Latest Tax Hike Proposal Hits Architects Harder

The new “Go Home” tax proposal in Olympia will hit architects squarely on the chin. It proposes a 20% Business & Occupations Tax hike on service businesses on architects. This tax hike would cost architecture and engineering firms over $23 million the first year and roughly $70 million over its three year term.

WA Lost 2,400 A&E Jobs This Year

Washington lost 2,400 A&E jobs in just January and February this year.  Since July 2008, Washington has lost 7,000 A&E jobs. Here is a graph from the Federal Bureau of Labor Statistics on the jobs situation for our industry.

Architects Cannot Afford a 20% Tax Hike

Architects already pay the highest B&O tax rate of 1.5% of gross receipts. The latest compromise increases the rate to 1.8% for over three years.

We agree with Governor Gregoire when she says that higher costs on the construction industry will prolong the recession. This tax increase will hamper architecture, and thus construction, from helping Washington State out of the current economic recession.

The state is relying upon construction. Construction relies upon architects. Put simply, if a project is not designed it cannot be constructed.

Every dollar spent on design supports $10 to $15 in construction. Every $10 million dollars spent on building construction typically requires 160,000 labor hours and creates 285 full-time, family wage jobs.

Don’t Raise Taxes on Businesses that are Barely Surviving

A&E firms in our state are coping with the current recession by closing offices, cutting staff, lowering benefits and reducing wages.

The direct impact of the current recession cannot be told just by the employment figures for. Many laid off architects are working from home trying to get design projects or performing consulting work. And, firms are reducing hours and using furloughs to keep staff employed but at reduced salaries. Their income is just a fraction of their previous job, but they are not technically “unemployed.” So, they don’t show up in the government reports

Since the B&O tax is levied on gross receipts, any additional tax burden will come directly out of staff, salaries and benefits. This tax is also being levied on contracts that have already been signed, but for which the work is ongoing.

The Double Whammy of Budgets and Taxes

This tax increase is a double-whammy on architects who are being hurt by other state decisions. In the proposed budget, the state is transferring almost $1 billion out of the capital budget to the operating budget. As a result, state funding for design projects has been cut dramatically.

At a time when the private sector cannot get credit for major construction, the state had curtailed its spending because of these budget transfers.

Thus, the state has cost architects their jobs through both its spending and taxing decisions.

New Taxes have Devastating Economic Impact on Architects

The legislature is still planning to raise B&O taxes on AIA/WA members. There are 37 hours left in the 2010 Legislative Session. Lawmakers must be told about the impact the proposed tax increases will have on your firms.

Contact your legislator today and tell them to oppose new taxes on architects.

Unemployment Rates Soar for Architects
Architects have been hit hard by the current recession. Engineering News Record reports unemployment rates for design and construction were up to 25% in January. Washington State has lost over 4,400 design jobs since 2008, according to the US Bureau of Labor Statistics.

Revenues - Lowest Since 2006
Quarterly architecture and engineering (A&E) firm revenue has fallen by $434 million, and has not been this low since 2006. And, revenues are continuing to fall.

In the Architecture Billings Index any number under 50 means declining revenues. The latest number is 42.5 and falling. National data shows “...architecture firms have lost almost 51,000 positions.”

New Taxes on Firms that are Barely Surviving?
The state is facing difficult decisions but architecture firms have made harder decisions – to let many people go. Recently an AIA/WA member’s firm, one with originally more than 100 employees and 2 offices, closed its doors. They stated that projects simply ran out.

The state should take steps similar to what private sector businesses have done to keep their budgets balanced in these difficult economic times.

This proposed B&O tax increase will not come out of profits. There are no profits right now for Washington architecture firms. This tax will be paid by more people being laid off, by salaries being cut and by benefits being reduced.

Contact your legislator today and tell them to oppose these new taxes on architects.

