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.

What's New

IRS: "Let's tax employees for their employer-provided cell phones"

June 12, 2009 in Blog

Once again the Internal Revenue Service is highlighting just how out of touch it can be when it comes to the convergence of technology and tax policy. Today's front page of the Wall Street Journal (subscription required, but you can see the synopsis for free) reports that the IRS is considering tightening regulations that consider employer-provided cell phones as a benefit to employees -- therefore making it a taxable benefit.

Ditching Federal Estate Tax Could Result in 33,000+ Jobs in Washington State

June 9, 2009 in Blog

The American
Family Business Foundation
released a new study that outlines just how many
jobs the nation could gain by eliminating the federal estate tax. Washington state would stand to gain approximately 33,000 jobs.

The report, written by Douglas Holtz-Eakin and Cameron
Smith, finds that small business payrolls would increase by about 2.6 percent,
if the federal estate tax – a tax levied on wealth accumulation at death – is allowed
to expire permanently. The 2.6 percent increase in payroll would result in 1.5
million jobs nationwide and 33,600 jobs in Washington state. This would improve
our state’s unemployment rate by a full 1% (9.1% to 8.1%).

Getting rid of the estate tax in Washington state, which
hits estates greater than $2 million with rates from 10-19%, is not politically
feasible right now. The state still faces a multi-billion-budget shortfall and
the failure of Initiative 920 in 2006 will probably convince policymakers that
Washingtonians want the tax to stick around.

But even if there is no political will to extinguish the
state's estate tax, there is polling evidence that shows taxpayers want to see the federal version go away.

The Tax Foundation, in its “20009 Survey of U.S. Attitudes
on Taxes, Government Spending and Wealth Distribution,"
finds that the estate
tax is considered the least fair federal tax. It received a worse rating than
the federal gas tax, federal income taxes, Social Security tax and others.

Their survey goes on to state that two-thirds (67 percent)
of U.S. adults say they favor complete elimination of the federal estate tax,
while only 17 percent oppose repeal and 16 percent are unsure. Interestingly,
and probably naturally, about three-quarters of those in the 45-54 and 55 years
and older subsets want an outright repeal.

Americans are an optimistic bunch. No matter our current
station in life, I think many of us expect to finish up our professional
careers as very successful people. Therefore, we all expect to save and invest
wisely enough so that we can retire in relative comfort (see Dream, American).
Americans want to see the estate tax disappear because we all expect to have to
pay it one day – or rather, we expect our children to receive less from us and
the fruits of our labor because Uncle Sam had to get his cut of assets on which
we previously paid taxes.

See the press release on the report.

33,000 New Jobs Could be Added at No Cost to Taxpayers

in Press releases

Seattle - Washington state could add some 33,000 new jobs at no cost to taxpayers if the federal estate tax were repealed, according to WPC analysis of a new study from the American Family Business Foundation.

Wrapping up the 2009 Legislative Session - Small Business Style

May 21, 2009 in Blog

When the Governor signed the budget bills yesterday, she wrapped up the work of the '09 Legislative Session. How did the business community fair? Not bad, considering all the proposals that were in the works.

At the onset of the session I, among many others, were fairly certain that we would see the Legislature push through pretty large tax increases to help shore up the $9 billion budget shortfall. Things came very close there towards the end with the proposed sales tax increase dying in the last stages of the session, and the high-income tax also falling by the wayside. However, there are about $300 million in new "fees" that the business community and citizens will have to fork over during the next biennium (see more on the fees).

For small businesses, there were some baby steps toward improving the!
business climate. SB 5042 will provide a waiver of penalties for small businesses that incur paperwork violations for the first time. Again, baby steps but a step in the right direction. I was encouraged, however, that so many of WPC-type regulatory reform ideas were introduced as legislation (e.g. executive sign-off on agency rulemaking, increasing legislative oversight of rulemaking activities, sunset provisions, and more). As Session progressed and economic stimulus became one of the top issues, WPC asked instead for a "de-regulatory stimulus package." Let's make Washington's morose regulatory climate a little easier for businesses to understand and therefor encourage more entrepreneurs to make that leap into small businesshood.

