WashACE Blog

Tax Reform Proposal in CA Contains Elements of Idea Floated Here

The California Tax Commission will soon release its suggestion for a massive reshaping of that state's tax structure. This morning's Wall Street Journal has an editorial praising elements of the proposal.

Even more impressive is the recommendation to eliminate the corporate income tax and the 5% of the sales tax that contributes to the general fund. These would be replaced by a broad-based Business Net Receipts Tax of no higher than 4%. This taxes businesses on what they produce, minus their costs of purchases from other firms. This is similar to a value added tax.

One benefit of this new levy is that it creates a level playing field among industries and reduces tax favoritism based on the power of lobbyists in Sacramento.

That sounds somewhat similar to the Net Economic Activity Tax proposed a few years ago by the Prosperity Partnership in Seattle. Here's how the plan is described in a 2008 post in Crosscut.

So what is NEAT? It's a kind of value-added tax imposed at each step of making a product, but it's subtractive, only taxing the value added, not the previous or cumulative value of the product, as a sales tax does. Productive labor is counted, making it a form of flat income tax. Small business is exempt, if less than $50,000, and a worker's first $20,000 is exempt. The tax would replace the hated B&O tax (levied on gross business, so punishing startups that are not yet profitable) and the state portion of the property tax (probably the most hated tax).

(See also this article in the Puget Sound Business Journal by Deirdre Gregg.)

Commentary has more on the California proposal, including a useful link to this AP story on the Tax Commission and its work.

Given the Golden State's notoriously gridlocked politics, it's hard to see a complex, integrated reform package getting through the meat grinder. But the proposal has a lot of sensible elements, including a backing away from the highly progressive (and volatile) personal income tax that has chased investment out of state. 

Thoughts?

Note to Guv: Tax Hikes Will Still Hurt the Economy

Meeting with statehouse reporters, Gov. Gregoire appeared to open the door to tax hikes, softening the no-new-taxes stance she wisely took last year. From Andrew Garber's Seattle Times story:

"I didn't want revenue last year because I couldn't figure out how you could do a revenue package that wouldn't hurt the economy. I'm still stuck in that rut but I've told leadership to come make your case," Gregoire said.

"I've told them come on in and convince me that's the right thing to do and that people will support it. At some point the people, I assume, don't want us to take any more cuts. I'm already hearing about 'why did you cut education?' Well there aren't any options."

Garber points out:

Her tone this morning was different from last week when she addressed business leaders at the Association of Washington Business policy summit. At the time Gregoire wouldn't rule out a tax increase but told the gathering, "Tell me a tax that you're going to increase that will give you $1 billion that doesn't hurt business, hurt individuals, hurt our recovery."

In The News Tribune, Peter Callaghan reports on the governor's thinking.

Unlike last session when Gregoire said she thought any tax hikes would lengthen and worsen the economic recession, the Democratic governor said that might not be the case now. That's because state economist Arun Raha said the state – and nation – are pulling out of the recession.

The folks at the Policy Summit would have been quick to point out to her that a fragile recovery can easily topple under new taxes. And, of course, most businesses in the state are already looking at tax hikes in the form of higher workers' comp premiums. These things add up.

More in this Brad Shannon story in the Olympian.

Governor Makes the Business Case for Boeing

Yesterday Gov. Gregoire released the pitch she is made Friday to Boeing Commercial Airplanes CEO Jim Albaugh to convince the company to build the second 787 production line here rather than Everett.  Aubrey Cohen at SeattlePI.com reports here. This is notable.

"We think Washington provides the highest possible quality, lowest possible risk and a competitive cost structure," Bill McSherry, a special adviser to Gregoire, said in an interview Monday. He said Gregoire was not proposing any new incentives to win the second line, adding that the state has taken many steps to improve the business climate for aerospace since 2003 and would continue to talk with Boeing about the company's legislative priorities.

The Seattle Times has some Republican reaction.

"I am disappointed to learn that the state has not seen fit to offer additional financial incentives," said U.S. Rep. Dave Reichert, R-Auburn, in a statement. "The 787 being built in South Carolina would be a blow. ... We must think creatively and strategically."