Two Bills that Tax Architects Introduced Yesterday

At noon yesterday, two bills were introduced that would cause severe difficulties for the profession. Parts of these bills make it expensive for firms to operate and pay their bills; while they also make firm employees personally liable for taxes if the firm fails! Then, without any public hearing or opportunity for public input, legislators rushed the bills through committee.

The first bill, Substitute House Bill 3191 (SHB 3191, part 12) will make it difficult for Washington firms to recruit and retain qualified employees by making firm officers and employees liable for unpaid taxes “regardless of fault or whether the individual was or should have been aware of the unpaid tax liability.”

Part 20 of this House bill increases the Business & Occupation (B&O) tax rate to 2.0% for environmental consulting services. Architects act as the prime consultant on design projects by bringing together different disciplines under a single contract to provide a complete set of services. It’s nearly impossible to separate out environmental consulting services from the other services provided in the contract.

The second bill, Substitute Senate Bill 6143 (SSB 6143, part 7) also creates new personal liability for corporate officers and key employees for unpaid taxes. Under current law, the state may go after business owners for unremitted sales tax but cannot go after employees who did not know or could not have known about the tax liabilities. This law changes that.

Part 20 of this Senate bill directly increases the B&O Tax rate for architecture firms to 1.75%. Architectural firms already pay the highest B&O tax rate of 1.5%. Increasing the tax burden on the service sector may bring unfortunate yet predictable results – architectural firms relocating out of state. This part also unfairly targets small firms as large multi-state firms already have the option to outsource projects; small and medium firms do not.

The AIA/WA is currently working to get harmful parts of these bills removed and to have legislators vote against them if they are not removed. You can find your legislator here, and let them know your concerns with SHB 3191 and SSB 6143.

Revenue Forecast Predicts Another Decrease

A press release published yesterday, June 18, by the State of Washington Economic and Revenue Forecast Council (ERFC), states that it “appears that we are finally approaching the end of this Great Recession.” This prediction regarding the end of the financial is based on “claims for unemployment insurance” peaking and “monthly job losses are diminishing.”

However, the release states that the bottom is still lower than predicted in March. The forecast goes on to state that “job losses will likely continue through the end of this year.” And, according to the EFRC, when the economy does rebound the improvement is likely to be gradual.

The predication also stated that the General Fund forecast for the biennium is “$27.2 billion” which is $185 million less than projected. Many newspapers have noted that Governor Gregoire intends to make even deeper budget cuts, payroll cuts, and to cap hiring because of the decrease.

Budget Gap Widens - Talk of Taxes Likely

The Economic and Revenue Forecast Council (Council) has issued a press release updating the revenue projection for Washington. The press release stated that there is a decline in tax collections from the November forecast. This decrease in tax collections equals a weaker forecast for the rest of the biennium.

Numbers have dropped drastically from those that were predicted in the February “Unofficial Early Guidance Report” from the Council; tax collections are now forecasted to be $552 million dollars lower in the next 28 months.

The predicted decrease in tax income has pushed the projected budget shortfall close to $9 million.

The calculation for the projected budget shortfall is done by finding the gap between tax collections and how much the state would need to spend in order to: maintain all state programs at currents levels; pay for growing school, prisons and Medicaid caseloads; give pay raises to state workers and teachers; and boost spending on programs for low income individuals and families.

Interestingly, although the budget shortfall has increased, the projected revenue for 2009-2011 is projected to be larger than it was in 2007-2009. With current cuts not closing the gap it is likely that talk of increasing taxes will become more prevalent.

Answers will come later this week when legislative budget writers are expected to unveil their spending plans for 2009-2011.

Turning Up the Heat for New Taxes

The AIAWA is paying close attention to the State Budget; there is concern that the deficit will cause legislators to target architects with a new taxes. The latest news is not encouraging. Other groups have also been watching the budget and during the recent gubernatorial campaign the state’s financial situation was a hot topic. At the time of the election, forecasters predicted there would be a $3.2 billion gap between expected revenue and planned spending. They underestimated.

