Income tax measure: Is it about trust?

There are many uncertainties and questions. But one might be: If not Inititiative 1098, can the state do absolutely nothing to fix its the structural problems of its tax system?

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Bill Gates, Sr.

There are many uncertainties and questions. But one might be: If not Inititiative 1098, can the state do absolutely nothing to fix its the structural problems of its tax system?

Don't trust the legislature with your money. That's basically what you hear from opponents of Initiative 1098, which would impose an income tax on individuals earning more than $200,000 a year or couples earning more than $400,000. It's also basically what Tim Eyman says in support of InItiative 1053, which would keep the legislature from raising taxes without 2/3 votes in both houses or a vote of the people. (Not that 1098 foes want to be seen as Eyman allies, much less Eyman clones; Mark Funk, who does media relations for the campaign against 1098, bristles when asked why his side shouldn't be compared to Eyman. “I've spent most of my life in politics fighting Tim Eyman,” he says.)

Opponents suggest that you can't trust I-1098, either, or at least you can't take it at face value. "We hope Washington voters aren't duped by the claim that only the rich will pay this tax,” the Wall Street Journal's editors wrote on Aug. 14. "The revenue from the tax will finance new spending, which will soar and lead to even higher deficits in the next downturn, which will create political pressure to expand the tax to the middle class."

The Seattle Times editorial board agreed. "Bill Gates Sr. — father of the famous one —recently dropped $400,000 into the campaign to convince Washington voters to saddle themselves with a state income tax," the Times informed its readers on Aug. 10. "The cash being poured into the pro-1098 campaign aims to convince you," the Times explained, "if you earn less than $200,000, that you will not pay the tax. You may not, in the first years. But the tax will be expanded. Taxes always are."

“Voters know there are no constitutional safeguards,” Dick Schrock, who directed the state's Department of Trade and Economic Development in the 1980s — and led the successful campaign against a state corporate income tax in 1975 — told Brad Shannon of The Olympian. “They could raise the rates at any time. They could raise the tax base at any time, to apply it to other income groups.”

In other words, I-1098 would let the camel's nose under the tent. The state constitution requires a two-thirds vote of the legislature to change an initiative in the first two years after it passes, but only a simple majority after that. Pass the initiative, and who knows what the legislature will do?

Opponents also claimed the initiative was misleadingly labeled. "To win votes," the Wall Street Journal editors wrote, "the ballot measure resorts to all sorts of trickery." Schrock certainly thought there was trickery involved. While I-1098 proponents were still collecting signatures to qualify the measure for November's election, he went to court to get the ballot title changed. Schrock argued that the words "income tax" should appear right at the top of the initiative petitions. He won. But he says the people circulating petitions just folded the tops down, so prospective signers couldn't see the crucial words.

And then there's the question of who's really behind 1098. No one has a bad word to say about Gates' own motives or sincerity, but 1098 opponents ask meaningfully if you've looked at the list of contributors. The really big money — apart from Gates' own — comes from unions that want to maintain or create public-sector jobs.

On the other side, 1098 backers point to the opposition contributors. Yes, there are more small donations than 1098 itself can claim, but there are also wealthy guys who have a vested interest in not paying taxes on their own high incomes.

Some opponents focus heavily on the initiative's union backing. On Aug. 10, an Evergreen Freedom Foundation blogger noted: "Just last week, SEIU's DC headquarters sent a $200,000 contribution to 'Washingtonians for education, health and tax relief,' the campaign heading up the fight for an income tax. I'm sure I'm not the only one who sees the hilarity in the committee's abuse of the phrase 'tax relief.' "

But you don't have to be a right-wing blogger to notice that big public employee unions have a stake in this game. Ron Lieber wrote recently in The New York Times about coming "class warfare" that would pit people receiving public-employee pensions against taxpayers, who'd be expected to keep funding those pensions come economic hell or high water, even though their own retirement savings are in the toilet. Arguably, public employee unions backing a new revenue stream fit into that context.