And state Senate Minority Leader Mike Hewitt, R-Walla Walla, ridiculed the governor's document for citing selected surveys that rank Washington's business climate ahead of states in the South.

"While this report is beautiful and glossy and filled with rankings, is there really any substance here that Boeing hasn't already considered?" Hewitt said in a statement. "We should be taking action like we did in 2003."

The Times also includes the information on the Deloitte study released last year citing, among other competitiveness factors,  higher labor and workers' comp costs.

Media reaction was surprisingly, well, skeptical.

Joe Turner of The News Tribune writes:

tI's not exactly like closing the barn door after the horse gets out. It's more like publishing a report that says "our barn was the best barn" after the horse gets out (and leases a barn in South Carolina.)

And Brad Shannon at The Olympian writes:

Maybe I'm wrong but it sounds like a take-it-or-leave-it gambit.

See also good reports in the Puget Sound Business Journal, KPLU, and the Everett Herald. This from the Herald story is telling:

... Snohomish County Executive Aaron Reardon worries that state may put a better offer on the table than did Washington.

Like Walla Walla’s Hewitt, Reardon found the governor’s business case lacking. Instead, he would have liked to see it address issues — workers compensation, unemployment insurance and workforce training — that Boeing has raised repeatedly.

While “it appears Washington is losing the competition to South Carolina, some (lawmakers) in Olympia still seem to think that everything is fine,” Reardon said.

Boeing, like all major companies, won't be swayed by the rankings of national magazines, think tanks, or advocacy groups. What matters is the company's assessment of current and prospective business conditions, particularly labor relations, operating costs, and incentives. We'll know soon enough. A recommendation is expected by the end of October and a decision by the end of the year.

AWB Examines Workers' Comp Rate Increase: Finds Flawed System

Two good posts at Olympia Business Watch, one linking to a column by Don Brunell, Association of Washington Business President.  Brunell's column makes this point:

Competition reduces costs and improves quality. But Washington is one of only four states with a state monopoly of workers’ comp insurance. Except for 375 large self-insured businesses, all employers are required to purchase their insurance from the government. About half the remaining states allow private insurers to compete with the government program.

...Washington should join with 90 percent of the nation that allows private-sector competition in order to reduce costs and improve service in our workers’ comp program.

In addition, some common-sense reforms L&I and the Legislature should pursue next session include creating a settlement option for complex or long-term claims as an alternative to pensions. Washington is one of six states that don’t allow final settlement agreements.

Kris Tefft takes a look at what's happening to workers' comp premiums in other states. Most are cutting rates, while ours will be going up. Check out their experiences. We should learn from them.

Opinion | Fix Washington's failing workers' compensation system | Seattle Times Newspaper

Washington state should be lowering the cost of doing business, not raising it, write these Republican members of the state Senate Labor, Commerce and Consumer Protection Committee. They oppose the state Department of Labor and Industries recommendation to increase workers' compensation tax revenues by $117 million in the next year.

via seattletimes.nwsource.com

Good suggestions for real system reform. Notice, in particular, that these recommendation, which mirror much of the business community's priorities, do not focus on cutting benefits. Rather, these are positive proposals to make the system work better for workers and employers.

Tax Foundation Thinks Washington's Tax Structure is Business Friendly

Yesterday, the Tax Foundation released the 2010 Business Tax Climate Index. I'm at the AWB Policy Summit and haven't had a chance to read the whole thing. Here's what we've said about it before. When I get a chance, I'll check to see if they've changed the methodology in response to criticisms.

Here's coverage in the Herald of Everett, the Puget Sound Business Journal, and the Vancouver Columbian. 

Meanwhile, I'm interested in your thoughts. Comment on how "business friendly" you think our tax system is.

More Reactions to Workers' Comp Increase

In my column in the Herald of Everett, I speculate that the proposed 7.6 percent increase in workers' compensation premiums may spur interest in a "private option."

Some groups may also look to inject some choice and competition into our system. Market forces successfully drive innovation in states that have shed the public monopoly.

Read the column for examples. In Olympia Business Watch, Kris Tefft also comments on the proposed rate increase here and here. The new blog, The Hammer, comments here.

