Business Climate

WPC's Center for Small Business focuses on improving Washington's small business climate by working closely with business owners and policymakers. The Center provides accurate information and analysis on the state's regulatory climate, tax structure, health insurance systems, and more.

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House Tax Package Targets Businesses, Non-profits, Venture Cap Investments

March 5, 2010 in Blog

Earlier this week the House released its smorgasbord of tax increases to help fill the $2.8 billion budget deficit. Largely lost among the 150+ pages of HB 3191 are sections 2101 and 2102, which would cap the investment income B&O deduction for non-financial institutions at $250,000 and tax any returns above that at 1.5% (the highest B&O rate).

As of now there is no cap on how much a non-financial business may deduct. According to the Department of Revenue (page 113), this deduction is "provided for interest, dividends and capital gain income earned by persons who are not engaged in banking, loan, security or other financial business." Basically, unless your business makes more than 50% of its revenue through loan income, you qual!
ify for this deduction. 

DOR also says that "The B&O tax is intended to apply for the privilege of engaging in business. This deduction reflects the perspective that investment income by nonfinancial firms is not considered as engaging in business."

Finally, DOR says that revenue could be increased through repealing this deduction but "compliance might be problematic." The Department does not elaborate on what kind of problems could be expected. 

Much of the concern revolves around "what qualifies as investment income?" For a business, non-profit, or other corporate entity, it is wise (and usually required) to have liquid assets invested in some form of interest-bearing vehicle; aka savings account. This may sound simplistic but just as most households hopefully have money stashed away for emergencies or a rainy day, businesses and non-profits similarly hold onto a reserve account as a similar precaution. This !
money is often set aside into various accounts that pay intere!

Chances are, unless you have a large business or non-profit organization, your reserves are not earning more than $250,000 in interest. Using some simple math and assuming a 4% rate of return (remember when financial analysts used to use 8%?) a business would have to have about $6.25 million in reserves to hit the $250,000 level. 

Now, you might say, "hey, $6.25 million is a lot of money," and to an individual citizen it may be. But many businesses have far far more than that on hand. Heck, over in Redmond, Microsoft has over $30 billion cash and cash equivalents on hand. They are not a business that makes money off of loans and investment income, but they probably pull in a tidy sum just from their reserves. Still in question is whether universities, most of which have substantial endowments, would continue to be exempt as well. As an aside, the a href="" target="_blank">University of Washington's Consolidated Endowment Fund is a little under $2 billion. And don't forget about the mother of all non-profits, the Gates Foundation, with cash and other investments totalling over $30 billion.

Also still questionable is how Venture Capital would be affected. Washington VC firms invested over half a billion from Q3 2008 to Q2 2009. That's 7th most in the nation, but 4th most per capita. High levels of VC funding is one of the reasons why Seattle continues to attract high-tech firm startups. How would these investments in future companies be affected by this tax increase? We don't yet know that either.

House Democrats expect to raise $58 million from this proposal during the remainder of the current b!
iennium (until June 30, 2011) and $126 million during the 2011-13 bienn!
ium. The plan is to link the money raised from capping the deduction to various education expenditures such as smaller class sizes and levy equalization. 

The reality is that any tax increase, whether through repealing "loopholes" or raising rates, will have a detriment effect on somebody. This is why WPC has been advocating for reining in government spending for years, so that policymakers wouldn't have to choose winners and losers in the tax policy game. 

Tempered reaction to latest unemployment numbers

March 3, 2010 in Blog

A majority of yesterday's headlines proclaimed that the state had seen its first "positive job growth numbers in a year." While technically true, the increase is small relative to the overral jobs picture, down 170,000+ since the turmoil began, and the unemployment rate actually continued to climb. 

To be sure, even a faint improvement month-over-month is good news when compared to the drastic decline in private sector jobs. But we are still nowhere near out of the woods, at least jobs-wise. As we've stated before, you will see productivity and output grow before j!
obs largely recover their previous levels (which is still years away).

Over at Crosscut, Stephen H. Dunphy writes that 

Another measure shows the true problem with the economy these days: the unemployment rate that counts unemployed people as well as those working part-time for economic reasons and those who have quit looking for work because they are discouraged. That number stood at 16.2 percent statewide, the same as the national average. In Oregon, that rate is 20.7 percent; in California, 21.1 percent.

He also points out that Washington will benefit from exporting to!
surging Asian economies. That will help some of our states la!
rger businesses (Microsoft, Boeing, et. al.) as they export both manufactured goods and software overseas.

But before we begin popping champagne corks, Dunphy points out, correctly I might add, that

"An estimated 359,500 people (not seasonally adjusted) in Washington were unemployed and looking for work in January, Employment Security said. More than 305,000 people received unemployment benefits in the state in January.

A final caution from Employment Security: Remember, one month is !
not a trend, so don’t get too excited about fluctuations in the numbers from month to month."

Also, Nikki Reading over at TVW a> links to an interesting Wall Street Journal article showing average unemployment rates by state with a year-over-year comparison. Interesting to see how all the states were affected. 

