I’ve always been happy with the simplicity of Washington state’s lack of income tax, but the findings of a state committee analyzing our tax system present a different picture. We get close to half of our income from sales (and B&O) tax, but the problem is “the top 1% of earners pay only around 1% of their income, while the bottom 20% of earners pay about 17% of their income to these [sales/excise] taxes.” The committee advocates adding an income tax at ~2.6% and reducing sales tax to ~3.5%. (Moving to a strict income tax puts the state in a vulnerable position if wages fall or jobs are lost.)
We don’t pay B&O tax because we are a service business, but it can be quite a drag on a business that sells products. Businesses must pay B&O tax on the total amount of every product sold in the state, and it is hidden from the purchaser. So if you assemble, say a computer, for sale, you have likely paid B&O tax on every part you bought to put the thing together, and then you must B&O tax again on the total when you sell it. Thus, they also recommend replacing the cumulative B&O tax with a value-added tax, where the business only pays tax on the value they add beyond part cost to final price.
(via Open Source Politics)