The Tax Foundation, one of my personal favorite conservative tax research organizations, wrote about a new law passed this year by the Legislature. The bill attempts to level the playing field between in-state and out-of-state companies by taxing them the same for business they do inside Washington.
The Tax Foundation objects. They’re wrong.
After decades of resisting, in 1977 the U.S. Supreme Court gave in and allowed states to impose taxes on interstate commerce. Since before the Constitution, this had been out of bounds due to the risk that states would shift tax burdens out-of-state and harm the national economy. Consequently, the Supreme Court warned that state taxes on interstate activity must be fairly apportioned, cannot discriminate on out-of-state taxpayers, must be related to provided services, and have nexus.
TVW, the “C-SPAN” of Washington State so to speak, recently interviewed Janetta Taylor of the Department of Revenue, where she boasts about how effective recent tax changes will be at shifting tax burdens to out-of-staters, for the benefit of in-state residents. These remarks should be Exhibit A in proving that Washington has designed its tax laws to do exactly what the Supreme Court has forbidden:
… (read their post for the whole thing: click here)
As one reader wrote into us, it’s more “constitutionally suspect” than “brilliant.” Beyond that, good tax policy is about paying for the services you use. Conservatives should oppose shifting tax burdens because it creates a constituency demanding larger government but not paying for. Liberals should oppose shifting tax burdens because it results in only fair-weather support for programs and services that evaporates when out-of-staters find a way out of footing the bill. All people should oppose it because states should be creating environments favorable to economic growth, and gimmicks and economic nexus games harm economic growth.
They don’t quite get it right. Most of their complaint is about how the Governor’s office describes the bill, not the substance of what we did. The new law in Washington state does exactly what their last paragraph asks for – it applies the B&O tax evenly to in-state and out-of-state businesses performing the same service activities in Washington. This doesn’t seem unreasonable to me, but then again, I’m one of those “politicians” they write about so disdainfully.
I fail to see why a business located outside the state and performing services inside the state should be able to avoid paying taxes on their activity. This shifts the cost of providing the service necessary to support the business activity to in-state taxpayers and gives the out-of-state guy a free ride. When the B&O tax was created, the only way a business could perform a service for a customer was over a handshake. This clearly hasn’t been true since Al Gore invented the Internet. Imagine two businesses are set up 50 miles from each other, but one is across the border in Oregon. They both perform services for customers in Washington state. Why would they have different tax treatment?