Why I-1098 would be very bad news for Washington state

A leading attorney argues that the measure is badly drawn, including such problems as no assurance that it will be deductible from federal income tax.

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Judith M. Runstad

A leading attorney argues that the measure is badly drawn, including such problems as no assurance that it will be deductible from federal income tax.

Before you make a decision on I-1098 (the Income Tax Initiative), please take a moment to consider.

In the past, many of us have discussed the need to take another look at our Washington tax structure. Many of us have also been advocates for education and higher education. However, having done my own research and analysis about how 1098 is drafted and about how it would impact our businesses and our economy, I have concluded that 1098 is a very bad idea.

Initially 1098 would create a state income tax of 5 percent for single filers for income over $200,000 and 9 percent for single filers for income over $500,000.  (The tax is based on federal income AGI.) The thresholds for couples are $400,000 and $1 million.  It purports to grant a 20 percent property tax cut, but the cut is only on the state portion of the property tax, so the real cut is closer to 4 percent.

There is a $400 per month B & O tax credit. The new B & O tax credit would not be particularly beneficial to the overall business community, since approximately 43 percent of those businesses are already exempt. There is no cut in the sales tax. 

Although the money is initially earmarked for education and health care, the legislature can sweep those funds any time. The legislature has done so 74 times over the last 10 years. Since 1098 is not constitutional, any time after two years the legislature can change any provision of the initiative.  The legislature has repeatedly swept earmarked funds into the general funds and repeatedly modified statewide initiatives. We will be starting with the fourth or fifth highest income tax rate in the country (experts disagree as to whether it would befourth or fifth, but the point is that we would be starting out in the top 10 percent of income tax states). When has the legislature ever modified taxes to decrease them? It will only go up from here.  Think California. 

Three more important facts about 1098:

  1. It was drafted to avoid the phrase "income tax," and thus is drafted as an "excise tax."  So, there is no assurance whatsoever that the tax imposed by 1098 will be deductible from federal income tax.  If that ruling is not obtained, this would be the only state income tax in the country to not be deductible from federal income tax.
  2. I-1098 does not allow any deductions from your Federal Adjusted Gross Income.. None.  Not for charitable contributions; not for home mortgages.  Washington will be one of nine of the 42 states with an income tax that has no such deductions. Many of you sit on nonprofit boards.  Many of you know that approximately 53 percent of charitable donations are made by individuals with income over $200,000.  I expect that if 1098 passes, some of the dollars currently flowing to nonprofits will instead be diverted to the legislature.
  3. I-1098 applies to income derived from sub S corporations, LLC's, partnerships, trusts,  dividends, capital gains, rents, etc.  Many of our businesses operate through these entities.  Many of our businesses reinvest in their business, but first, they will have to pay 9 percent to the state.  Surveys show that these businesses will invest less in people and capital improvements in order to pay the tax.

I have served on three Washington Gubernatorial Competitiveness Councils, so I am keenly aware of the importance of being attractive to new and existing businesses. 1098 would take Washington state from being competitive, to one of the worst states to start or retain a business. We would have the 4th-5th highest income tax rate in the country. Most small businesses are created as sub S, LLC's or partnerships. One of the reasons many people in the venture capital area and tech area are so concerned about this is that they know that if 1098 is in place, entrepreneurs will not locate in Washington state and many will simply move their businesses.  We are already seeing plans to relocate to Washington state being put on hold, awaiting the outcome of the 1098 election.  We are already aware of companies exploring alternative states, due to the difficulty of recruiting into a state with such a high starting income tax rate.  The purported B & O cut only applies to about 25 percent of businesses, as a little less than half are already exempt.  Enacting a tax increase that is almost 200 percent larger than the biggest tax increase in Washington history will be a blow to our business environment.

I-1098 is also horrible fiscal policy. This will be the largest tax increase in Washington history.  Even California has discovered that this type of income tax is extremely volatile and leads to overspending in the good years; then, when an economic downturn occurs, a scramble for more funds to pay for the funds promised in the good years, resulting in new taxes and increases in existing taxes.  High earner taxes have failed everywhere:  (Oregon:  receipts less than half anticipated; Connecticut:  a decade of no job growth; New Jersey: stagnation and now an effort to roll back taxes; Maryland: 12 percent of high earners died or left the state in the first year of the new tax). Keep in mind that Washington state also has the highest inheritance tax in the country — not a good idea to die here!

This initiative is opposed by a broad coalition. If you check the Defeat 1098.com website, you will see a broad-based non-partisan coalition.  To date, Defeat 1098 has 2,150 donors at an average of $1,200 per donor.  Note that the Yes on 1098 group has 300 donors, the majority of which are public employee unions.  Their average donation is $11,000. Large union contributions are pouring in the door.

Note that every major newspaper in the state has opined against this measure.  But, because 1098 is posing as a "soak the rich" class-warfare type of measure, if the facts are not put out about how this will negatively impact our economic climate, it may well pass.  I urge you to get involved.


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