During the interim the Center for Small Business will continue!
to ascertain what the new rules and regulations mean for small businesses. We are also working on finalizing plans for the 2009 Statewide Small Business Conference, to be held in the Fall. This Conference will also address what happened this year and look ahead to the 2010 Legislative Session and let small business owners contribute their own thoughts and recommendations to the policy process. After all, if, as a small business owner, you are not involved in the policy process, you'll likely be unhappy with the results.

Is the economic downturn leveling off?

May 19, 2009 in Blog

Today's Unemployment Level report from the Employment Security Department (ESD) may give some hope to economists whose job it is to prognosticate on the health and well being of Washington's economy. The unemployment rate in April remained essentially unchanged with March's rate (both at 9.1%).

This is good news in that for the first time in almost 15 months the unemployment level did not get worse (it did not technically get better, but a tie is a win in this situation).  Consider that a year ago the unemployment rate in the state was 4.9%, so we are still almost double where we were not too long ago. Obviously, not everything is smiles and champagne. And there are still many serious concerns with the lack of credit for businesses, as well as no s!
ign in the construction industry
that things are turning around soon.

However, even the state's chief economist, Dr. Arun Raha, seems cautiously optimistic. Listen to his remarks yesterday on KUOW.

Payday lending bill would reduce access to credit

May 15, 2009 in Blog

The governor is thinking about vetoing a bill that would limit access to credit by placing new regulations on payday lenders. Political activists attack the 2,600 people working in the state’s 571 payday lending stores by calling them “loan sharks,” and say that a short-term loan works out to 2,700% when calculated on a yearly basis. First, they are manipulating their example to make the percentage rate look abnormally high. The fee for a $100 payday loan is $15. The average loan term is 20 days, which is 274% when calculated on an annual basis.

Second, they forget that if you are late by one day in paying your property taxes, the state will charge you 1,825% Annual Percentage Rate (APR) on a $100 tax bill. Here are some other common examples.

Overdraft fee: 912%. For a bounced check of $100 a typical bank will charge an overdraft fee of $35. Although the account holder might pay the original check amount plus the overdraft fee within a few days, the APR for this “loan” is 912%.

Credit card late fee: 652%. For a past-due amount of $100 a credit card company may charge a $25 late fee. If the cardholder pays the amount owed plus the late fee within two weeks, the APR charged by the credit card company is 652%.

Electricity bill fee: 560%. If Seattle City Light charges $30 plus its reconnect fee of $16 for a $100 electricity bill that is 30 days overdue the APR is 560%.

Late rent fee: 365%. Landlords typically add a 5% fee if rent is paid more than five days late. On an overdue rent payment of $100 this works out to an APR of 365%.

The political activists are playing a game by treating three-week loans as if they lasted a year.  Try it yourself.  The mathematical formula is: Loan fee divided by loan amount divided by loan term (in days) times 365 times 100.

If you lend a friend a dollar and the next day he pays you back $1.05, you just charged him 1,825% interest on an annual basis.

The math works the other way too. The borrower of a $100,000, 30-year mortgage at 5% will pay back $193,255 over the life of the loan – or 93% more than the amount he borrowed. A payday borrower will only pay back 15% of the original loan. So who got the better deal? The answer is both. Lenders provide different credit products for different purposes, depending on what the borrower needs. A payday loan makes sense if the borrower needs money for 20 days to pay a property tax bill that carries a stiff late penalty.

Across Washington, payday lenders employ 2,600 people, have a yearly payroll of $60 million, provide health coverage to 3,500 people, create $1.4 billion in easy-access credit, pay $5 million a year in taxes to the state, and are tightly regulated by the Department of Financial Institutions.

