Lowry to veto B&O tax cut legislation; cites federal budget uncertainty

OLYMPIA Renewing his call for a state reserve fund that is large enough to help offset pending federal cutbacks, Gov. Mike Lowry today announced he would veto legislation that he said would cut too deeply into the state's savings account and would jeopardize Washington's financial future.

The governor said that given federal officials' commitment to deep spending reductions over the next seven years, the B&O tax reduction which would reduce state revenues by nearly $350 million through fiscal year 1999 simply goes too far.

"I sympathize with the Legislature's desire to cut taxes," Lowry said, "and without question, the B&O tax is a bad tax. But in these very uncertain times, we simply cannot afford to commit to long-term tax cuts that could put our state's economy in a precarious position in a few short years."

Lowry said Washington state needs a healthy reserve fund to help offset unexpected emergencies and expected federal cuts of between $2.3 and $4.2 billion over the next seven years. He has recommended setting aside about $500 million of the state's $677 million budget surplus which he said amounts to less than 3 percent of the state's total biennial budget.

The governor also cited an October 1995 survey by the National Governors' Association of state reserve fund balances that indicated other states were committed to much larger reserve funds. Michigan, for example, planned on setting aside more than 14 percent of projected 1996 revenues, while Iowa expected to save nearly 12 percent.

"A year from now, we'll have a much better idea of how deep the federal cutbacks will be, and how far Congress and the President are willing to go in passing responsibility for critical services to the states," Lowry said. "That's the time we should be looking at across-the-board tax cuts not today; not when our only budget certainty is that nothing is certain."

The governor added that in a recent decision to extend Washington state's superior AA bond rating, Fitch Investment Services, Inc. cited the state's "consistent application of sound debt policy, improved financial practices and gradual economic diversification."

"Today, our economy is strong," Lowry said. "That's no accident. But without a doubt, setting aside a prudent reserve is one of the most important steps we can take now to ensure that our current level of economic growth will continue and that our strong educational system, skilled workforce, targeted tax incentives and high quality of life will continue to attract and keep desirable employers in our state."

The governor said that in the past two legislative sessions, taxes on the state's businesses have been cut by $375 million (on a biennial basis), and in 1994, B&O tax liability was eliminated for 67,000 small businesses. During that same period of time, Lowry said, targeted tax cuts for manufacturers and hi-technology companies have helped attract a number of world-class businesses to Washington.

Senate Bill 6117 would roll back part of the 1993 Business & Occupation tax increase on service-sector businesses for three types of service businesses. For each of the three classifications, the reduction would represent a 50 percent roll-back of the tax increase enacted in 1993.

According to Lowry, the legislation would offer only marginal tax relief to the state's smaller businesses, saving a $60,000 barbershop about $156 annually. However, under the same plan, a $5 million law firm would save about $25,000 a year.

The governor said the bottom line is that the state can't afford to commit to long-term tax cuts while part of the state's fiscal fate is still in the undecided hands of Congress and the President.

"Fiscal responsibility requires that we put enough money in the bank to address substantial federal reductions between now and 2002," Lowry said. "To do anything else is simply too big of a gamble."


For more information, contact the Governor's Communications Office at (360) 753-6790.