Take heart. We're a backwater no longer. Washington may have missed out on the Civil War and the Revolution, but we're in the thick of history now. "The battle between taxpayers and government unions will define the fiscal future of the 50 states,” says The Wall Street Journal ($), “and the newest battlefield is Washington state. That’s where a few rich taxpayers led by Bill Gates, Sr. and the Service Employees International Union (SEIU) are bankrolling a November ballot measure to create the state’s first income tax.”
As David Brewster noted on August 16, the Journal argues that Washington's I-1098 would stifle economic growth. The nine states without income taxes averaged job growth of 18.4% over the past decade, the paper observes, while the 9 states with the highest income tax rates averaged only 8.4%. Gates argues that only 3 percent of Washington households would pay the new tax. “What he doesn’t say is that Washington’s lack of an income tax is among its main comparative advantages in luring those top 3%, along with their businesses and jobs, into the state. . . . Even liberal Democratic Governor Christine Gregoire begins her sales pitch to prospective business investors with the reminder: ‘No income tax.’”
Don't be fooled, the Journal's editors huff. “Income taxes are always sold as a one-time way to reduce deficits,” they write, “but they always become engines of greater spending, and eventually deficits. Just ask Californians."
Actually, no one is selling I-1098 as a one-time way to reduce the state's looming budget deficit. Gates talks about fairness, about raising more money for public education and health care for low income citizens, about tax relief for the vast majority of small businesses. He might reasonably argue that the Washington legislature has proven itself very timid about raising taxes, very wary about stirring up another Tim Eyman initiative.
Dire predictions aside, what really is in the initiative, which will be voted on this November? And how many of the economic arguments against it hold up?
In a nutshell, 1098 would impose a 5 percent tax on individual income above $200,000 a year ($400,000 for a couple), and 9 percent on individual income above S500,000 ($1 million for a couple).
The Journal claimed that "Washington would move overnight from one of the nine states with no income tax to having the eighth highest rate in the country." Gates disputes that. He says that “people who say our income tax is just like Oregon and California miss the reality. They need to look at 'effective' rate.” Once a person crossed a threshold, the tax wouldn't be levied on income up to that level. The tax rates would apply only to income above the thresholds. For a couple with income of $1 million, Gates explained, “there would be a 5% rate against the amount of income over $400,000 or .05 x $600,000 or $30,000. In other places where the exemption is, say, $40,000, the tax is applied to $960,000 at a rate from 3% up to 9% for a total like $72,000 — a huge difference and an effective rate of 7.2%.”
Sightline Institute disputes the now-infamous Wall Street Journal characterization, too. Sightline has posted graphs showing that a single person earning $350,000 would pay less income tax here than in any other state that taxes income. The Washington taxpayer would pay about $8,000, while the top state, Oregon, would extract $35,000, according to the chart.
The initiative would raise an estimated $1.7 billion a year. The first $700 million would be used to reduce state (not local) property taxes by 20 percent, and provide a $4,800 credit to payers of the business and occupation tax. This would result in a property tax reduction of about 4 percent (the state's share of property tax is only 20 percent) and would free 80 percent of the state's businesses from paying any B&O tax at all. The funds left over (an estimated $1 billion a year) would be divided 70-30 between education (both K-12 and colleges, but mostly public schools) and basic health.
So now, what about the arguments pro and con? Critics and defenders say look at who's backing (or opposing) the initiative. Naturally, given a tax matter, there's a lot of naked self-interest involved. Further, opponents of I-1098 say look at the legislature's track record — you can't trust those guys.
Let's stipulate that you can't trust the legislature and that there is a lot of naked self interest among the backers on both sides. (I'll deal with those arguments in a later piece.) But whatever the legislature may or may not do, and whatever some backers and foes of the initiative may or may not stand to gain, let's try to look dispassionately at these questions: If I-1098 works as intended, will it right real wrongs? Will it be good for business or bad?
Both sides in the debate think that if voters understood I-1098 better, those voters would agree with them. And both sides realize that an initiative campaign relies more on the visceral than on the intellectual. As Mark Funk, who is handling media relations for I-1098 opponents, says, it usually boils down to “four sound bites on each side.”
No one denies that the initiative would take 80 percent of the state's businesses off the hook for B&O tax. It would presumably remove one of the many barriers facing a person who wants to start something really small. The question is whether or not the net impact would be positive or negative for statewide economic growth and jobs.
Many small and not-so-small businesses operate as partnerships, limited liability companies, or S corporations, none of which pay federal corporate income tax. The money they earn passes through to the individual owners. I-1098 opponents argue that if you tax business owners on their high personal incomes, you're really taxing their businesses — because you're dealing with the same dollars.
Initiative foes Joe Barer, president of the strategic consulting firm Lake Partners, and Matt McIlwain, a managing director of the Madrona Venture Group, argue that marginal costs drive business decisions, and a new tax will make some business owners think twice about investing or hiring. The tax would also discourage people from moving or staying here to start the next big thing.
“The proposed income tax would penalize small business owners and entrepreneurs . . . and damage our state’s national and global competitiveness for new investment and job creation,” a Washington Research Council >Policy Brief argues. “Because S corporations, LLCs and partnerships . . . have their income passed through to owners’ (shareholders’) individual tax returns, I-1098 imposes a substantial new business tax on many of this state’s small, emerging, and dynamic enterprises. This is certain to discourage entrepreneurial activity in the state.”
The opponents' strategy has been to rally to the defense of small business, deflecting attention from their solicitude for the very wealthy. But what about the rich? Here, the local argument echoes debates over letting the Bush tax cuts for top-end earners expire. At either the state or national level, most of the very few people who would pay a tax on high personal income arguably aren't those who would be building companies or creating jobs.
Like what you just read? Support high quality local journalism. Become a member of Crosscut today!