Yesterday, the State Revenue Forecast Council, as reported by the Seattle Times and other news outlets, stated that the state’s budget deficit now is a whopping $5.1 billion. And, there will be one more forecast before the budget is finalized – meaning the budget hole may grow even more. The Seattle Times also pointed out that, “State spending has increased by $8 billion since Gregoire was elected governor in 2004.”

AIAWA previously warned about the impact of a big budget deficit on the profession. Even before the latest forecast, legislative leaders were predicting the need for new taxes.

Senator Lisa Brown, the Senate Majority Leader, said that the definition of tax increase is important and “closing loopholes” isn’t equivalent to raising taxes. Representative Hans Dunshee, the probable next chair of the budget-writing House Appropriations Committee, said “… it’s likely any tax proposal would go to a vote of the people.” Under the state Constitution, the legislature can by-pass the governor and put a bill directly on the ballot without her signature. Such a move would push every business group in the state, including the AIA, to raise money and have a voice on a ballot measure next year.

Longtime budget analyst Richard Davis (former head of the Washington Research Council and now with the Association of Washington Business) wrote in yesterday’s Everett Herald, “Some lawmakers will want to extend the sales tax to business and professional services.” He further writes, “Others will press to repeal existing tax exemptions. A repealed exemption is a tax hike.”

As previously reported, four years ago when the budget hole was much smaller (more than half of what it is projected at now), there was a host of new taxes introduced. In the end, they did enact a huge new tax on estates and raised taxes on selected industries and products; that set the precedent of going after targeted industries. In addition, the legislature may choose to eliminate tax incentives passed in recent years for renewable energy, energy efficiency, affordable housing or other important environmental and economic benefit programs.

The AIAWA will continue to closely review the budget and tax bills for direct or indirect impacts on the profession and your businesses. Please look for more updates from us.

Democrat Leader: Targeted Tax Increases on the Table for 2009

Yesterday, the Seattle Times reported Senate Majority Leader Lisa Brown (D-3, Spokane) is planning for tax and fee increases in the 2009 legislative session. The article states:

Senate Majority Leader Lisa Brown, D-Spokane, didn't rule out the prospect of tax or fee increases.

Brown also said lawmakers could look at targeted taxes or fees, or consider ending certain tax exemptions.

"If you look at a tax exemption and you decide you need to close it or limit it somehow, is that raising a tax? Some of it comes down to definitions," she said.

As previously reported, in 2005 the legislature and Gregoire passed tax increases on targeted industries. Based on these comments, that is likely to again be the Democrat’s strategy in 2009.

The Department of Revenue (DOR) tracks exemptions from current state taxes. Its 2008 report finds that eliminating the sales tax exemption for personal and professional services, of which architecture is a part, would generate about $4 billion a biennium for the state and $1.2 billion for local governments. That one move alone would wipe out the state budget deficit. More likely, is they will pick selected industries, such as architecture, for the tax hit.

The DOR report states:

If the sales tax is considered as a broad-based tax upon consumption, then purchases of personal and professional services consumed by individuals and businesses could logically be subject to tax.

The Seattle Times also notes that the legislature might protect Gregoire from breaking her no-tax increase pledge by putting tax increases before the voters for approval:

Paul Berendt, a former chairman of the state Democratic Party, said he thinks Gregoire and lawmakers could put together a tax package that would help balance the budget and support new programs — and send it to voters.

That would allow Gregoire to propose additional spending without signing a tax increase.

Under the Washington Constitution a referendum from the legislature to the people bypasses the governor and goes straight to the ballot.

The idea of eliminating the exemption for architecture services is not new. AIA Florida has led a multi-year battle against an effort there. Most recently they were successful in preventing a ballot measure from going before voters to implement a sales tax on professional services.

The state budget deficit for the next biennium is currently projected to be $3.2 billion and is expected to grow to $4-$4.5 billion by the time the budget is drafted.

The AIAWA will be closely monitoring the budget development very closely.