Late in the game Governor Chris Gregoire has said she'll vote for the income tax initiative, I-1098. The initiative, which would tax individual income over $200,000 a year or a couple's income above $400,000, isn't ideal, Gregoire says, but she doesn't have a better idea, and she doesn't see any other way to come up with the missing money for education.
Anti-1098 spokesman Matt McIlwain, a managing director at Madrona Venture Partners, stopped by Crosscut's new office the next day to make a couple of the same points — 1098 is a lot less than ideal, and he doesn't really have a better idea. But he came to a radically different conclusion: He won't vote for it, and he hopes you won't, either.
McIlwain stuck closely to the arguments he and other anti-1098 campaigners have been using from the get-go. (There was some joking about this. He doesn't lack a sense of humor.) It would be the largest tax increase in Washington history. Because it wouldn't touch the sales tax, it would do nothing to make the system less regressive.
He also said states with income taxes fare worse economically than states without. This would give Washington one of the highest income tax rates in the nation. It would constitute the largest tax increase in Washington history. And there's every reason to believe that the legislature would tamper with it after two years, extending the tax to virtually everyone, and using the money for whatever it pleased.
McIlwain also cited a recent Wall Street Journal piece that said: “Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies — Bill Gates Sr., has, of course, been the leading spokesman for 1098 — are proposing — and the consequences have been devastating.” Both their gross state products and their per capital incomes have risen less than the national average.
Of course, only seven states currently lack income taxes, so it's hard to know what that means: Those 11 have underperformed an average of 50 states, 43 of which have income taxes. States that have had income taxes even longer have evidently done better. Surely there's a lesson, but who knows what it is?
The Journal author, economist Arthur Laffer, thinks he does: “It's striking how the high-tax states have underperformed relative to those with no income tax. Especially noteworthy is how well Washington has performed compared to states with no income tax. If Washington passes Initiative 1098, it will go from being one of the fastest-growing states in the country to one of the slowest-growing. And passage of I-1098 will only be the beginning. Just look at Ohio, Michigan and California to see that once a state adopts an income tax, there is no end to the number of reasons that such a tax could be extended, expanded and increased. “
An allegedly inverse relationship between taxes and economic growth — high taxes bring low growth, and low taxes bring high growth — has, of course, been a focus of highly partisan debate for at least a quarter century. In the 1980s, the famous Laffer Curve — brainchild of the Laffer — told us that beyond a certain point, as top marginal tax rates rose, government revenue actually fell, because the economy grew so much less. It's the old idea that a smaller share of a big pie gives you more than a larger share of a small pie. You want the pie to grow. On the federal level, Laffer's idea clearly hasn't worked. On the state level, it may or may not be a different story.
But it's certainly part of an ongoing partisan argument. In Minneapolis recently for a Republican fund raiser, Newt Gingrich suggested that ”[t]he states with the lowest unemployment rates have the lowest taxes." Eric Black of MinnPost checked it out and found that it was nonsense. In fact, if you combined state and local tax burdens and compared those combined tax levels against unemployment rates, there was no correlation at all. Some low-tax states did have low unemployment. But some high-tax states did, too.
The evidence for some of the other things to which McIlwain alluded is less problematic. Evidently, this would be the largest single tax increase in state history. Examining this claim in the Seattle Times, Andrew Garber concluded it was accurate — although as a percentage of the economy, the tax increase passed in 1983 (when Washington was dragging itself out of a recession during which statewide unemployment peaked at 12.1 percent) was larger. Asked about this, McIlwain and his colleague Mark Funk just said they were glad the Times had found that their statement was true.
Garber also found it was true that 1098 would give Washington one of the highest income tax rates in the country — albeit only for people making more than $500,000. But very few people would pay it at all. And no one would pay it on individual income below $200,000 or a couple's income below $400,000.
But the crux of McIlwain's argument was less what 1098 would be than what it would do. In his view, it would put a permanent brake on economic growth. If high earners have to pay state income tax, some of the smart people who want to create or at least work on the Next Big Thing will just leave — or won't come here in the first place. So much for the idea that quality of life, the natural environment, the quality of our educational system makes the crucial difference. Money guys care about money. (This isn't a revolutionary idea. Think of the estimated $3 billion worth of tax breaks the state showered on Boeing to persuade the company to build its first 787 assembly line in Everett.)
Actually, McIlwain didn't dismiss the importance of education. He did argue that one should separate the financial problems of universities, especially the University of Washington, from those of K-12. And he didn't argue that less money would be good for K-12, just that education budgets had grown substantially over the past dozen years, and that improving education would require more than dollars. What more? This is 2010; he mentioned charter schools.
(He also suggested it would be ironic for 1098 to reduce the state's portion of the property tax — which is constitutionally earmarked for education — while purporting to raise money for education by other means. Of course, under the initiative, the first money brought in by the income tax would be used to offset losses caused by reduction in the property and B&O taxes. After that, most of the money would be used to increase education funding.
Writers asked McIlwain repeatedly what tax reform he'd like better than 1098. Or what his ideal tax system would look like. This isn't the first time people have asked him those questions, and he simply won't propose an alternative. For the time being, he's against 1098. He doesn't have to be for anything. But he did suggest the kind of tax reform he might personally favor: Make it revenue neutral. If there is an income tax, apply it broadly and tie it to a cut in the sales tax.
The Washington State Tax Structure Study Committee, which Bill Gates Sr. chaired (the so-called Gates Committee), proposed an income tax with a corresponding cut in the state's share of sales and property taxes. The committee members 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.” They also said that the B&O tax could be replaced with a value-added tax on businesses. Under ground rules that the legislature established when it formed the committee, the tax reform would have to be revenue neutral.
The legislature ignored the recommendation. This time around, Gates isn't relying on the legislature, and he's advocating something a lot more modest. He knows that a constitutional amendment would get around the legal challenge, but he also knows that getting the necessary 2/3 vote in the legislature for anything — much less a constitutional amendment on tax policy — isn't likely. Arguably, a constitutional amendment would be the right way to approach tax reform. But if one held out for a constitutional amendment, one would have to wait a long, long time.
Actually, former King County Executive Ron Sims did propose an amendment during the 2004 Democratic gubernatorial primary. Trailing Christine Gregoire for the nomination that she ultimately won — and, therefore, with nothing to lose — Sims proposed something remarkably close to what McIlwain says he personally might consider a good idea: amending the state constitution to create a graduated net income tax and to scrap both the B&O tax and the state's 6.5-percent portion of the sales tax. The Seattle Times called Sims' idea “bold but impractical.” It wasn't enough to save his candidacy.
As a couple of people at the Crosscut meeting noted, there seemed to be an inconsistency: On one hand, McIlwain thought it would be fairer to have an income tax burden that fell on everyone, not just the wealthiest 2 percent of the population. On the other, he opposed the initiative partly because the legislature might extend it to everyone.
But he didn't have to be consistent. He wasn't arguing for anything. He was opposing 1098. The latest Elway poll indicates that for the first time, a majority may agree with him. We'll see.