Someone — I think it was Emerson — said that money often costs too much. It’s an observation that many state legislators understand all too well.
Want to increase funding for education? Provide a property tax break for veterans and seniors? Maybe ensure the revenue for essential services for working families? Or give people selling modest and middle-class homes a tax break? Well, that money has a cost. And it’s generally to taxpayers.
To fund what it deemed essential services and programs, the Washington state legislature enacted a combination of tax increases and decreases. Taken together, they increase revenue by approximately $2 billion over four years. At the same time, the legislature failed to pass a capital gains tax.
Whether the cost is too much probably depends on where you stand.
Graduated Real Estate Excise Tax (Senate Bill 5998)
When you sell real estate, as the seller you’re subject to a real estate excise tax, or REET. You’re also subject to the tax if you transfer a controlling interest of 50 percent or more during a 12-month period.
The state REET rate has been a flat 1.28% based on the selling price of the real estate. However, beginning January 1, 2020 that flat rate changes to a graduated rate. As a result, the tax will decrease for some, increase for others, and for many it will stay the same.
In addition, cities and counties can impose their own REET to fund such things as capital improvements, conservation areas and affordable housing.
Other provisions may eliminate certain previously available REET minimization strategies.
Business and Occupation Tax on Specified Financial Institutions (Substitute House Bill 2167)
The business and occupation (B&O) tax is the principal tax that Washington imposes on businesses for business activities conducted in the state. It is a gross receipts tax— calculated without allowing any deductions and without regard to a business’ profit or loss.
Beginning January 1, 2020, specified financial institutions are subject to an additional 1.2 percent B&O tax.
The legislation defines a specified financial institution as a financial institution that is member of a consolidated financial institution group that reported an annual net income of at least $1 billion dollars on its consolidated financial statement for the previous calendar year.
The term also includes those institutions that are no longer required to file consolidated financial statements, but were subject to the tax in two of the last four years.
Taxes on International Investment Management Services (Senate Bill 6016)
Originally intended to reduce a perceived competitive disadvantage, Washington enacted a preferential B&O tax rate in 1995 for those people and firms providing international investment management services. This preferential rate was 0.275 percent, as opposed to the general services rate of 1.5 percent.
At the time, the preference was intended to apply only to a limited number of taxpayers. However, in the intervening years, other tax changes meant that more businesses than originally intended have claimed the preferential rate. As a result of this legislation, those eligible for the tax preference are now limited.
In general, the preferential rate applies only to those providing international investment management services and that have more than 25 percent of their employees in the state. They must also be a member of an affiliate group that has worldwide gross revenue of more than $400 million dollars and meets other criteria regarding their offices, employees and worldwide assets.
Property Tax Exemptions (Senate Bill 5160)
To provide relief for certain low-income seniors, veterans and people with disabilities, Washington’s partial state property-tax exemption is expanded. To be eligible, the property and the person claiming the exemption must meet a number of requirements.
In general, the property must have been the person’s principal place of residence for at least nine months during the calendar year. The person must be retired as a result of a disability, at least 61 years old, or a veteran receiving a certain level of disability compensation.
Beginning in 2020, the person claiming relief is also subject to income thresholds which reflect differences in the cost of living in counties throughout the state. Prior to calendar year 2020, those thresholds are established state-wide.
Workforce Education Investment Funded by B&O Surcharge on Certain Service Businesses (House Bill 2158)
Advanced computing businesses and selected service businesses become subject to a B&O surcharge that increases their B&O tax rates as of January 1, 2020.
According to the legislature, it is essential that Washington residents have the opportunity to succeed in a competitive global economy by investing in Washington students for Washington jobs. Therefore, the surcharge will be used to fund a new workforce education investment account, supported by professions that depend on higher education, that will expand existing investments to help people earn the credentials essential to obtain family-wage jobs.
For selected service businesses the surcharge is 20 percent of the B&O tax on general service revenues. Such businesses include banks, attorneys, CPAs and physicians, to name a few.
The surcharge for advanced computing businesses with affiliated group revenue between $25 and $100 billion is 33.33 percent. Businesses with affiliated group revenue over $100 billion are subject to a 66.66 percent surcharge. That pretty much limits the highest surcharge to Microsoft and Amazon.
Microsoft has been a strong proponent of this surcharge. In a statement to GeekWire, Microsoft’s government affairs director for Washington explained the company’s reasoning: Education beyond high school has long been an onramp to success in Washington state and our nation, and a priority for Microsoft. We’re proud to have supported HB 2158 because it will help recession-proof higher education in our state and expand access, especially for those from low and middle income families, to the broad range of postsecondary education opportunities that kids in our state will need to succeed in the future.
Importantly, the surcharge has an annual cap of $7 million per affiliated group and a floor of $4 million. In other words, large affiliated groups pay no more than $7 million a year and small ones with surcharges of less than $4 million actually pay nothing.
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