Main Street in the crosshairs of House Bill 2156
State Director Patrick Connor reports from Olympia on the small-business agenda for the legislative week ending April 19
Week 14 ended on a troubling note for small business as the House Finance Committee approved its package of tax bills with only modest changes. Moreover, the Senate advanced some of its tax bills to next week’s floor calendar. This included:
- HB 2156, capital gains and graduated real estate excise tax (REET)
- HB 2157, changing nonresident sales and use tax exemption to remittance
- HB 2158, B&O tax increase on certain services
- SB 5997, changing nonresident sales and use tax exemption to remittance
- SB 5998, graduated real estate excise tax
HB 2156 proponents claim the new capital gains tax would apply to windfall profits from the sale of stocks and bonds. That is only partly true. The bill fully exempts all capital gains realized by corporations. However, the bill was amended Friday to expand the applicability of the proposed tax on small businesses, despite NFIB’s objections previously raised in testimony. This is patently unfair and undermines sponsors’ assurances that the target of the bill is a few thousand wealthy investors.
Furthermore, HB 2156 would subject small businesses to double taxation on real estate sales while corporations may see a tax DECREASE for the same transactions. Selling land that has appreciated by $100,000 or more would trigger the proposed capital gains tax for sole proprietors, partnerships, LLCs, and other pass-through entities – which is how 75% of small businesses are organized. This would be assessed in addition to the real estate excise tax. (Granted, the House would reduce the REET for land valued at less than $500,000 and increase it for sales valued at $1.5 million or more.) Thus, a small business and a large corporation could each buy a plot of land for $100,000 and later sell it for $250,000. The small business would pay BOTH the capital gains and REET, while the corporation would only pay the REET … at a lower rate than is in effect today.
Similarly, a small business realizing a $100,000 capital gain on the sale of intellectual property would pay the new tax. A corporation would not. It is easy to imagine this having a chilling effect on startup tech firms and inventors.
Make no mistake, small business is in the crosshairs of HB 2156 as currently drafted.
Sales Taxes
HB 2157 and SB 5997 would harm border-county retailers who will certainly see reduced sales to residents of Oregon, Alaska, Montana, and Canadian provinces who often cross the border into our state for business, family, recreational, or other purposes. Few nonresidents would be likely to save their receipts all year, make sure the sales tax paid is more than $25, and then apply for a rebate of the state’s portion of those sales taxes (there would be no refund of the local sales tax). It would be far easier for them to simply stop shopping in Washington. NFIB continues to oppose this portion of the bill.
B&O Taxes
HB 2158 targets selected service firms for B&O tax increases in order to boost higher education spending. Basically, Microsoft asked for this tax hike to subsidize its workforce training needs. Were the bill limited to those parts placing a special B&O tax on tech giants with global sales of $25 billion or more, NFIB would have no reason to object. However, the bill would:
- Increase the cost of health care and medications, when health insurance and medical costs are already unaffordable.
- Increase the cost of housing when homelessness is rampant, and the Legislature is looking to raise public spending on myriad housing assistance programs.
- Increase operating costs to small businesses by taxing business-to-business services, like payroll, accounting, tax preparation, legal services, advertising, design, and so on, while larger businesses would avoid the tax by handling those activities in-house.
HB 2157 and 2158 are scheduled for public hearing and executive action Monday in the House Appropriations Committee. HB 2156 has not yet been scheduled for consideration by that panel.
Bills Missing Crossover Deadline
On a more positive note, this week did see the demise of a few more bills NFIB opposes, thanks to Wednesday’s deadline for legislation to be approved by the opposite chamber (House bills had to pass the Senate and vice versa). This cut-off does not apply to bills deemed “necessary to implement the budget” (NTIB), so some that appear to be dead today may be resurrected before the end of the session.
Bad-for-small-business bills that did not survive the chopping block this week included:
- SB 5077, Limiting the availability of plastic straws
- SB 5323, Statewide plastic bag ban and authorization for fees on paper bags
- SB 5740, Automatic payroll deduction for state-administered worker retirement savings accounts
- SB 5822, Taskforce on establishing a universal health care system
State Budget Lockboxes
New legislation, largely dealing with budget-related topics, was also introduced this week. Of note, NFIB testified Thursday in support of two proposed state constitutional amendments both dealing with programs funded by payroll taxes. The pair were introduced by NFIB member and Senate Ways & Means Committee ranking member Sen. John Braun. Two NFIB member senators joined him among the resolutions’ co-sponsors, Sens. Mark Mullet and Guy Palumbo.
- SJR 8211 would establish lockboxes for the Paid Family and Medical Leave program, and the proposed Long-Term Services & Supports Trust program. The latter, HB 1087, won Senate approval this week. As we’ve previously reported, that bill would establish a new payroll tax on workers to fund a benefit program that could be used for a variety of home-care, medical assistance, and other support services, primarily for the elderly. SJR 8211 would require funds for these programs be placed in special, dedicated accounts protected from legislative raids to fund other state activities. Based on a briefing from the state Employment Security Department, NFIB also voiced support for clarification in the resolution to ensure funds held in a federal trust fund would not be re-routed to a state account, thereby causing a conflict with federal law for unemployment tax collections. In response, the committee delayed a vote on the bill, allowing time for amendments to be drafted.
- SJR 8212 would allow those restricted funds to be invested in order to help mitigate against future payroll tax increases to maintain program solvency. The State Investment Board has an excellent record of responsibly investing state funds and realizing significant returns on those investments. The bill was approved by the committee and has already been added to the Senate floor calendar for action next week.
In our testimony, NFIB pointed out that the need for these constitutional amendments is easily demonstrated by a comparison of the state’s workers’ compensation and unemployment systems. Under past administrations, workers’ comp tax rates (premiums) have been set based on political calculations, rather than actuarially sound solvency requirements. Moreover, roughly $100 million per year is diverted from workers’ comp “trust” accounts to other activities with a tangential, and sometimes tenuous, nexus to providing benefits to injured workers. For instance, workers’ comp dollars are used to fund the state apprenticeship council, farmworker housing inspections, L&I’s wage and hour enforcement efforts, among a myriad of other diversions. Consequently, significant rate fluctuations have occurred in the past, and could well happen again under a different administration. In contrast, unemployment insurance tax collections are deposited in a federal trust fund, which the Legislature cannot access without significant penalties to employers and the state. As a result, the state’s unemployment insurance surplus actually grew (and is now more than $4 billion), while some 35 or so states saw their unemployment systems effectively go bankrupt, requiring federal bailout loans, in the wake of the Great Recession.
Sadly, we do not believe workers’ compensation “trust” funds would be protected by SJR 8211 since those premiums are based on hours worked, not wages paid. The proposed constitutional amendment as currently drafted would only apply to programs funded by taxes on wages.
Due to the Easter holiday, no floor action in either chamber is scheduled for the weekend.
The Week Ahead
Next week, both chambers will be on the floor for more concurrence and conference committee votes, which began Thursday. This is where amendments made in one chamber have changed a bill from the way it passed in the other. The originating body is then able to concur with the amendments made in the other chamber or refuse to concur and ask that other chamber to recede from (remove) its amendments. Conference committees can also be appointed to revise bills that passed both chambers in different forms. The revised bill reported by a conference committee must then be approved, without further changes, by both bodies.
Next week should also see the release of a compromise budget and tax package if a special session is to be avoided.
Previous Reports From the State Capitol
