State tax knife may slice Amazon, Microsoft

Washington Gov. Jay Inslee is proposing to cut the tax break on business and occupation taxes by 25% in order to raise more funding for state education.

By TheStreet Staff Apr 14, 2013 3:16PM

thestreet logoSeattle skyline and Space Needle at night © Clane Gessel Photography/Flickr/Getty ImagesBy Renee Butler, TheStreet

 

Washington is a near-mythical state, where the trees tower higher than most buildings, pot is legal, and beaches or state parks are omnipresent. The state also offers another big reason people choose to live there: taxes, or rather a lack thereof.

 

In the state of Washington, residents don't pay state income taxes and companies don't pay corporate income taxes. As for companies, they're required to pay a gross receipts tax that's fairly low -- 0.13% to 3.3%. The state also offers a variety of other tax breaks for corporations, making it a popular spot for companies to be headquartered, especially those in technology. Point in fact, Amazon (AMZN) and Microsoft (MSFT) both call Washington state home. (Microsoft publishes MSN Money.)

 

However, that could all be changing. 

Gov. Jay Inslee is proposing to cut the tax break on business and occupation taxes by 25%. Granted, Inslee's efforts are all part of a bid to patch together the more than $1.5 billion deficit projected for the budget ending in mid-2015 and respond effectively to a Washington Supreme Court ruling that the state isn't contributing enough to public education -- but he seems to have invoked a much broader reaction.

 

Tech sector hit the worst

Politicians in Washington are looking to make up a deficit while concentrating on public education -- prompting Democrats in the Washington House to propose similar changes at the state level. The bill on the table right now would narrow Business & Occupation (B&O) and sales tax exemptions for import commerce. The technology sector would be hit the worst, as the Democrats seek to narrow the high-tech research & development (R&D) B&O credit and repeal the R&D sales & use tax exemption.

 

Education is a hot button cause that is hard to argue against -- but that doesn't mean the companies in the state are going to be supportive.

 

As I write this, the Capitol is swarming with lobbyists. One such man, who asked to not be named, said that every major company -- Amazon and Microsoft included -- has sent in the "big guns" to try to see that such a bill is not passed.

 

And no wonder.

 

If the proposed tax changes go through, they're going to cut into the profits significantly -- and there really isn't much room for that. Take Amazon, for instance. It lost $39 million last year. Microsoft is a big money maker -- just under $17 billion in net income for 2012 -- but that was down from $23.2 billion a year earlier. 

 

Corporations always seem to find a way to ease their tax burdens, but there would be no way to get around the proposed tax changes. And investors won't like that very much.

 

The legislative session in Washington state will close in just a few weeks, so we will have to see what happens -- but if the Democrats successfully pass the proposed tax changes, Amazon, Microsoft and the people who invest in those companies could be in for a rough ride.

  

More from TheStreet.com

 

2Comments
Apr 21, 2013 8:27AM
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And everyone wonders why companies move jobs overseas.  Only the Democrats are listed in the article as pushing this .... they apparently still haven't a grasp on how finances work, if that wasn't already evident over the last 4 years. Well, actually 6 since Pelosi/Reed started taking the country a "new direction" (Nancy Quote when the Dems took over the House the last 2 terms under Bush) and indeed they started us down this path to financial disaster. With the beauty that they could blame Bush for all. And, the Dems still do .... wake up folks or at least stop blaming Republicans for all of this mess.

Look, businesses exist to make money. To to that they hire workers which is how people get jobs. The more the company makes the more it can either invest in expanding its business or paying its employees and shareholders. 

If you work for someone else, you benefit.

If you have money in any kind of stock like in 401k plans, you benefit.

And by law, the upper management and board of directors are obligated to optimize shareholder values or they can be sued.  So, they have to look at what makes the most sense and to make the most money for the company.

 So, when there is uncertainty in the operating environment (think higher corp tax rates, excessive govt. red tape, or now health care) they are obligated to look for ways to reduce that.

So companies move offices over seas to reduce tax liabilities.  Or entire manufacturing operations.
They will stop reducing investment in their company and hold cash in uncertain times so they will have some "fat on their bones" to survive the unknown future - if they don't, they risk going out of business. You can see this in the corp. balance sheets, now at all time highs. And the effects of trickle down economics effects stop working, because companies and people with money hold on to it due to the uncertainty. Businesses essentially react to governemnt .... governments direct how business will operate by writing all of these laws with loopholes. 

 The Dem politicians then turn around and whine/blame the businesses. They call the businesses and CEOs greedy for not investing, for legally following the tax codes the politicians just wrote, for moving jobs and entire divisions overseas. Net effect is they are destroying our economy with these policies

 If this goes through and down the road you read Microsoft or other companies move out of state or the US as a result of this, I'm sure you will read lots of articles blaming the businesses. If you lose your job, you will probably do the same.  But the real culprit is the govt. creating a negative business environment that drives up costs. 

This in my mind is the difference between Republican and Democratic thought processes. The Dems think more laws and taxes are needed, while Republicans think less regulation and fewer taxes are the answer. 

If you want businesses to stay put and start investing again/hiring people, then higher taxes and more regulations (like Obamacare) is the exact worst thing to do.  But if they add these taxes and the businesses react as they must, then be ready to see the articles about corp greed. It is a race to the bottom.
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