation.

The result is our proposed Single Business Tax or a gross receipts margins tax that would be:

• Revenue neutral.

• Treat all business owners equally by using one flat rate.

• Eliminate loopholes and special treatment.

• Simplify administration of the tax to reduce compliance costs for business.

This proposal would result in radical simplification of current business taxes by eliminating the confusing multiple rates on business activities, and by repealing the special interest tax credits and exemptions for some industries that have built up over the years. The Single Business Tax would be phased in over multiple years to allow employers and public officials time to adjust to the new system.

Here is how it would work:

The business owner would be given a choice of three ways to calculate their taxable margins, and would be allowed to choose the one that results in the lowest tax burden. Calculating the taxable margins could be based on either the business’:

1.     Total gross receipts minus labor costs

2.     Total gross receipts minus all production costs except labor

3.     60% of total gross receipts

Then the business owner would multiply the taxable margin by the Single Business Tax rate for each taxing jurisdiction. The final amount owed for each taxing jurisdiction would be sent to the state in one payment and then distributed by the state to local governments.

Our goal is to offer a B&O reform proposal that is not based on imposing an income tax on businesses or individuals, but to offer a way policymakers can constructively improve the business climate while collecting needed revenue for government. A solid set of tax principles must guide the adoption of any effective tax structure, otherwise our state would again end up with a system riddled with loopholes and special-interest carve-outs.

There is no silver bullet to solving the problems inherent in the gross receipts tax. However, through embracing solid tax principles and meaningful reform – both in the short and long-terms – we can help encourage future economic growth.

Here are additional details on WPC’s B&O reform proposal: Replacing the Business and Occupation Tax with a Single Business Tax

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is a contributing editor of the Heartland Institute’s Budget & Tax News. Mercier also serves on the board of the Washington Coalition for Open Government and was an adviser to the 2002 Washington State Tax Structure Committee.