June 1, 2013 in City

Shawn Vestal: ‘Tax hike’ hyperbole doesn’t stand up to scrutiny

By The Spokesman-Review
 

Are you on the list?

Talk about a question that cues its own ominous music.

This is a question the House GOP in Olympia is asking people these days, via a massive Twitter dump. The list rounds up the number of firms that would be affected by a proposal to extend a small tax increase for Washington state’s service businesses.

The proposal is in the House budget, and it would raise a half-million in new revenue by extending a tax rate that has been in place for three years – keeping it at 1.8 percent of a business’s gross receipts rather than allowing it to return to 1.5 percent. It is part of a House proposal to raise a pittance against our permanent philosophy of “all cuts, all the time.”

“All cuts, all the time” can only thrive if the effects of large cuts are rhetorically minimized and the effects of small tax increases are rhetorically maximized. The molehills must be shaped into mountains.

And so, the list. Produced by House Republicans using state Department of Revenue data, it adds up the impact of the tax by industry over the 2013-15 biennium. The House GOP claims the increase “could eliminate thousands of jobs.” It refers to the proposal as a “massive tax hike.”

The list tells us that extending the 0.3 percent surtax will cost 144,237 employers nearly $532 million in those two years.

Sounds dire. But numbers are funny things. Sometimes, if you look at them a little harder, your understanding of them changes. That job-killing half a billion, for example, equates to an average of $1,842.96 per employer per year.

That’s not how much taxes would go up. It’s how much they wouldn’t go down.

It’s not nothing. But it couldn’t kill much of a job.

And then there’s this: The smallest businesses on the list – the ones politicians speak of with the most reverence – don’t pay the tax. Around 45 percent of state businesses pay no B&O tax, because their revenues are low enough to qualify for a tax credit, said Mike Gowrylow, spokesman for the Revenue Department.

“It looks like more businesses are affected than actually are,” Gowrylow said.

Still, the list is being touted vigorously by opponents of the House budget, as the special legislative session drags on. Rep. Cary Condotta, a Republican from East Wenatchee, said it’s an effort to illustrate that the tax proposal was sold under false pretenses. Condotta said that Democrats pitched the surtax extension as affecting large, wealthy employers.

“It affects a very broad coalition of small businesses,” he said. “It affects self-employed people. It’s a lot broader than they said it was.”

Perhaps. But it’s nowhere near as deep as Republicans are saying. In 2012, according to Department of Revenue statistics not included on the list, 87 percent of all service B&O taxes were paid by 11 percent of the businesses. The House GOP is focusing a lot on that remaining 13 percent. It argues that janitors will take a big tax hit; it tweets that the list includes the “most vulnerable” because it affects the owners of nursing homes; it raises fears about the impact on barbers and nannies.

The list gives us totals for each of these categories; basic math allows us to examine the supposed massiveness of these hits more closely. The 229 employers who provide child day care services would pay $94,700 over two years in the surtax. That means it cost the average employer in this category – the “nannies” – $206 a year.

But hold on. That is not how much the average nanny’s taxes would go up; it’s how much they wouldn’t go down if the House proposal succeeds. Is that the same thing? That average nanny has been paying $3,721 in total B&O taxes for three years now. Is it a massive tax hike if it doesn’t drop to $3,515?

How about barbers? In the category of personal care services, the average employer has been paying $1,689 in total B&O taxes for each of the past three years. Will there be a jobs bloodbath if it doesn’t drop to $1,407?

If anything, these averages overstate the tax bills of the smallest small businesses. Remember, nearly half of all service businesses are fully exempted from the tax because they earn too little. The largest employers pay the vast majority of these taxes.

But the wolf-crying never ends. One GOP staffer told me this week that the proposal would force his grandfather to hire fewer people in his landscaping business.

The average employer in the “dwelling services” category, which includes landscapers, has been paying $2,500.27 per year in B&O taxes. If those taxes don’t go down by $416.71 this year – if they don’t decline by around 35 bucks a month – a job will be killed.

What kind of job is that again?

Condotta says I’m underestimating the impact taxes have on small-business owners, who have suffered greatly during the recession, as well as the cumulative impact of these taxes. He also points out, correctly, that the surtax was sold as a temporary measure.

The underlying problem is the structure of all taxation in Washington. Everyone knows this – the B&O tax is deeply flawed, just as the sales tax is deeply flawed.

A few years back, Condotta and Jim McIntire, the former Democratic representative and current state treasurer, worked to develop a tax-reform proposal. What they found is everyone can agree on those problems, but all potential solutions lead to a political dead end: the income tax.

“Without some form of a personal flat tax or income tax, it’s very difficult to restructure,” he said. “And voters have turned down the income tax again and again and again and again.”

The income tax is nothing to be scared of, of course. Idaho – the business owner’s pal – has one. But if there’s anything politics teaches us, it’s that even when there’s not much to be scared of, somebody will do their best to scare you anyway.

Shawn Vestal can be reached at (509) 459-5431 or shawnv@ spokesman.com. Follow him on Twitter at @vestal13.


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