Sightline's critique of new taxes gets numbers wrong

March 3, 2010 in Blog

Eric de Place over at The Sightline Institute took exception to our recent Legislative Memo, “Tripling Hazardous Substance Tax Would Boost Gas Prices.”  In particular de Place claims we were “obviously” wrong in our analysis in two specific areas; claiming that the proposed tax would increase gas prices four to six cents per gallon and in our data regarding the total amount of pollutants entering the Puget Sound through stormwater.

But a closer look shows that the criticism is a bit reckless.

Sightline claims we are wrong to say that the proposed tax “would increase gas prices by four to six cents per gallon.”  De Place writes:

“…it’s obviously false to anyone who bothers to perform some simple arithmetic. All you need to do is multiply the tax increase (1.3%) by the wholesale price of gasoline (about $2.30).... the correct answer is that the impact would be less than 3 cents per gallon." 

There are several problems with Sightline’s over-simplification of the math.  First, he conveniently ignores the recent trends in wholesale gas prices.  According to the U.S. Energy Information Administration(EIA), the average wholesale price for gasoline in 2008 was $2.69/gal on the West Coast for all gas products.  During 2008 the wholesale price topped out at $3.63, which would equate to a 4.7 cent tax increase at the pump under the current proposal. He conveniently picks the low point of recent gas prices for his estimate.

Second, while it may be true that 2008 numbers represent the current high-water mark in wholesale gas prices, it cannot be ignored that oil industry is a volatile market and most predict prices will increase in the near future. Many agree with this assessment, including, ironically, de Place.

One year ago he argued that the EIA has historically underestimated the price of gas.  In his blog post, entitled, “Future Gas Prices,” de Place bemoans the low EIA estimates of gas prices.  In late 2008 the EIA predicted that prices would top out just over a $3/gal, well under the $4/gal mark that prices actually reached in 2008.  De Place at the time wrote:

“as anyone not living under a rock is aware, the average retail price of gasoline is currently above $4 per gallon….the EIA also publishes a "high price" forecast, just in case something untoward should happen. Boy, I sure hope that high price forecast doesn't materialize because it shows future gas prices getting up almost, but not quite, to $4 a gallon by... wait for it... sometime around 2030.”

Finally, de Place points to the state’s Department of Revenue (DOR) as the definitive authority on price increases based on the proposed tax.  He notes:

 “Not surprisingly, that's also what the state's Department of Revenue says: 3 cents, at most.”

However, an email sent by Drew Shirk, DOR’s Legislative and External Affairs Liaison said, “We estimate that every one percentage point increase of the hazardous substance tax rate will likely result in about a 2.5 to 3.5 cent increase in the retail price/gal.”  That means, at least before politics took over DOR’s gas price projections, the tax proposal would raise prices at the pump by as much as 4.6 cents/gal, not the 3 cents they are now predicting.

The second point questioned by Sightline is our analysis of the Department of Ecology’s re-calculation of pollutants entering the Puget Sound through stormwater.  They claim we are guilty of “cherry-picking” our numbers and misrepresenting the actual amount of pollutants that enter the Sound.  Here too, de Place is wrong in his criticism.

Our analysis of Ecology’s re-calculation highlights that an error was found in the first two phases of the Department’s toxic loadings reports.  In our Memo we note that David Dicks, Director of the Puget Sound Partnership, wrote in July of 2009 that:

“Nearly 150,000 pounds of toxic chemicals – including petroleum, lead arsenic and fertilizers – enter the Puget Sound each day.”

In addition, this is the same claim that Director Dicks and others made when the Partnership released their Action Agenda in December of 2008.  At the time, the claim of 150,000 pounds represented the low end of the range based on phase two of the toxic reports.

However, after re-calculating the toxic loading reports, the claims regarding the amount of toxics entering the Puget Sound on an daily basis has been revised down from the 150,000 pounds to 39,000 pounds.  The re-calculation was published in January of 2010.  Our use of 39,000 lbs/day (14.2 million lbs/year) is consistent with what proponents, like Washington Conservation Voters and the House Democratic Caucus, have been using all along.

Sightline is correct that we could have better clarified our use of the table from Ecology’s re-calculation.  In our Memo we wrote, “The table below shows the change in pollutant loading to the Puget Sound after the recalculation.”  What we should have said was the table shows the re-calculation of oil and grease in the Puget Sound.  This was a minor oversight on our part, but one that should have been caught and will be corrected.

That does not change the fundamental reality, however.  Oil and grease represent more than 90 percent of pollutants, so the revision of those numbers is a dramatic and wholesale change of the data. Sightline’s critique is tantamount to saying, “yeah, but what about the other nine percent?”

None of Sightline’s claims attempt to undermine the basic argument we made.  The truth is that hundreds of millions of dollars are spent on stormwater improvements today and the state’s roadmap guiding this work was flawed and has been re-calculated, drastically reducing the amount of toxics entering the Puget Sound.