People working in payday lending stores don’t fit most people’s idea of “loan sharks.”

With the economy the way it is this is not the time for the governor to: 1) make it harder for people to get access to credit; 2) add new burdens to a business that is actually employing people; 3) reduce tax revenues by stifling a legal, profitable business sector – hey, these days the state treasury needs every dollar it can get.

Texas House passes bill to help small businesses

May 6, 2009 in Blog

There aren't too many states with a gross receipts tax system like Washington's Business and Occupation tax (B&O). But Texas has what is called a "margins tax" that functions somewhat similarly. The Texas margins tax is not an exact apples-to-apples comparison with the B&O tax but it levies a tax on gross receipts that is based upon taxing the value added -- so in reality it is much more like a Value Added Tax (VAT). Unlike Washington, Texas companies can deduct the cost of goods purchased, as well as the cost of employee payroll and benefits. 

Similarly to Washington, there is an exemption level. Businesses in Texas with less than $300,000 in total revenue are exempt from paying the margins tax. In Washington state the exemption level is just $28,000.

Yesterday the Texas House of Representatives unanimously passed a !
temporary exemption that, if the Senate concurs, will raise the $300,000 exemption to $1 million during the 2010-2011 biennium. Businesses with under $1 million in total revenue won't have to pay the 1% margins tax (0.5% for retailers/wholesalers). This tax cut would cost the state of Texas $172 million during the next biennium but would not bind future legislatures since the provision sunsets. The tax break is estimated to save 39,000 small businesses on average over $4,300 each.

WPC has long advocated for raising the B&O exemption, particularly for new businesses (read our B&O recommendations). Responsible tax policy means a low tax rate spread across a large tax base, so I'm inclined to perhaps change the Texas proposal towards new businesses. Why? How do we extend the tax base? By encouraging investment and lowering the cost bar!
riers to enter the market. Let's make our state a great st!
ate for new and small businesses by keeping the tax/regulatory cost down for the first few years. It might be a small step but it would be the correct one.

Business tax rankings: WA does really well in areas it doesn't tax (yet)

April 16, 2009 in Blog

As some policymakers continue to push for "revenue enhancements" to shore up the state's $9 billion budget deficit, some are oft to quote studies showing Washington's pro-business climate in order to justify said "revenue enhancements (tax increases)". 

Get ready for another round of citations because this week the Small Business & Entrepreneurship Council released its "Business Tax Index 2009: Best to Worst State Tax Systems for Entrepreneurship and Small Business."

Their study ranks Washingt!
on as the 4th best place for small businesses viz a viz tax systems. This is a one place improvement over 2008. 

While I do think the world of the SBE Council, for years we have had issues with the way they weight their index. I've blogged on their methodology before but here's a quick summary:

Washington ranks very well in the rankings where there essentially is no data. We rank 1st in personal and corporate income taxes becau!
se we do not have them
. We rank 1st in capital gains tax rates because we do not have them. We are in the middle of the pack for property tax rates. We are second-to-last in state, local sales, gross receipts, and excise taxes. We are 44th in adjusted unemployment taxes. Second-to-last in gas taxes. 

Basically, we are overweighted towards a high ranking because Washington is unable to be ranked in so many of the criteria. And when we can contribute data to the study, we rank pretty low.

So as poli!
cymakers pitch a sales tax increase and while pointing to this study as reason why businesses should be able to "handle it", they are forgetting that we are already ranked second-to-last in the sales and gross receipts tax column. Maybe they are trying to shoot the moon. I think this is one reason why the business community, and a lot of other folks, are nervous about letting the state establish new avenue of taxation. Washington ranks very well in the SBE Council study in the areas where we don't tax, but pretty awful in the areas we do tax.
Perhaps its just a matter of trust

But this same group apparently doesn't think so great of us when it comes to health care for small businesses. It ranked Washington second-to-last on its "Health Care Policy Cost Index." 