That's certainly the lesson that I-1098 opponents draw from Oregon. In January, Oregon voters approved two referendums on taxes enacted by the state legislature last year. One raised personal income taxes on individuals earning more than $125,000 and households earning more than $250,000 a year. The other raised income taxes on corporations. Gates sees the Oregon result as evidence that people in this economy will vote to raise taxes, and specifically will vote to raise them on top earners. With all the anti-tax rhetoric that's currently in the air, he considers it a hopeful sign.

(But he acknowledges that Oregon already had an income tax, and that people seem to be more comfortable with a tax they know than one they don't. Twenty-five years ago, Oregon voters rejected a sales tax by nearly 4-to-1. The group backing the sales tax had argued that it would enable the state to lower its income taxes.)

Opponents of 1098 see the Oregon referendum campaigns as evidence that unions are willing to spend a lot to gain a lot, and that their investment in Oregon paid off handsomely. The unions "leveraged $8 million to get $800 million," Funk says. Here, where the stakes are even higher, they'll presumably be willing to spend even more.

Opponents also point out that 1098 differs significantly from the recommendations that the "Gates Committee" — the Washington State Tax Structure Study Committee, chaired by Gates — gave the legislature in 2002. "If the Legislature chooses to replace major taxes," the group proposed an income tax with a corresponding elimination of the state's share of sales and property taxes. Committee members split on the details. They recommended "both a flat rate and a graduated rate income tax," but noted that "a greater number of Committee members supported a flat rate income tax."

Unlike the Gates Committee's proposal, 1098 wouldn't do away with the sales tax. Opponents argue that the sales tax is the most regressive part of Washington's tax system , so 1098 wouldn't make the system signifcantly less regressive. Arguably, they're crying crocodile tears. But arguably, they're right.

Critics also note that unlike the Gates Committee's proposal, 1098 wouldn't be revenue-neutral. It wouldn't, although revenue neutrality was one of the ground rules that the legislature established, when it formed the committee, rather than the committee members' own choice.

Even though the legislature had asked for the committee's recommendations, lawmakers largely ignored them. And those same lawmakers have largely refused to tackle the issue of tax reform. Despite the feeling among many of the measure's natural supporters that initiatives are a lousy way to discuss and make policy, this would fundamentally change state tax policy in just that way.

I-1098 supporters concede this, but say they've been frustrated by the legislature's reluctance and/or inability to tackle such things. "We have been unable to move an income tax through the legislature," says John Burbank, of the Economic Opportunity Institute even "under a strong Democratic majority." Gates has seen the same things. "Clearly,” he said earlier this year, there's "a mindset in the legislature that there's no business even thinking about having an income tax."

Gates himself now believes that the people wouldn't support a broadly based income tax. And he thinks the state just plain needs to raise more money. He doesn't think revenue-neutral tax reform would suffice. He says frankly that generating more revenue, especially for education, is a major goal of the initiative campaign.

I-1098 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 cut a homeowner's property taxes by about 4 percent and would free 80 percent of the state's businesses from paying the B&O. The remaining $1 billion a year would be divided 70-30 between education (mostly K-12) and basic health.

Opponents suggest, though, that the new revenue might not really help education. Matt McIlwain, a managing director of the Madrona Venture Group, says that money isn't all the public schools need. He doesn't deny that money would help. But he isn't sure the initiative would provide it. Instead of giving the state's schools an extra $700 million a year for education, the legislature could substitute the new money for old, freeing the old to be used for other programs. Joe Barer, president of the strategic consulting firm Lake Partners, and Funk note that this year, the legislature "swept" money from the education trust, and there's no reason to believe legislators won't do the same thing in the future.

