Business and Occupation Tax. Washington's major business tax is the business and occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities conducted within the state, without any deduction for the costs of doing business. Businesses must pay the B&O tax even though they may not have any profits or may be operating at a loss. A business or taxpayer may have more than one B&O tax rate, depending on the types of activities conducted.

Businesses and their affiliates with over $1 million of taxable service and other activities B&O income in the previous calendar year pay taxes at the service and other activities B&O rate of 1.75 percent. All others pay taxes at the service and other activities B&O rate of 1.5 percent.

Business and Occupation Tax Deduction for First Mortgage Interest. A B&O tax deduction is available to financial institutions for interest earnings on investments or loans secured by first mortgages or deeds of trust on residential properties. An originating lender that sells mortgage loans onto the secondary market but continues to service the loans, may deduct the fees for servicing these loans. This exemption is limited to community banks, which are located in less than ten states. A financial business that is located in more than ten states may not deduct from B&O tax amounts received from interest earnings on loans secured by first mortgages or deeds of trust on residential properties.

The deduction of interest on investments or loans secured by first mortgages or deeds of trust for entities engaged in banking, loan, security, or other financial business is limited to interest received on investments or qualified loans.

A qualified loan is a loan provided to a qualified buyer and a qualified buyer includes the following definitions:

• for loans for properties located in counties with median incomes greater than the state’s median income, a qualified borrower is a person or family whose income is at or below 80 percent of the area median income (AMI) for the fair market rent area, metropolitan statistical area, or county in which the property is located;
• for loans for properties located in counties with median incomes below the state’s median income, a qualified borrower is a person or family whose income is at or below 80 percent of AMI for the state;
• for loans purchased by the Washington State Housing Finance Commission as a participating lender in one of the commission's homeownership programs, for properties located in counties with median incomes greater than the state’s median income, a qualified borrower is a person or family whose income is at or below 120 percent of AMI for the fair market rent area, metropolitan statistical area, or county in which the property is located; and
• for loans purchased by the Washington State Housing Finance Commission as a participating lender in one of the commission's homeownership programs, for properties located in counties with median incomes below the state’s median income, a qualified borrower is a person or family whose income is at or below 120 percent of AMI for the state.

By December 15th, 2024, and each December 15th thereafter, the Department of Revenue (DOR) is directed to estimate any increase in state general fund revenues as a result of limiting this deduction and notify the state treasurer of the estimated amounts. Beginning January 1, 2025, and by each January 1st thereafter, the state treasurer must transfer the estimated amount determined by DOR from the general fund into the housing trust fund. DOR may not make any adjustments to the estimate after the state treasurer makes the fund transfer.

The bill applies to interest received on or after August 1, 2023. 

• Limits, rather than repeals, the business and occupation tax deduction for interest on investments or loans secured by first mortgages or deeds of trust on non-transient residential properties to interest received on investments or qualified loans.
• Requires any loan serving as the basis for the tax deduction to be reported to the Joint Legislative Audit and Review Committee by April 15, 2024, and annually thereafter.
• Provides that a qualified loan is a loan provided to a qualified borrower and a qualified borrower includes the following definitions:
  1. for loans for properties located in counties with median incomes greater than the state’s median income, a qualified borrower is a person or family whose income is at or below 80 percent of AMI for the fair market rent area, metropolitan statistical area, or county in which the property is located;
  2. for loans for properties located in counties with median incomes below the state’s median income, a qualified borrower is a person or family whose income is at or below 80 percent of AMI for the state;
  3. for loans purchased by the Washington State Housing Finance Commission as a participating lender in one of the commission's homeownership programs, for properties located in counties with median incomes greater than the state’s median income, a qualified borrower is a person or family whose income is at or below 120 percent of AMI for the fair market rent area, metropolitan statistical area, or county in which the property is located; and
  4. for loans purchased by the Washington State Housing Finance Commission as a participating lender in one of the commission's homeownership programs, for properties located in counties with median incomes below the state’s median income, a qualified borrower is a person or family whose income is at or below 120 percent of AMI for the state.
• Modifies the procedures by which DOR must estimate the increase in state general fund revenue as a result of the modifications to the deduction and requires the estimate be completed by December 15, 2024, rather than October 15, 2024.
• Modifies the date by which the state treasurer must transfer funds from the general fund to the housing trust from November 1, 2024, to January 1, 2025.
• Amends the title.

The committee recommended a different version of the bill than what was heard.  PRO: Washington is experiencing a housing crisis. We need all options on the table to create more housing. The state needs more housing overall and increased access to that housing for all income levels. The original deduction was given on the idea that mortgage interest rates could be offered at a lower rate if the institutions were able to deduct interest on taxes. The housing market has been nationalized and local lenders can't make a huge difference with respect to interest rates in their local areas. The revenue from the repeal of the deduction would go to the housing trust fund, which has been successful historically. Development of affordable housing often relies on limited public funding. Increasing public funding for affordable housing would be beneficial. The state should explore creative and innovative ways to bridge the housing market gap like this one.

CON: Large national banks do not enjoy the deduction. This deferral is only used by community banks and local lenders. Many banks have stopped or slowed mortgage lending and eliminating the exemption would reduce the supply of mortgage credit for borrowers. Some people are willing to pay the premium to keep the money in the community, but there’s a limit to the premium they’re willing to pay. Many beneficial programs tailored to communities may be at risk should this deduction be repealed. Some smaller banks can create affordable loan programs at a lower rate than national banks and this bill would limit the ability for smaller banks to provide the lower rates. Now is not the time to place more tax burden on small lending entities. This proposal will do more to exacerbate the housing problem than to solve it. If you want more of something you subsidize it, if you want less, you tax it. The business of mortgages has shifted to independent mortgage lenders instead of banks.