Policymakers have a choice.  Based on current funding levels and the scientific record, lawmakers should reevaluate their pursuits to increase the tax burden on citizens and business of the state, until we can be certain that the costs are appropriate to the challenge.

As for Sightline’s claims that we are in error in our analysis, we have in the past enjoyed an open dialogue and communication with them.  It is too bad they chose not to use the open dialogue to correct such a minor oversight.  Had they e-mailed their concerns or questions, we could have addressed them. Instead they shot first and missed the mark.  As a result, it looks as if it is Sightline is the one “cherry-picking” numbers and playing politics to avoid the truth.

Feds grant WA $84 million for broadband expansion

March 2, 2010 in Blog

The U.S. Department of Commerce's National Telecommunications and Information Administration announced today a grant of $84 million to the Northwest Open Access Network (NoaNet) "to deliver new and enhanced broadband capabilities to some of the more remote regions of the state by adding 830 miles of figer and eight new microwave sites to their existing high-speed network."

State's unemployment rate now at 9.3%

March 2, 2010 in Blog

The Employment Security Department announced today that Washington's unemployment rate for the month of January now stands at 9.3% percent. 

The state unemployment rate stood at 9.2% (revised) for the month of December 2009, while nationally the rate remained at just under 10%. A year-over-year comparison shows that Washington has shed almost 108,000 jobs since January 2009. However, there was some positive growth for the first time in quite awhile.

Honest dialogue about regulations and the cost of homes

March 2, 2010 in In the News
Covington/Maple Valley Reporter
Covington/Maple Valley Reporter
Tuesday, March 2, 2010

Increase taxes to protect and save jobs. Really?

March 1, 2010 in Blog

The House finally released its revenue package today to the tune of $758 million in new revenue (really more like $858 million when you account for "anticipated budget actions"). 

It shapes up to resemble the Governor's proposal (mostly because it lacks a general sales tax increase) more so than the Senate's version. But I'll leave the budget minutia in the more capable hands of WPC's budget savant Jason Mercier

But how will these tax increases affect the business community? Along with the Washington Research Council, we have et="_blank">issued data that show the negative impact on jobs from increasing either the sales or B&O tax. If policymakers want $1 billion in increased sales tax revenue, they should be prepared for the loss of thousands of jobs over the next couple of years. 

But according to some analysts, the state should increase taxes even more in order to save more jobs. This comes from the Economic Opportunity Institute's Marilyn Watkins who wrote an op-ed in last week's Puget Sound Business Journal saying just that (subscription required for whole article).

She quotes former McCain economic advisor (who also advises President Obama) Mark Zandi's assertion that each $1 of government spending results in a $1.41 increase in economic activi!
ty. It's called the multiplier effect and it's somethi!
ng we've written about before (and here too). 

Watkin's assertion is that, due to the multiplier effect, the state should actually increase state spending. And to do that the state needs to increase its coffers, therefore, we should raise taxes even more than is being proposed.

Interstate purchase of health insurance would cut costs, insure more

February 26, 2010 in Blog

In the wake of yesterday's Health Care Summit, and the lack of progress towards any sort of compromise on the issue (as if we expected something different) comes a reminder that while the big guys duke it out back in D.C., there are still people waiting for reform.

Some of those who would benefit most from meaningful health care reform are the owners and employees of small businesses. The number of small businesses that can afford to provide health insurance to their employees continues to drop and is at a level that is far less than larger businesses. 

Even though the issue is grandiose, there are small steps that policymakers on both sides of the aisle have talked about -- even here in Washington state. One of the steps is to allow for purchase of!
health insurance across state lines
. This would help create more competition and drive prices down. 

Alan Reynolds of the Cato Institute points out that up to 11 million previously-uninsured Americans could gain health insurance through such a move, and without costing taxpayers anything.  

Why isn't this happening already? Because, according to Reynolds,

"Because the main barrier to choice and competition has nothing to do with 'market dominance' or the health insurers' anti-trust exemption that Congress is targeting as this week's scapegoat. Rather, much of the 'national' access-to-insurance problem is that states like New York, New Jersey, Massachusetts and West Virginia impose burdensome mandates and regulations that push premiums sky-high."

HB 3015, sponsor!
erning health savings accounts (another great way to
control medical costs and shift towards consumer-oriented health care) to incorporate the language from 3015. Look for further debate on the issue of both HSAs and interstate purchasing of health insurance. 

Voter-Approved Taxpayer Protection Gone for Now - Economy Shows Signs of Weakness

February 25, 2010 in In the News
Washington Alliance for a Competitive Economy
Washington Alliance for a Competitive Economy
Thursday, February 25, 2010

Small Businesses Now have Two-Day Grace Period on Regulatory Compliance

in Press releases

Olympia – Yesterday Governor Gregoire signed House Bill 2603 into law.  The bi-partisan bill, which passed the legislature unanimously, gives small businesses a grace period of two business days to comply when found in violation of a state regulation.