Initiative backers think the state Supreme Court will supply a reason. The state constitution says: "It is the paramount duty of the state to make ample provision for the education of all children residing within its borders." No one has a clue what the founders had in mind when they wrote that, but in 1978, the state Supreme Court decided that it meant what it said. In a case brought by the Seattle School District, the court ruled that the state had to pay fully for a program of basic education. But it let the legislature define basic education, and the legislature has gradually paid for less and less of what virtually every school district in the state considers vital. "Special" levies now make up roughly one-quarter of the average school district's budget — and, if the state hadn't imposed a statutory lid on levies, they'd probably make up more.

Last year, the legislature passed a sweeping education reform law, ESHB 2261. The law contained no funding mechanism. The reforms are to be phased in by 2018. It's not hard to find legislative leaders who point proudly to the law and to their passing it in defiance of the teachers' union. But ask about funding, and they change the subject.

In February, King County Superior Court Judge John Erlick ruled that the state was shirking its "paramount duty" yet again. Erlick wasn't impressed by good intentions about funding educational reform by 2018. Pie in the sky wouldn't cut it. “[T]he question of whether the Respondent State is currently complying with its legal duty under this court’s interpretation of the [state constitution] is a binary yes-or-no question,” he wrote. “This court concludes that the answer to that question is 'no.'”

The immediate effect of the McCleary decision was zilch. But eventually, Gates expects the Supreme Court to tell the state that indeed, it is shirking its paramount duty. Burbank agrees. He points out that the education reform law wil require at least another $1.5 billion a year, which raises the ante even more. “If they're going to meet their 'paramount duty,' " Burbank suggests, they'll have to use the money as 1098's backers envision.

Two constitutional questions hang over 1098. The implication of "paramount duty" is the less important. Proponents and opponents agree that if the initiative passes, it will be challenged as unconstitutional and will ultimately live or die by the ruling of the Washington Supreme Court.

In 1932, the people of Washington voted two-to-one for a graduated income tax on individuals and corporations. The next year, the Washington Supreme Court ruled that the tax was unconstitutional. The court reasoned in its "Culliton" decision that income was a form of property and the state constitution says clearly in Article III that "(a)ll taxes shall be uniform upon the same class of property.” Therefore, the state could not have a graduated income tax.

Culliton has been widely regarded as settled law. The state Supreme Court has reaffirmed it. In 1972, the state attorney general's office reaffirmed it, too. But in Appendix B of the Gates Committee report, Hugh Spitzer, who teaches Washington constitutional law at the University of Washington Law School, suggested that the question was ripe for re-examination. Culliton was based on a misreading of an earlier decision, Spitzer argues, and that wrongly-chosen precedent itself was based on U.S. Supreme Court rulings that had since been overturned.

"Today there are only two states . . .whose courts have not reversed earlier decisions treating income as property,” Spitzer explained. "In all other states where this issue has been considered, the income tax is treated as a form of excise tax or in a category of its own. Accordingly, there is a reasonable likelihood that if the Washington State Legislature or voters enacted an income tax today, Washington's courts would approach the issue with a fresh view."

Why not just avoid the court challenge and present I-1098 as a constitutional amendment? Because that would require a two-thirds vote of the legislature and, Gates says, there's no chance of getting two-thirds.

But of course, even getting five votes on the state's high court is hardly a slam-dunk.

Uncertainty is bad for business, Barer notes, and the initiative campaign has "piled uncertainty on uncertainty." No one knows whether 1098 will pass; how the courts will rule on it if it does; whether or not the IRS would allow a federal deduction for the new tax (1098 supporters say this is a total red herring); or how legislators might change the law in two years.

And virtually no one trusts the legislature. That said, what's a skeptical citizen to do? Can Washington never create a new tax? Without more money, just exactly what should the state shortchange? Conversely, if the state isn't going to keep cutting programs and services, what's a better way to raise the cash?

I-1098 opponents aren't obligated to answer those questions, any more than Eyman is. But it's legitimate for voters to ask: If not this, what? If not now, when?


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About the Authors & Contributors

Daniel Jack Chasan

Daniel Jack Chasan

Daniel Jack Chasan is an author, attorney, and writer of many articles about Northwest environmental issues.