The 2023 legislative session has begun, and as the newly elected Chair of the House Finance Committee, I am leading the most diverse fiscal committee in the state’s history.
Taxes should be unbiased. Although numbers do not see color, the codification of numbers into revenue policy has historically been unfair to marginalized communities. As chair, I will bring a unique and needed historical understanding of intent versus impact as we move towards a more fair and just tax code.
Together, the committee members and I are bringing new perspectives, experiences, and voices to the table, which will be vital as we create a tax structure that works for all taxpayers, by being equitable, adequate, stable, and transparent. Below is an update on the work happening this session as we continue to move toward that goal.
The Working Families Tax Credit
Last week, applications opened for the Working Families Tax Credit (WFTC), a policy we passed in 2021. The purpose of the WFTC is to stimulate the local economy, promote racial equity, and support the financial stability and well-being of Washington residents and their families. This new annual tax refund for Washington residents is worth up to $1,200, depending on your income level and how many children you have in your household. More than 500,000 Washington families will qualify!
You can apply for the Working Families tax Credit online, by mail, or e-file. See if you’re eligible here: WorkingFamiliesCredit.wa.gov.
The Department of Revenue (DOR) is already promoting the new program, especially to communities that experience barriers to accessing critical information and services due to language, disability status, poverty, homelessness, and other factors.
To find more information and multilingual promotional materials, and to help spread the word among your networks, check DOR’s website: WorkingFamililesCredit.wa.gov.
Modifying and expanding the WFTC in 2023
Rep. My-Linh Thai, who championed the Working Families Tax Credit (WFTC) in 2021 has proposed two bills this session, House Bill 1477 and House Bill 1075, which will modify and expand the program so that more individuals in need can qualify for the tax refund.
HB 1477 updates the WFTC to ensure individuals filing as “married filing separately” can qualify, as well as allow people to apply for any WFTC payments for which they were eligible but did not claim for up to three years. HB 1075 expands eligibility for the WFTC to every Washingtonian age 18 or older who qualifies, regardless of if they have a qualifying dependent child. Both bills were heard in committee last week and are scheduled for a vote out of committee today, Thursday, February 9.
Tax Structure Reforms Under Consideration
Wealth Tax
Another proposal sponsored by Rep. Thai is the Washington State Wealth Tax, which she introduced as part of a coordinated campaign with seven other states: California, Connecticut, Illinois, Hawaii, Maryland, Minnesota, and New York.
House Bill 1473 creates a narrowly tailored property tax on extreme wealth derived from the ownership of stocks, bonds, and other financial assets, with the proceeds dedicated to education, housing, disability services, and tax credits for working families. The first $250 million of assessed value is exempted, meaning only the wealthiest people in Washington would pay the tax.
The wealth tax operates similarly to Washington’s well-established property tax on homes and real estate. By extending the property tax to include stocks, bonds, and other financial assets, the Washington State Wealth Tax ensures that extremely wealthy Washingtonians – some of the richest people in the world – are taxed on their assets just like middle-class families are already taxed on theirs.
The revenue generated is dedicated to four funds — the Education Legacy Trust Fund, which is a dedicated funding source for early learning, K-12, and higher education; the Housing Trust Fund, which pays for the construction of affordable housing; and two new funds created in the bill: a disabilities care trust account that will pay for services for Washingtonians with disabilities, and a taxpayer justice account that is intended to offer credits against taxes paid disproportionately by low-income and middle-income families.
Margins Tax
In 2021, the Tax Structure Work Group (TSWG) gathered feedback from taxpayers and in 2022, they studied and refined tax proposals. This year, Rep. Amy Walen introduced House Bill 1644, a bill to reform Washington state’s business tax system as recommended by the TSWG by replacing the current business and occupation (B&O) tax with a margin tax, modeled after Texas’ franchise tax.
The proposed margin tax would replace the current B&O tax, which is calculated using businesses’ gross receipts. Previous economic studies found that the B&O tax can disadvantage small, start-up, and low-margin companies like restaurants and grocery stores. To address these disadvantages and other issues with the B&O tax, the TSWG recommended that the Legislature consider replacing the B&O tax with a modified gross receipts tax called a “margin tax.” In the margin tax, a business starts with its gross receipts and then subtracts the greatest of four possible deductions:
- Cost of goods sold,
- Compensation paid,
- A fixed percentage of gross receipts (30%), or
- A flat amount ($1 million).
The remaining “margin” is then taxed at a single rate for all taxpayers. As specified in SB 5693, proposals from the Tax Structure Work Group must be revenue neutral. The margin tax rate to achieve revenue neutrality is 3.1966%.
During public outreach for the work group, some business owners provided feedback that a replacement for the B&O should be fairer than the current system, but also keep simplicity in mind. Recognizing that changing a system that has been in place for nearly 90 years might be complex, the margin tax proposal also provides an “EZ rate” option for businesses with gross revenue of $5 million or less annually to essentially stick with the B&O model. An eligible business can elect to pay the margin tax on its gross revenue, with no standard deductions allowed, at a lower “EZ rate” of 1.75%.
The proposal would eliminate the B&O starting January 1, 2027, and the margin tax would begin for gross revenue earned in 2027.
Businesses who are interested in the impact of replacing the B&O tax with a margin tax on their own tax payments can use the Tax Structure Work Group’s tax calculator to compare their current B&O tax to what they would pay under a potential margin tax. The tax calculator is for discussion purposes only and inputted information is not shared or stored. More detail on the margin tax proposal is available on the Tax Structure Work Group’s website.
The bipartisan Senate companion bill (SB 5482) had a hearing in the Senate Business, Financial Services, Gaming & Trade Committee at the end of last month, when the House version was introduced.
Property Tax Rebate and Renter’s Credit
As a percentage of household income, low-income families pay nearly six times more in taxes that our state’s highest income households. That’s because our state’s tax structure relies heavily on sales, property, and other excise taxes, while assets like wealth are exempt. Just as we need to fix our upside-down tax code by taxing wealth and replacing the inequitable B&O tax, we need to reduce the disproportionate share of taxes lower-income Washingtonians are paying to fund our schools and communities. That’s why I introduced House Bill 1556, which creates a primary residence property tax exemption and renter’s credit.
Under the bill, beginning in 2027, a homeowner can claim a refund of state property taxes paid the previous year, up to $250,000 of assessed value on their home. At the same time, qualifying renters will be able to claim a refund of 2% of gross rent paid in the prior year on their principal place of residence.
The Senate companion bill (SB 5495) had a hearing last month in the Senate Ways & Means Committee.
I hope you found this quick update informative and useful.
I’ll continue to update you on our progress in the House Finance Committee as the 2023 legislative session continues, so look out for more Finance newsletters coming soon!
Sincerely,
Rep. April Berg