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Progressive tax might make a breakthrough in state

Initiative 1077, just filed by advocates of an income tax, could put more of the state's tax burden on the very wealthiest, while reducing property and business and occupation taxes.
A crowd of people work on their 1920 IRS forms. Could Washington finally join most of the rest of the country with a state income tax?

A crowd of people work on their 1920 IRS forms. Could Washington finally join most of the rest of the country with a state income tax? Underwood & Underwood, 1920/via Wikimedia Commons

Advocates of an income tax in Washington, long accustomed to a losing fight, are playing on a new field in 2010, and the filing of Initiative 1077 on Wednesday (April 21) could be a breakthrough in efforts to make the state's tax system more progressive. The state relies heavily on a sales tax at both the state and local levels, a tax that fall disproportionately on lower incomes.

Announcing the initiative at a news conference, Seattle attorney Bill Gates Sr. said lower- and middle-income families pay too much tax and the wealthy too little. The business and occupation tax on gross receipts, he said, "penalizes small businesses, the engines of job growth in our state."

The senior Gates, father of the Microsoft founder, has been talking about an income tax for Washington for a long time, heading a 2002 study that called for tax reform. His recommendations have brought nods of approval, particularly among Democrats, but no action, in part because of supermajority voting requirements in the legislature. But the politics and economics of 2010 have created a new opportunity for Gates and his supporters.

This year has brought more attention to the rapidly rising gap between the nation's rich and poor, with middle classes drifting downward as well. According to the Economic Opportunity Institute (EOI), a progressive think tank in Seattle, the top fifth of Washington's households gained 11.6 percent in earnings in the past decade, while the bottom fifth lost 4.2 percent. The pattern has been repeated nationwide and has increased interest in taxes that strike at upper incomes.

Perhaps the most important recent action was the Oregon voters' decision in January to boost income taxes on individuals earning above $125,000 and couples earning over $250,000. Oregon's vote was watched nationally, as it was the first such result after the election of Massachusetts's U.S. Sen. Scott Brown, which was interpreted as a conservative backlash to government in general. Oregon also increased corporation taxes on larger firms, many headquartered outside the state, again relying on the taxing of wealth.

That idea of taxing wealth and redistributing the revenue to programs that benefit lower-income citizens is also at the heart of I-1077, in several respects.

No income below $200,000 for an individual or $400,000 for a couple would face an income tax; it is collected entirely on income above that level (set by using the federal tax form). For individuals, the state tax is 5 percent on $200,000 or more and 9 percent on income above $400,000. For couples, it's 5 percent over $400,000 and 9 percent over $1 million. The actual amount for the individual, however, will be less than the face amount, because of the ability of taxpayers to deduct the state income tax from federal taxes.

As the Economic Opportunity Institute points out, federal deductions for high-income taxpayers are much higher than if they deduct sales taxes. This would lower the total tax impact of a couple earning $500,000, for instance, from $5,000 to $4,382, or less than 1 percent of their total income. At the level of a couple earning $3 million, the impact of their state income tax ($210,000) would be reduced by $46,184 because of the federal deduction.

The initiative also strikes at the business and occupations tax, one of the most regressive of the state's taxes because it is particularly hard on small businesses and start-ups. The Department of Revenue believes 81 percent of businesses would pay no B&O taxes and another 12 percent would have their taxes reduced. For homeowners, the state's property tax would be reduced 20 percent, replaced by revenue from the new income tax. State property taxes account for about 21 percent of the property taxes that fund local schools and governments.

The gist of I-1077, then, is redistribution of the burden with high-income families paying more to ease the burden of middle and lower-income families and to pay for services that are used by all (education) and by lower-income citizens (health care).


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Comments:

Posted Fri, Apr 23, 2:31 a.m. Inappropriate

Sometimes, life is so tricky and playful that we become victims of our creative mind. Whenever you hear the term miserable failure just what comes to mind? Those who searched for the term in Google just a few years ago would have been bombarded with articles about George W. Bush. It was possible through just what was referred to as a "Google Bomb," where pranksters were able to attach things referring to the term toward George W. Bush. Numerous today nevertheless link the term and also the person together, but Google has successfully defused the situation when searching for only the term. Today you are likely to find many different failed matters and actions, also as a plethora of politicians both domestic and foreign who individuals feel didn't keep up to their expectations.

teria

Posted Fri, Apr 23, 6:25 a.m. Inappropriate

Floyd, If you love the Oregon system so much, please feel free to move back there. The EOI, who basically wrote this POS (According to Dave Ross, who sits on their board)is a far left progressive, union sponsored organization. The rates will never be high enough to satisfy the spending habits of the State. The thresholds will lower and the rates will rise. McKay's support only confirms the wrongheaded thinking and bad policy behind the effort.

Cameron

Posted Fri, Apr 23, 6:54 a.m. Inappropriate

I see the "press" have been given their talking points.

BlueLight

Posted Fri, Apr 23, 7:43 a.m. Inappropriate

No chance in Hades will this pass. It's a classic camel's nose scheme and it's doomed in this state. What is interesting was that there was a study done to show the cost of collecting this new tax and enforcement ate most of the gains if the tax was only applied to the upper 1% of incomes. Which means that it will have to be lowered to apply to the middle class to generate any actual income gains for the state.