Tracy Warner's column in the Wenatchee World sums it up nicely:

...basic economics tells you if you want more of something, jobs in this case, do not tax it. Raise the cost of something and people will buy less, jobs in this case. The state is about to raise the price of employment by $120 million statewide. This is not good.

Right.

Solving the Budget Problem Without Raising Taxes

Saturday, the Wenatchee World ran an editorial that does a nice job of putting our current economic and fiscal condition in perspective. (h/t Jason Mercier) Under the headline "Change in a time of shortages" the editors point out that current projections call for a slow recovery, not a quick rebound, and state and local revenues can be expected to be down for the foreseeable future. And they recognize the opportunity behind the shortfall.

If we have just begun a lengthy span with government revenues less than desired, then government must change. Groups that expect government to sustain them will have to consider how much more money can be extracted from the consumers who daily demonstrate that they don’t have much extra to spend. There will be a limit to how many of society’s shortcomings can be eased by government spending. Entire state programs may be cut, and the cuts may be even more painful and controversial than a year ago, when federal stimulus money helped ease budget pains. And in the cities like Wenatchee, expect less.

All is not sorrow. Taken in the proper perspective, this is a time of opportunity for both government and business. Creativity and a willingness to change, to find new ways of doing things, will go a long way.

The Yakima Herald-Republic makes a similar point.

Most encouraging in the wake of these new revenue forecasts is the nearly unanimous call from lawmakers to reduce spending. No one has yet expressed interest in suggesting a tax increase, nor is there a clamor for a special session.

These are both good signs. This is certainly not the time to entertain any type of tax increase nor is the revenue projection a cause for panic.

In The News Tribune, columnist Peter Callaghan looks at the difference a year makes to lawmakers confronting another round of budget cuts. 

Getting worse more slowly may be the sign of a turnaround, but as Austin Jenkins writes in Crosscut, for the majority party the coming session the next session looks, well, here's his description:

Majority Democrats in the Washington legislature are facing a miserable 60-day, election-year session come January.

I agree with the folks at the World, the fiscal crisis provides abundant opportunities for change. But it won't be easy and it won't be fun for lawmakers eager to avoid conflict.

Reactions to Proposed Workers' Comp Rate Hike

Business groups were swift to respond to yesterday's proposed 7.6 percent increase in workers' comp premiums.  At the Puget Sound Business Journal, Deirdre Gregg writes that she started receiving emails opposing the hike even before she'd heard about it.

Not long after the announcement, AWB issued a press release saying the rate hike underscores the need for systemic reform, also noting the piling on of employer costs.

“In this difficult economic climate, any rate increase is a problem for struggling employers,” said AWB President Don Brunell. “The workers compensation tax or rate is one issue but when the cumulative impact of all costs of taxes, fees and government-mandated programs are added together, it makes it increasingly difficult for employers to keep people on the job and their doors open.”

Specific reforms sought by the state chamber:

Some common-sense reforms L&I and the Legislature should pursue next session include creating a settlement option for complex or long-term claims as an alternative to pensions. Washington is one of six states that doesn’t allow final settlement agreements.

Washington should also bring its coverage of “occupational disease” claims into line with the majority of states by refusing to cover factors that aren’t primarily work related. Presently, Washington has one of the broadest legal standards for occupational disease coverage in the nation.

The state should also join the 42 other states that allow and encourage the use of medical provider networks to treat injured workers according to national best practices and treatment guidelines at costs that can be negotiated and stabilized.

Finally, Washington should, like many states, index its maximum wage benefits to 100% of the state’s average monthly wage, not the current unjustified rate of 120 percent.

More on AWB's Olympia Business Watch blog here and here.

Republicans quickly raised their concerns, including this video from Sen. Janéa Holmquist.

Additional coverage in the Bellingham Herald and Vancouver Columbian, the latter with good business reactions from local employers.

7.6 Percent Workers' Comp Premium Hike Proposed by Labor and Industries

This morning the department of labor industries proposed a 7.6 percent increase in workers' comp premiums for 2010. Here's the press release.

I'll be writing more on this later.