WA Bill Would Limit Bank B&O Tax Exemption

The difficult budgeting process continues in Olympia with yesterday’s introduction of legislation that would limit the primary business and occupation (B&O) tax exemption available to banks.

As anticipated, House Bill 2078, which was sponsored by freshman Representative Laurie Jinkins (D-27), finds that smaller classes in the early grades can significantly increase the amount of learning that takes place in the classroom, and declares the intent of the Legislature to fully fund K-12 class size reductions by narrowing tax deductions for banks, and repealing the sales tax exemption for nonresidents.

Under current law (RCW 82.04.4292), a financial institution may deduct the interest income on mortgage loans from B&O taxes owed. This exemption applies to both banks and credit unions; however it is not used by credit unions since they take advantage of a broader, complete B&O tax exemption under a separate statutory provision. The new bill does not repeal the bank exemption completely, but instead limits the deduction to $100 million dollars per year—effectively making it applicable only to larger banks.

The Department of Revenue values the first mortgage income tax deduction at $81 million for year 2010, making it a significant target for groups pushing to eliminate tax loopholes in favor of education or social service funding.

Earlier this week, banks began reaching out to House members, arguing that: 

  • The first mortgage income tax deduction remains good public policy because it encourages lenders to stay in the housing finance business and helps keep home ownership more affordable to consumers;
  • The B&O tax rate for banks increased by 20 percent in 2010, and its removal would further impair the recovery of banks and thrifts headquartered in Washington; and
  • The increased costs would be passed on to home buyers, further weakening economic recovery.

The bill, which has 47 additional co-sponsors, including the Chair of the House Financial Institutions & Insurance Committee, has been referred to the House Ways & Means Committee, but hasn’t yet been scheduled for a hearing. Despite the large number of co-sponsors for the bill, it is unlikely to be able to garner the 2/3 voted needed for passage as a tax increase.

On Monday, SEIU 775 Northwest was rumored to have filed a series of initiatives that would end various tax exemptions; however the initiatives had not yet been reviewed by the state Attorney General’s Office, and the language had not yet been made available. The initiatives may mirror I-1156, which would close tax “loopholes” limiting the first mortgage exemption annually to $100 million dollars per bank. The initiative would also close loopholes for cosmetic plastic surgery and private jets.

The proposed I-1152 is of greater concern to credit unions, as it would eliminate virtually all tax preferences on record (including the state credit union B&O tax exemption) and dedicate newfound revenues to fund healthcare.

To be certified and placed on the ballot, an initiative must collect the signatures of at least 241,153 registered voters. The deadline for filing petition signatures for initiatives is 5:00 p.m. July 8, 2011.

Questions about the tax exemption? Contact a member of the Association’s Legislative Affairs team:

Mark Minickiello, Vice President, Legislative Affairs
Stacy Augustine, Senior Vice President & General Counsel


Posted in Advocacy News.