Washington Business Winter 2019 | Washington Business | Page 47

business backgrounder | taxation
“It’s great to be able to say right now that we’re
one in seven states that doesn’t have a personal
income tax or that we don’t have a capital gains
tax. This is great marketing for us.”
— Allison Clark, managing director, Business Development,
Washington state Department of Commerce
overall, a middling tax burden
Typically, tax burdens are measured in two dimensions: taxes
per capita and taxes as a share of personal income. Washington
ranks near the middle on both metrics, 17th on taxes per capita
and 28th on taxes as a percentage of personal income (2015
data, the most recent available). Relatively prosperous states
like Washington often rank higher on the per capita measure
than taxes as a share of the economy. The bigger the economy,
the narrower the slice required to fund a given level of public
services. In that way, economic vitality enables lower tax rates.
Washington has enjoyed extraordinary economic vitality,
outperforming the national economy since the end of the
Great Recession.
“Washington state’s tax system has contributed to the
state’s run of economic growth,” says AWB government affairs
director for tax and fiscal policy Clay Hill.
Hill cites as strengths Washington’s modest tax burden, ease
of administration and compliance, property tax limits, and a
stable revenue structure that allows for sustainable budgeting.
Business taxes in Washington are relatively high, he
acknowledges. Whether measured as business taxes per
employee, business share of all state and local taxes, or
business taxes as a share of private-sector gross domestic
product, Washington ranks in the top 10. Nonetheless, most
entrepreneurs and corporations have adapted, as evidenced
by the strong economy.
incentives and exemptions
Hill also debunks the charge that the state’s tax structure
is riddled with loopholes for business. He points out that
many of the tax preferences identified by the Department of
Revenue are for nonprofit organizations, government, or part
of the process of defining the tax base.
Further, many of the business tax adjustments offset the
pyramiding problems inherent in the Business and Occupation
(B&O) tax (taxing transactions multiple times through the
production cycle).
“All of the so-called ‘tax preferences’ were established in
a democratic process after extended legislative and public
debate,” Hill says. And the state has established audit and
reporting requirements for regular reviews.
The Washington Research Council concluded, “The vast
majority of … tax preferences simply serve to level the playing
field for the state’s businesses and to improve tax policy…
Tax adjustments are a valuable policy tool that allows state
government to reduce inequities in the tax system and create
incentives, both of which make Washington more competitive
in the world and among the 50 states.”
We know tax policy affects corporate decision-making.
Allison Clark, managing director, business development at the
Washington State Department of Commerce, discussed the
issue at the 2018 AWB Policy Summit.
“It’s great to be able to say right now that we’re one in seven
states that doesn’t have a personal income tax or that we don’t
have a capital gains tax,” Clark said. “This is great marketing
for us.”
but is it ‘fair’?
What about the recurring charge that the system is too
regressive, falling more heavily on lower-income taxpayers
than on the wealthy?
Context is important. Tax policy is best understood by
taking all taxes into account: local, state and federal. States
with income taxes tend to have more progressive state-and-
local tax structures (i.e. higher income taxpayers pay a relatively
higher share of their income in taxes) than states without, says
Washington Research Council economist Kriss Sjoblom.
However, Sjoblom points out that “All state and local tax
structures are regressive, even states like California and New
York. It’s just that states with progressive personal income
taxes are generally less regressive than others.”
Sjoblom and other economists cite a principle of fiscal
federalism that holds that redistributive tax policy is best
handled at the federal level. Doing so reduces the interstate tax
winter 2019 47