Tax Change is Coming

With the economy in a state of turmoil, businesses want to know what they can expect from both the incoming administration of Barack Obama and the second term of Gov. Christine Gregoire. The answer isn’t a simple one. We don’t know what tax proposals will go to the Legislature, but we do know that change is on the horizon.

Gary Tober, shareholder of the Seattle-based Lane Powell PC law firm, says we can anticipate that certain categories will be the focus of the spring legislative session, such as the corporate rate of taxation. At the state level, no significant changes to 2009 taxes have been announced, but that situation is also expected to change, primarily because of the sizable budget deficit.

“The governor has indicated that she would not raise taxes,” Tober says. “However, everybody is anticipating there will be at least a $5 billion deficit, so it would appear that we are going to have a need for additional tax revenues.”

Tober adds that the governor could cover that deficit without raising tax rates by broadening the tax base. In terms of business and occupation (B&O) taxes, for example, the state Legislature could repeal existing exemptions for certain types of business activities and require additional business types to pay B&O. He also says that we might see taxes or fees imposed for ecological or environmental reasons to give companies incentives to “go green.”

Another possibility to tackle the deficit is to increase excise taxes to generate additional revenues.Gov. Gregoire’s office, however, is adamant on its no-tax-hike promises. “The governor has not and does not support an increase in the B&O tax,” says Pearse Edwards, communications director for the governor. “In fact, the governor does not believe we should raise any taxes or fees to balance the state’s budget shortfall.”

“I think it is theoretically possible to deal with the deficit without increasing tax rates, but I’m skeptical,” Tober notes. “I think the governor is going to have to either make significant reductions in government programs and/or increase the tax base to have a balanced, fiscallyresponsible budget.”

In terms of estate taxes, attorney Mark Albertson of the Albertson Law Group in Kent and Bellevue says that estate taxes in Washington state are likely to stay at the $2 million exemption level that went into effect Jan. 1, 2006. Gregoire supported this estate-tax level previously, and Albertson does not expect her position to change.

More significant changes may also come from the anticipated “massive new federal tax legislation next year,” Tober says. President-elect Obama has proposed freezing the estate tax at 2009 levels: a $3.5 million exemption with a tax rate of 45 percent on the amount above the exemption. Without this proposal, the federal estate-tax law will sunset on Dec. 31, 2010, and drop to an exemption of $1 million and a tax rate of 55 percent on Jan. 1, 2011.Obama says he also will repeal tax loopholes that reward corporations that retain their earnings overseas. In turn, he says he will lower the corporate tax rate for companies that begin or expand operations in the United States.

Another area of concern for businesses is the proposed 4 percent payroll tax on employees earning more than $250,000 per year, Tober adds. As currently proposed, businesses would cover half of the payroll tax and the employees affected would pay the other half. While Obama did not flesh out all of these ideas during the campaign, Tober points out that the President-elect pledged to raise the current capital-gains and dividend rates to at least 20 percent, which would reduce a company or investor’s net return on investments. “This would impact businesses,” Tober explains, “by making the costs of making investments and raising capital more expensive.”