Senate passes fix for new business tax to fund college aid

A new business tax the Legislature passed last year to generate money for the state’s college grant program needs an overhaul even though it just went into effect on Jan. 1, Senate Democrats said Thursday.

They passed and sent to the House a bill that Sen. Jamie Pedersen, D-Seattle, called a “significant improvement” because the system would be less complicated, affect fewer businesses but collect more money.

Senate Republicans argued, however, the tax should be scrapped entirely because the strong economy is generating extra money for state coffers.

Sen. John Braun, R-Centralia, said the problems the new bill is trying to fix show the original law – which he and other GOP legislators voted against last year – was poorly written.

“There are a billion reasons why this bill should just repeal that law,” Braun said.

Forecasts released since the 2019 session ended show the state is expected to collect an extra $1 billion in tax revenue. Braun said that money should be used instead.

The tax, known as the workforce education investment surcharge on the business and occupation tax paid by some professional service and technology companies, is to be put into a special account for higher education programs.

The largest item for that account is the Washington College Grant program, which will guarantee aid to college students at or below the state’s median family income, based on a sliding scale that increases the grant as family income drops. The account also provides money for the Carrier Connected Learning program for community and technical college students; the state Opportunity Scholarship program; tuition waivers for veterans and National Guard members; and loan repayment programs for graduates of certain health care professions.

Sen. David Frockt, D-Seattle, said those programs “cap off a transformational decade” of efforts by the Legislature to provide help for low- and middle-income families after the recession forced cuts in higher education.

“All the good intentions in the world don’t mean anything if you’re not willing to put the money behind it,” Frockt said.

Sen. Mark Schoesler, R-Ritzville, said money that comes into the state’s General Fund has a tendency to be moved around for other purposes, even when special accounts are set up. It happens regardless of which party is in the majority, he added.

“There’s no guarantee this (money) won’t be swept” into other uses, he said.

During debate Wednesday, Republicans proposed 27 different revisions of the new bill. None passed.

Sen. Mike Padden, of Spokane Valley, suggested exemptions from the surcharge for businesses that treat substance abuse or law firms that use at least 10% of their work hours on pro bono cases. Sen. Jeff Holy, of Cheney, suggested exempting any business owned by a veteran. Schoesler suggested the surcharge should not apply to revenue from Medicaid patients. Sen. Shelly Short, of Addy, suggested exemptions for medical office, dental offices, outpatient centers and diagnostic laboratories in rural areas as well as for all pharmacies.

When the tax passed last year, it was projected to raise about $375 million through mid-2021. Current projections show that won’t be enough to cover the demand for the programs to be covered by the account, which are estimated to be about $100 million higher. The new bill would raise an estimated $500 million.

That bill, which passed the Senate on a 28-21 vote after a debate that stretched over two days, reduces the number of professional service businesses that will pay the surcharge by 71,000 by saying the surcharge would only apply to companies that have yearly gross income of more than $1 million. But business above that threshold would pay a 1.75% surcharge, rather than the 1.5% in the current law.

The new bill also streamlines the surcharge on what the law calls “advanced computing businesses” that have worldwide gross revenues of more than $25 billion. Current law calls for the surcharge to double if the that revenue is more than $100 billion. The bill has a single rate of 1.22% over the standard B&O tax, and it caps the surcharge at $9 million rather than the current $7 million.

One of the main targets of the advanced computing business tax is Microsoft. In an interview with Olympia reporters Thursday, Microsoft President Brad Smith said he supports the surcharge in general, although he hasn’t analyzed whether the company will pay more under revisions in the bill the Senate passed.

“We think it’s a valid step forward,” Smith said. “We’re glad they’re working through the details to make sure it all works well.”