The bad thing about WA state is the tax structure -- no corp or personal income tax (good), but the B&O tax is a gross receipts tax, really complex (it varies by county and by type of business), and has pyramiding (as do all gross receipts taxes) -- it's equivalent to a 12-15% corp income tax for many businesses. If you don't use 2-3 levels of contractors, or have a lot of work done as subassemblies, it should be ok -- for a software/internet startup who buys hosting from a single provider only, it is probably more like a 3-4% income tax.
It's still better overall than most states, but I'd prefer a different corporate income tax structure. Even a 5-10% corporate income tax, with no minimum, would be fine. The worst part about California corporate taxes is the $800 minimum; if you got rid of that, it would be pretty reasonable I think.
Can you expand on why the lack of personal income tax is a good thing? Instead, WA has roughly 10% sales tax which some would say disproportionately taxes the poor.
Lower personal income tax, all other things equal, is better. I wasn't trying to directly compare sales tax vs. personal income tax vs. payroll tax vs. corp income tax vs. capital gains vs. property tax. Just that B&O/gross receipts is worse than corp income tax.
I'm personally pro something like a broad VAT with a $20k credit or $50k exemption, including property. In general, consumption taxes seem preferable to income or investment taxes, in that they deter consumption vs. deterring investment. Consumption has fewer inherent positive externalities than investment or income. And then add additional taxes for the purpose of capturing and offsetting externalities like pollution, traffic, etc., rather than strictly as revenue.
And I'd really like to see experiments on taxing status goods. Create or find things like they have in game economies, which are not really necessary or important, and which are purely purchased for signaling value, and tax those. Raising the taxes on those things, thus raising cost, is beneficial to the buyers and to society. (I think Scott Adams from Dilbert has proposed this.)
It's good in that it's efficient (consumption = income-savings so it is good that it does not tax savings), but it's bad in that it's regressive. The easiest way to make it progressive is by offering a rebate check to residents for poverty-level spending (or 2x poverty perhaps). This makes it highly progressive: low income earners actually get money from it on net. The problem is that a rebate check provides a perverse incentive for people to claim residency in the state.
Another way of saying this is that it's regressive because it's flat, but it's a better tax overall if you could unflatten it.
I hadn't thought of the "residency arbitrage" problem at the state level. Presumably it would work a lot better at the federal level as a result; we already have lots of effort put into both becoming a citizen and determining who is and is not a citizen.
The other benefit of a negative tax (negative consumption tax or negative income tax) is that we could then get rid of virtually all other benefits and entitlements -- just increase the base subsidy. There's no reason to administer a food stamp program if you just give everyone a $20-30k/yr income. Same thing with student aid; why give someone subsidized loans when you can just give them $20-30k/yr and tuition/etc. costs $10-40k/yr, so a feasible part-time job (or private scholarship) covers the cost of going to school at Harvard, and you can actually save money if you instead go somewhere cheaper.
I'm not 100% in favor of giving everyone free stuff, but I'd far prefer to just give everyone free stuff vs. build an expensive bureaucracy to administer a program which incentivizes poverty and disability (a huge fraction of the SDI payments are to people who are basically employable and functional, but who can't get jobs; if they had an independent $20-30k income, there would be nothing to discourage them from doing $5-10k extra in legal work.) Obviously services other than pure transfer payments would still be needed, but the majority of welfare programs are about the transfer payments; counseling and other support could be charity, commercial, or funded separately.
Nice to meet someone with my exact policy views! :-)
There's another huge problem that it solves besides just administrative costs. Currently marginal tax rates near the poverty line are very high due to loss of access to need-based programs like foodstamps (exactly how high depends a lot on individual circumstances). It's a horrible burden on the working poor that nobody seems to understand. More discussion here: http://politicalcalculations.blogspot.com/2012/12/the-flat-t...
Sadly false for two reasons. (If I wanted a directly and short-term self-serving policy, I'd just advocate for a $1t/yr national defense budget, half of which to be spent on IT security; I actually think total defense spending should be $50-100b. I am confident I have little enough political power to not matter.)
Washington's general sales tax rate is 6.5%, which is similar to the general sales tax rate in all other states that have one. Most other states, in addition to a 5-7% general sales tax, also tax personal income. I've looked, but have failed to find what the taxpayers in those states are getting for their overall higher taxes.
As an aside, OR to the south of WA doesn't have a sales tax at all, but rather an income tax, which would come out to about 9% for me if I lived there. In WA I pay about a 9% sales tax on things I purchase excepting housing and food. When you do the math, whether I'm rich or I'm poor; my taxes are lower in WA - unless I'm spending obscene amounts of money buying stuff other than housing and food (edit: or don't have an income but do purchase goods and services).
Also, I don't know if it's related or not, but WA does have a much more vibrant economy than OR and most other states with an income tax.
Little known fact - income derived from sales to people outside WA is no subject to B&O tax. An Internet startup will likely have only 2% of their users in WA, and so only that much is subject to B&O tax.
This is not a tax advice, consult a competent accountant.
The issue is purchasing services within WA -- those services will be marked up due to B&O (tax pyramiding).
the 0.5-1% rate on final sales is inconsequential; it's the tax pyramiding on every purchase before that. Admittedly it matters a whole lot less for a startup than for a purely local business (say a coffee shop who buys bread locally which is made from facilities, staff, and multiple other inputs, each of which is also produced within the state and has gross receipts taxes added.
It's particularly bad because it essentially discourages outsourcing and encourages vertical integration, counter to efficiency and new business formation. The same product can cost a lot more if you use the best components and best assembly vs. more expensive and lower quality things produced entirely in-house.
When I am shopping for hosting services or hardware, I am shopping across entire country, I don't care if the vendors had to markup this or that, and I don't have to buy local, and vendors don't mark up their prices based on my location within US.
When selling, I am paying tax only on sales to WA residents, which is like 1% of my world-wide sales, and on those I am paying like 0.5% gross receipts tax. So it's 0.005% tax rate total.
How did you end up with "for a software/internet startup who buys hosting from a single provider only, it is probably more like a 3-4% income tax." ???
Most businesses buy a lot of products and services locally. It is infeasible for your garbage collection service or other utilities to be sourced from outside the local area, for a lot of goods there are licensing or transportation issues which make them local, etc.
Internet companies are a huge exception to normal businesses. (which is why they're so awesome and can turn into scalable startups so easily). Income tax is on profits, so if you have a low margin business, or an earlier startup business, you'd be paying low total income taxes even at the 3-4% rate., so a tiny B&O direct expense and higher costs for facilities, contractors, etc. translates to a much higher equivalent income tax rate.
B&O isn't a good argument against setting up your tech company in WA; it's just an unfair tax which penalizes some businesses (inherently local ones) while favoring others (prof services and internet). (the only good argument against tech startups in Seattle is the somewhat-smaller-than-Bay-Area pool of tech workers, largely better now than it was 10y ago when they were just Boeing and Microsoft, and the lack of great VCs (there are a few, but not the best in the world, and not many vs. SF, NYC, or Boston).
I don't quite understand how it could be that high...for software sales (which I assume falls under the retail classification) the B&O tax rate is .471%. On $1M gross that's $4710. In order for that to be equivalent to a 10% income tax, you would have to be only netting $50k on that $1M, which would be incredibly low margin. Did I miss something?
It's still better overall than most states, but I'd prefer a different corporate income tax structure. Even a 5-10% corporate income tax, with no minimum, would be fine. The worst part about California corporate taxes is the $800 minimum; if you got rid of that, it would be pretty reasonable I think.