Federal effective tax rates average 20% for small businesses

April 15, 2009 in Blog

A new report out from the Small Business Administration reveals the effective tax rates for small businesses when it comes to federal income taxes. Average rates range from 13.3% for small sole proprietorships to 27% for small S corporations. And remember, the effective tax rate is the actual amount of taxes paid by a firm as a percent of its net income. This is important because these rates reflect the statutory benefits aimed at lowering a business' tax liability. In essence, the 13-27% is lower than what the rate would otherwise be without legislative deductions, exemptions, credits, et al.

And keep in mind that the SBA defines a small business as a firm with less than 500 employees. In my mind, a firm with 499 employees is a pretty large enterprise. I do appreciate that the state government defines a small business as one with 20 or fewer wo!
rkers and earn less than $3 million or less in annual gross income. 

As the economic downturn interminably lags on, the importance of supporting small businesses is more important than ever. Looking at data from the last recession in the early 2000s (granted a different type of slowdown, but a strong one nonetheless), sole proprietorships and LLCs see strong growth during the downturn. Even going back to the early 1990s recession -- and before LLCs were available in Washington -- sole proprietorships skyrocketed while corporation registrations floundered. This also happened during the recession of the early 80s.

When unemployment takes off during a recession, budding entrepreneurs who have been laid off are almost forced to finally start that small business they have been thinking about for so long. In fact, according to the t="_blank">census bureau, during the 2001-2002 period, firms with between 1-4 employees saw a 14% increase in employment while firms with 5 or more employees saw an average employment percentage decrease of 5.3%. As the economy turned around over the next few years, and the unemployment rate improved, some of those small business owners went back into the fold of a large employer and steady paycheck.

Policymakers on both the state and federal side should recognize that right now there are a lot of laid off workers who are also budding entrepreneurs looking for their next opportunity. Washington's unemployment rate for March is now a startling 9.2% and is forecasted to get worse over the next year. The Small Business Survival a> report linked to earlier also mentions that, even with Washington's supposedly friendly small business climate, "Washington businesses pay a higher initial share of taxes than individuals compared to other states."

So, as policymakers in Olympia debate what (not if) kind of tax increases should be leveled on businesses, they should remember that any kind of tax increase will come on top of the 13-27% federal income tax.

State unemployment rate now 9.2%

April 14, 2009 in Blog

The state's Employment Security Department released March unemployment rate numbers for Washington this morning. The rate is now 9.2%. This is almost a ten percent rise above February's 8.4%. The federal unemployment rate for the month of March was 8.5%. 

It is important to remember that unemployment rate numbers are a lagging economic indicator -- meaning this is a look backwards to assess the past month in regards to job levels. There are other economic indicators that are more forward looking (ala stock market, construction permit levels, etc.).

Earlier this year, Washington state Economic and Forecast Council director Arun Raha indicated that he expects the unemployment rate to top out around 10% in 2010. This is despite the fact that some areas of the economy see!
m to be bottoming out. Even if the economy "turns around" in 2009 3rd quarter, don't be surprised to see a continuation of jobs lost.

The U.S. economy has lost just over 5.1 million jobs since it's December 2007 peak. Washington's nonfarm payroll has declined by almost 100,000 jobs since March 2008.
According to the ESD release, practically every sector of the economy lost jobs. The construction industry was hit hardest; accounting for half the job losses in the goods-producing industry and March marked the 14th consecutive month with employment declines in this sector. The financial services industry also was hit very hard, losing 9,000 jobs. Professional and business services shed 16,100 jobs. 
But government reflected year-over-year growth of 4,400 job!
s. The federal government expanded by 1,600 jobs, state govern!
ment by 1,100 jobs and local employment by 1,700 jobs. 
Back in March 2008, Washington's unemployment rate was 4.8%. Today's numbers represent a 92% increase.