Fairness issue defines income tax debate
October 5, 2010
The state-sponsored spread in the Sept. 6 issue of Fortune magazine touted Washington as a land of natural beauty, educated residents and, oh yeah, no state income tax.
No state income tax for now, at least.
Initiative 1098, a measure on the November ballot, calls for instituting a state income tax on the richest 1.2 percent of earners. The measure could be a $2 billion boon for education and health care.
Initiative backers said the measure aims to correct a structural imbalance and lessen the reliance on sales tax — a revenue source subject to the roller-coaster fluctuations of the economy.
“This doesn’t solve everything that’s wrong with a tax system that’s ranked the worst in the nation, but it’s a step toward making it more fair,” Yes on Initiative 1098 spokesman Sandeep Kaushik said.
Opponents said levying a state income tax on high earners could erase a competitive edge and eliminate a draw for prospective business investment — and jobs — in a sour economy. Only a handful of states do not collect income tax.
Brett Davis, economic policy analyst at the Olympia-based Evergreen Freedom Foundation — a group opposed to I-1098 — has concerns about income taxes creeping into other income brackets.
“I’m not too confident in government’s ability to rein in its desire for more taxes,” he said. “It seems like they always want more, and when they get it, they spend even more and they want even more.”
Bill Gates Sr. — a retired Seattle attorney and father of the Microsoft founder — joined education and public health advocates to put the initiative on the Nov. 2 ballot.
I-1098 aims to create a 5 percent tax on annual income of more than $200,000 for individuals and $400,000 for couples, plus a 9 percent tax on income of more than $500,000 for individuals and $1 million for couples.
Potential and pitfalls
The initiative directs the expected $2 billion per year to cash-strapped education and public health systems in order to reduce K-12 class sizes, ease access to higher education, shore up state-subsidized health insurance for the poor, and buttress long-term care for the elderly and disabled.
Marilyn Watkins, policy director at the Seattle-based Economic Opportunity Institute — a group backing I-1098 — said the state has the policy framework in place to improve education, but lacks the dollars to implement the changes.
“We’ve made all of these great commitments that we should be making,” she said. “They’re the kinds of things we know we need to do, but there is no way to fund any of them.”
Under the existing arrangement, the U.S. Census Bureau ranked Washington as the most sales tax dependent in the county — 61.2 percent of state revenue flows from sales taxes.
I-1098 proponents said the structure is unfair to low earners, because they pay a higher portion of their income in taxes.
Defeat 1098 spokesman Mark Funk said targeting a group of high-earning taxpayers — estimated to be 34,000 to 38,000 residents — to fund programs for everyone is unfair.
“You’re filling out the lower portion of Qwest Field and asking those 34,000 people to pick up $3 billion in tax burden,” he said.
The measure also calls for the state property tax level to be dropped by 20 percent — or about a 4 percent cut for the average homeowner, because counties, cities and fire and school districts collect most property taxes.
I-1098 also outlines the expansion of the business-and-occupation tax credit to exempt about 118,000 businesses from the tax; 39,000 more could be in line for B&O tax reductions.
Complicating the effect of the initiative on businesses is how S corporations — small- to medium-sized businesses with less than 100 shareholders — might be impacted. The name comes from a section of the tax code.
S corporation owners pay federal income taxes on company profit as part of their personal tax filings.
Funk said I-1098 could penalize S corporations and be a drag on businesses. Kaushik said the effect is overstated and more than made up for by savings from the B&O tax credit.
Opponents said I-1098 could repel businesses interested in relocating to Washington or starting operations here. Initiative supporter Watkins, however, said the measure is not a deterrent.
“Washington has all sorts of things going for it,” she said. “South Dakota, Alaska, Wyoming — these aren’t really our key competitor states.”
Florida, Nevada and Texas do not collect state income taxes, either.
Backers used a lighthearted TV spot — featuring the elder Gates in a dunk tank — to proclaim the measure is not intended to soak the rich. Instead, proponents emphasize the potential tax rollbacks.
“This puts that saved money into the pockets of homeowners so that they can go out and spend that,” Kaushik said.
Debate has also raged about possible changes to I-1098 if the measure passes and goes into effect. The initiative contains language to require a public vote in order to raise taxes.
Regardless, opponents said legislators could reset the income tax threshold to include less wealthy earners.
Defeat 1098 has asked voters if state lawmakers can be trusted not to change the measure. Instead, Funk said, the focus should be on reform and holding legislators accountable.
“There’s a lot of lobbyists with a lot of sharp elbows,” he said. “You don’t pass a tax increase and then go back and start making changes. We’ve got to figure out what kind of reforms we want before we start putting money in.”
Who could be affected in Issaquah?
If Initiative 1098 passes next month, hundreds of Issaquah residents could be subject to state income tax, though exact figures remain difficult to come by.
Chandler Felt, a demographer at the King County Office of Strategic Planning and Performance Management, used the most recent census data available to estimate that 1,153 Issaquah households took in more than $200,000 per year on average between 2006-08.
But the exact number remains elusive, because there is no way to determine how many of the households fall into the income bracket because the data does not separate single filers and couples. Under I-1098, single filers qualify for the tax if they earn more than $200,000 per year and couples meet the threshold at more than $400,000.
Where does the money come from?
Both the pro- and anti-initiative backers had raised about the same amount of money — $4 million — by Sept. 30, state Public Disclosure Commission filings show.
I-1098 organizer Bill Gates Sr. donated $500,000 to Washingtonians for Education, Health and Tax Relief — the political action committee running ads in support of the measure. Unions representing state employees and teachers also contributed hundreds of thousands of dollars to the initiative campaign.
Microsoft CEO Steve Ballmer, Amazon.com CEO Jeff Bezos and department store exec John Nordstrom donated to defeat the measure.
On the Web
Caleb Heeringa: 392-6434, ext. 247, or firstname.lastname@example.org. Warren Kagarise: 392-6434, ext. 234, or email@example.com. Comment at www.issaquahpress.com.