A proposal by Gov. Chris Gregoire to "streamline" the collection of business and occupation taxes by centralizing B&O tax collections at the state level could cost Seattle between $23 million and $43 million, city staffers told the city council this morning.

The briefing, part of the Office of Intergovernmental Relations' weekly legislative update, prompted a barrage of sarcastic remarks from council members, including Richard Conlin, who suggested that "'alleged streamlining' or 'consolidation and centralization under a state bureaucracy'" might be more accurate terms than "streamlining" to describe the governor's proposal.

At a press conference last week, Gregoire said her proposal was intended to "make it easier and cheaper" for small businesses to operate. Currently, she said, paying local B&O taxes is "at least, complicated, and at worst, a nightmare."[pullquote]Cities' will lose ability to audit companies within their boundaries to make sure they're complying with city tax requirements.—City Finance Director Glen Lee on Gregoire B&O proposal. [/pullquote]

However, city staffers and officials say it would do little, if anything, to save small businesses time or money, and would cost the city millions in lost revenues from audit fees, penalties from businesses that have failed to pay their taxes, and a 1 percent administration fee that would go directly to the state.

Specifically, city finance director Glen Lee says, the proposal "makes the B&O tax overall more complicated" because businesses in every city will now have to adopt a new, centralized structure for determining how much tax they owe. "It's making the process much more complicated, because firms are going to have to go through a fairly significant shift over the next few years."

Additionally, because businesses will have more freedom to decide what portion of their income is technically earned within a city, revenues to cities will almost certainly go down---as companies, in effect, "move" revenues from cities that charge B&O taxes to other areas that don't. "In our best estimate, we'd lose anywhere from $6 to $18 million" from revenues that move outside Seattle, Lee says, "especially those that have a large staff presence but the actual sale of the final product is outside the jurisdiction."

Enforcement, Lee adds, would also take place at the state level, eliminating cities' ability to audit companies within their boundaries to make sure they're complying with city tax requirements. In effect, companies that pay city taxes would no longer answer to the city, and enforcement would be centralized in an office in Olympia---a formula Lee says is certain to result in more tax evasion. (Sales taxes are collected at the state level, but evasion is harder because sales tax is determined at the point of sale, rather than after the fact). All audit enforcement revenues, along with penalties and interest on unpaid taxes, would shift from cities to the state, a hit to Seattle of as much as $6 million a year.

Gregoire's proposal would also eliminate a number of business taxes that provide revenue to the city, including a tax on the amount of square footage a business uses. And it would require cities to pay 1 percent of all B&O tax collections to administer the program, a cost of about $1.5 million a year.

Council member Sally Clark, who was just sworn in as council president this afternoon, met with Gregoire last week to express her concerns about the proposal. "I told the governor that we had a lot of concerns about what this means to local jurisdictions," Clark says. "We think that we end up losing a lot of money and it's not to the benefit of local businesses." Clark says she's hopeful that cities can work with legislators to craft a bill that doesn't result in such a big financial hit to cities.

Although dozens of cities collect B&O taxes, statewide, five cities---Seattle, Bellingham, Bellevue, Everett, and Tacoma---account for about 90 percent of all local B&O tax collections in the state.

Gregoire's spokeswoman, Karina Shagren, has not yet returned a call seeking comment on the governor's proposal.