Also the reasoning for the tax is that in a recession revenues from sales tax and property tax drop. Part of that is due to unemployment which would also hit an income tax. One has to only look at Oregon which is doing poorly with it's income tax.

Also this tax does not apply to income earned by trusts. Which is one way that the rich shelter their income. Place it in a trust, let the trust grow un taxed and pay out only a reasonable "income" to the trustee. You only have to look at the Gate's sheltered income to see how well this works.

GaryP

Posted Fri, Apr 23, 8:18 a.m. Inappropriate

I like the idea of taxation systems distributed amongst different forms of manifest wealth. The ability to accumulate (income tax), the ability to spend (sales tax), and the ability to hold wealth (property tax) are each legitimate forms of economic activity that are enhanced by the support systems provided by government (roads, education, security, etc.). This is why there is such a logical argument against the B&O; tax, which is just a tax on transactions whether there is wealth created or not.

A three legged platform is much more stable than a 2 or 1 legged platform.

It does make sense to insert a limit on the overall revenues produced by the sum total of all systems as a checks and balance mechanism.

Over time it will most likely be that effort will be made by interests will try to influence the balance of the sharing of the tax burden. This kind of influence is nothing new. Notice how the mechanic and plumber charge sales tax on their service while the lawyer and accountant do not. Why do you think this is so?

ruffner

Posted Fri, Apr 23, 10:03 a.m. Inappropriate

This initiative relies on two problematic assumptions: first, that in the emotional swamp of 2010 politics a majority of Washington voters are capable of making a rational decision on anything, and second, that they will be able to do the basic math required to appreciate the initiative's net effect on the overall tax picture.

In other words, it doesn't have a chance.

woofer

Posted Fri, Apr 23, 10:10 a.m. Inappropriate

This is a very positive measure, and a key step toward what I think should be the ultimate goal: elimination of the B&O; tax. Small businesses are the way out of recession, and it is hard to imagine a policy more destructive to small businesses than the B&O; tax. I-1077 would not eliminate the B&O;, but it would create a large exemption that would be an enormous boon for small businesses, which, I might add, are very supportive of I-1077.

In the ideal world, we would have sales tax relief instead of property tax relief. I don't like the property tax either, but sales tax is too high. It is especially devastating to retailers in the border counties. It also punishes low-income workers. But I understand the political forces that led to the decision to use property tax relief instead.

Politically, the victory in Oregon and the likely victory for I-1077 in Washington point the way forward from the problems that have crippled state budgets all over the country. A sensible discussion about the various revenue and spending options is the antidote to the vacuous anti-government rhetoric.

Posted Fri, Apr 23, 10:51 a.m. Inappropriate

Mr. Gates, Sr., is a Man of the Establishment if there ever was one in this state. He has made a very prosperous living siding with the powerful against the weak at many turns. It's not surprising that he's very happy to give a "kickback" to one of his most powerful clients, the state government, in the form of an income tax. But for many owners of single-proprietorship businesses, whose business income is counted as personal income, this will be just one more expensive burden to bear. It will cost jobs. It will cause businesses to move out of the state. But the Seattle-Olympia ruling class doesn't care because it's populated by people, like Mr. Gates, Sr., who know or care nothing about how wealth is generated in an economy. All they are concerned about is confiscating wealth from its creators in order to spend it on their whims.

Their promises of tax relief in other areas are bold-faced lies. Anyone who's lived through the last legislative session knows that the leadership in Olympia has no compunction about raising taxes. An income tax will be just one more tax to raise along with the others. And anyone who does not believe that it will soon be extended to the middle class is a fool.

Just adding more taxes on more people is not tax reform. A flat rate income tax on all the residents of this state would be real tax reform, but only if it is coupled with a complete elimination of the sales, property and B&O; taxes. Anything less than elimination of those taxes makes this income tax proposal just another strangling hand around the neck of the golden goose whose eggs fund all our government largess: Business.

dbreneman

Posted Fri, Apr 23, 3 p.m. Inappropriate

The fate of I-1077 may be in the hands of the state’s small business sector. Companies that employ less than 50 people make up about 85 percent of the state’s businesses and account for 40 percent of all state employment. In previous attempts to abolish or reduce the B & O tax, small business has teamed with large business in opposition, even though it habitually complains about its tax burden. This time around the one million or more owners and employees of these small firms might think about voting their wallets.

Posted Fri, Apr 23, 6:18 p.m. Inappropriate

It figures the Editors picks all agree with McKay. Echo chamber

Cameron

Posted Sat, Apr 24, 8:17 a.m. Inappropriate

No chance Floyd, this turkey is dead on arrival.

Posted Tue, Apr 27, 7:08 p.m. Inappropriate

To the conservative critics: just because you disagree with an income tax doesn't mean you represent the average voter. How much support did a KING5 poll recently find for I-1077? 66 percent. Could be an anomaly. But also not something you can dismiss out of hand either.

http://www.surveyusa.com/client/PollReport.aspx?g=e1aeebb4-a15f-4258-82c2-54058726f3ef

Trevor

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