Many difficulties lie ahead for Bill Gates Sr.'s proposal for a state income tax on higher-income taxpayers.
It comes in the wake of a similar, successful effort to increase such taxes on upper-income citizens in Oregon, a state which historically has been reliant on income taxes.
If the proposal makes it to the fall ballot — and I presume it will, given the money and organizational muscle that will be available to it &mdaash; I will vote for I-1077. But its passage will be problematic, given Washington's anti-income-tax tradition. Whether it passes or not, it should be followed by a comprehensive review of the entire state tax code, which is an incoherent mess compared to those of many other states.
While living elsewhere, I believed that Washington would adopt income taxes, used in 43 other states, if only governors and key legislative leaders rallied behind them. As a generally progressive state, I thought, Washington would accept a more progressive tax system. Moreover, labor and other organized groups in the state would not only accept but support such a change.
On coming home more than nine years ago, however, I soon learned otherwise.
Voters here, in turned out, had approved an income tax 78 years ago. But the state Supreme Court ruled it unconstitutional a year later. The court ruled against it again in 1950 when it said that income was property — and that a constitutional requirement for uniformity of property taxes meant a constitutional amendment would be necessary to authorize a progressive income tax.
In 1972 then-state Attorney General Slade Gorton and Deputy Attorney General Phil Austin advised, in a letter to a state legislator (Rep. Jeff Douthwaite of Seattle), that "according to numerous decisions of our state supreme court, the income of both corporations and individuals is a form of property." The letter went on to say that "while it may theoretically be possible presently to draft a bill imposing a state income tax which would be constitutionally defensible, any such tax would not only have to be a 'single-rate' tax ... but, in addition, would have to apply uniformly to all income, both personal and corporate; be imposed either against gross income without any deductions, or net income calculated solely on the basis of business expense but not personal deductions; and not in any event exceed a rate of 2 percent (under the present Constitution)."
While there are legal obstacles, there are larger and more practical political obstacles. Despite our state's progressive reputation, its tax code is riddled with provisions that are the opposite of progressive.
The "tax expenditures" (i.e., loopholes and preferences) extended to favored sectors and businesses, at the state and local levels, now amount to three times the size of the state's biennial budget. The business and occupations (B&O) tax, unused in other places, places a heavy burden against small business. There is a state property tax (whereas property taxes are levied in most states at the local level only).
Regressive sales taxes are a principal revenue source. While the state's political traditions have been associated with President Franklin Roosevelt and Sens. Warren Magnuson and Henry (Scoop) Jackson, its tax code is more akin to that of a corporatist Benito Mussolini's.
Yet the very middle- and low-income citizens who might be expected to favor progressivity have been strongly opposed to income taxes. Why is that?
The answer is the same one we see reflected in current Tea Party movements across the country. Ordinary, working taxpayers believe that government cannot be trusted and that any new tax — progressive or not — would simply be piled atop existing taxes so as to facilitate ever-rising government spending.
In Washington, the critics have a case. State spending in Gov. Chris Gregoire's first term particularly exploded and rose well beyond projected tax revenues. In the meantime, pledges by Gregoire, as by previous governors, to remove special-interest tax expenditures proved empty. The present tax system is screwing them, voters figure, and nominal "reforms" would merely amount to more tax increases for them without removing special deals for companies with political clout.
The present Gates proposal is both sensible and well intended.
- It would levy a 5 percent income tax on individual earnings over $200,000 per year and 9 percent on earnings over $500,000. For couples, the tax rates would apply at $400,000 and $1 million.
- The state portion of the property tax would be reduced by 20 percent.
- The credit on state B&O taxes would rise from $420 to $4,800 per year, eliminating the tax for 80 percent of state businesses and cutting it for another 10 percent.
- The new income-tax revenues would bring an estimated $700 million to an education trust dedicated to class-size reductions and other purposes as well as $300 million to the Basic Health Plan and long-term care.
But it is easy to see where points of opposition will lie.
- Rich individuals and couples, it will be argued, have opportunities to shelter their income, which other taxpayers do not. (An individual with $200,000 taxable income might in fact have gross income several times that high). But small business owners, for instance, might have less latitude. Their $200,000 taxable income, unsheltered year-to-year, would be all they had. And, if individuals are to be taxed, why not corporations?
- The state property-tax reduction would indeed be 20 percent but, since the state share of the property tax is only 20 percent of a property owner's bill, the real property tax cut would amount to only 4 percent.
- The revenues to be dedicated to education and health would not necessarily continue to flow to those purposes. The legislature often has shifted money from dedicated accounts to other purposes. Beyond that, is the dedicated education money — to be allocated in large part to class-size reduction mdash; simply a payoff to teachers unions to buy their support for I-1077? Recent studies have shown that class-size reduction, in any case, cannot be correlated with higher educational achievement. Washington Education Association President Mary Lindquist immediately welcomed the proposal. So did the Service Employees International Union, which stands to benefit from a new infusion of state tax revenues.
- The principal objection, however, is likely to be the "camel's nose" argument — that this new tax, initially levied only against individuals with high income, might then be extended to middle- and low-income citizens.
The arguments against I-1077 cannot be dismissed wishfully. Both constitutional and practical political arguments must be taken seriously, and will be by thousands of state voters.
Let us say that I-1077, despite the obstacles, does pass, as I hope it will. What should follow?
I-1077 would consitute a mere nibble at the edge of the overhaul our state tax code badly needs. Corporate and individual income taxes will be accepted only when and if "tax expenditures" for politically favored corporations are reduced; sales taxes are reduced; state property taxes are reduced; the B&O tax wholly removed; and the overall tax burden not increased.
Gates headed a study commission in 2001-02 that recommended to then-Gov. Gary Locke and the legislature a package of reforms, with the net effect of making the system more fair and progressive. The report got short shrift and promptly was filed in the Nisqually Delta.
The post-Gates Commission problem — and the problem with all prior attempts toward comprehensive state tax reform to include corporate and personal income taxes — is that, when initial attempts fail, the reform effort simply stops. There is no followthrough.
In the early to mid-1960s, President Lyndon Johnson successfully saw to enactment a number of proposals which previously had failed to get majority support but had been pushed forward over a 20-year period by political and other leaders who believed them necessary. Medicare, Medicaid, the Civil Rights and Voting Rights acts, federal aid to education, and other Great Society-era measures became realities only because of ceaseless, organized efforts. Here in Washington, we tend to give up quickly after periodic failed attempts.
After November, I hope Gov. Gregoire and the legislature will form a new tax-reform commission and, then, pay attention to its recommendations. If it is to be effective, such a commission will need to hold public hearings, form support groups around the state, and then come up with proposals that can transparently be seen as progressive, fair, and enhancing economic growth. A big task and a big order. Otherwise, I-1077 will either succeed or fail this fall and it will then be business as usual.