This Washington

State: Cities' Concerns About Centralized B&O Tax Are Overblown

By Erica C. Barnett January 17, 2012

The state Department of Revenue (DOR) issued a point-by-point response to the story PubliCola broke last week about the potential cost to cities if the state takes over collection of business and occupation taxes. Seattle's budget officials estimate that handing over B&O taxing authority to the state could cost the city as much as $43 million a year.

DOR, which distributed the memo, did not agree with the city's assessment, arguing that businesses overwhelmingly support the proposal; that the proposal simplifies tax administration rather than making it more complicated, as the city's finance director claimed to PubliCola; and that cities won't lose money as businesses "move" revenues outside cities that have B&O taxes (for example, by saying work performed outside Seattle by a Seattle-based firm shouldn't be subject to Seattle's tax) because any potential losses will be offset by new revenues (and if they aren't, cities can just increase their tax rates).

"[Cities like Seattle] appear to be overestimating the negative impacts of the change and ignoring the positive impacts," including the fact that companies that are headquartered outside a city but do business inside the city would have to pay city B&O taxes under the proposal, DOR spokesman Mike Gorylow says---a point that's echoed in the DOR memo, which says cities "will receive more payments from service firms located outside a city that make sales into the city. ... For example, a movie studio that earns revenue on ticket sales in Seattle currently has no city B&O tax liability.  Under the proposal, that studio will owe local taxes."

Additionally, Gorylow disputes Seattle finance director Glen Lee's claim that the city will no longer have the authority to audit businesses to make sure they're complying with Seattle tax laws. Cities will still have the authority to audit businesses, he says---they'll just do so in cooperation with the state, which also has auditing authority. "The city of Seattle could continue to do their own audits as well if they think there are gaps in our audit coverage," Gorylow says. However, Lee told PubliCola last week that the city would lose all of its existing audit enforcement revenues, along with penalties and interest on unpaid taxes, under the proposal.

Finally, the DOR argues that even though cities will lose the ability to charge certain taxes---for example, Seattle would lose its square footage tax---they could just charge a new tax or raise other taxes. Editorializing here, but that argument seems to fly in the face of political reality at a time when raising taxes is political suicide.

City Council members are opposed to the proposal, which council member Richard Conlin called "alleged 'streamlining' and former council budget chair Jean Godden referred to bluntly as a "grab" by the state.
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