Inslee signs B&O tax surcharge to pay for expanded college aid

OLYMPIA – A change in state tax law that will hit many professional firms and tech businesses while it helps to pay for Washington’s expanded college scholarship programs was signed Monday by Gov. Jay Inslee.

The business and occupation tax surcharge was the first bill to pass both chambers of the Legislature this year, in part because it was needed to correct problems with the original law passed last year in the closing days of the 2019 session.

It reaches back to the start of this year to retroactively change the tax structure, eliminating thousands of small companies that would have had to pay, but upping the rate for some that are covered.

Inslee said the new Washington College Grant program, which guarantees assistance on a sliding scale based on family income up to $97,000 for a family of four, is the best in the country. It needs “a stable system to make sure it’s funded,” he said.

Money from the tax surcharge will also help with students in technical and vocational training programs, and with salaries for college instructors in science, technology, engineering and math.

In designing the program last year, the state underestimated the demand for grants, and overestimated how much the original formula would collect. In the first month of the 2020 session, majority Democrats pushed through a new bill with several revisions.

The new law still covers service businesses that rely heavily on college degrees, such as medicine, law, architecture, finance and information technology. But it exempts companies that have gross receipts below $1 million.

Supporters said that would drop the number of companies subject to the surcharge to about 15,000, down from about 82,000.

Those companies not exempt, however, will pay a 1.75% surcharge, up from the 1.5% in the old formula.

It streamlines the surcharge on “advanced computing” businesses to a single rate, down from three tiers based on gross income.

The new rate is 1.22% for advanced computing businesses with a gross income worldwide of more than $25 billion. The total amount such a company can pay is capped at $9 million, up from $7 million in the old formula. The surcharge on those businesses doesn’t take effect until April 1.

The changes will add about $38 million to state revenues over the next 17 months as the taxes take effect, and more than $115 million a year after that.

Republicans, who uniformly voted against the bill this year, argued that the tax should have been repealed, not adjusted. The state’s current tax system is bringing in about $1 billion more than lawmakers were told to expect when they adjourned last year, so the new tax isn’t needed to pay for the College Grant program, they said.