Income tax on high earners will go to vote

Initiative 1098 would impose an income tax on the top 1.2 percent of Washington wage earners, securing funding for education...

By Dominick Bonny

Battle lines are being drawn over Washington State voter Initiative-1098 – which would establish a state income tax – and the opposing fronts are business and education.

Come November, Washingtonians will cast their ballots and decide whether to impose an income tax on the top 1.2 percent of wage earners – couples making more than $400,000 and individuals making more that $200,000 a year. The tax would also cut property tax by 20 percent and exempt about 375,000 state businesses from paying the business and occupation tax. The initiative was drafted by Bill Gates Sr., along with tax attorneys and with the support of the Equal Opportunity Institute, a non-partisan, nonprofit public policy lobby in Seattle.

The initiative would tie income tax revenue to education and health funding, barring the money from going into the state general fund, over which legislators have control. If passed, it would generate $11.16 billion over a five-year period, according to the Washington State Office of Financial Management.

Opponents call to mind the fact that after two years the state Legislature can amend a law passed by initiative with a simple majority and they say when that happens, lawmakers will extend the tax to everyone regardless of their income bracket.

“There’s hardly an initiative that hasn’t been altered by the Legislature,” said Mark Funk, media director for the Defeat 1098 campaign. “That’s going to open a can of worms.”

But Sandeep Kaushik, spokesman for Yes on 1098, said opponents are using fear tactics and expanding the income tax to everyone would be political suicide for legislators.

Marilyn Watkins, policy director with the Equal Opportunity Institute, agrees.

“We have the power of referendum, initiative and election,” Watkins said.”The voters of Washington can keep this tax at the level they think is appropriate.”

According to research from the Institute on Taxation and Economic Policy, a national tax research organization, Washington has one of the most regressive tax structures in the nation. ITEP research shows a sort of trickle-down tax system where the poorest state citizens pay the highest percentage of taxes. Between the sales tax and other taxes passed onto consumers, like state business and occupation tax and property tax, ITEP shows the lowest 20 percent of wage earners end up paying 17.3 percent while the top 1 percent only pays 2.6.

“I don’t know what state (opponents) have been living in for the last 20 years,” Watkins said. “This doesn’t even level the playing field.”

Yet opponents say the tax will affect more citizens than initiative-supporters would have people believe. They say the tax will hurt small businesses classified as S corporations.

According to the Secretary of State’s office, of the 402,918 businesses in Washington, 138,236 are active profit corporations – including C corporations, L.L.Cs and others. The S corporation status allows owners to report their business profit or loss on personal income tax returns, shielding the company from having to pay the federal income taxes they would as a C corporation – what some call “double taxation”.

“For tax purposes there’s no distinction between the company and the individual,” said Stephen Mullen, president of Washington Roundtable, a special interest group representing state businesses. “You get the liability protection of a C corp. but you don’t pay federal taxes.”

Funk said that many agricultural businesses in the state are classified as S corporations and because their operational costs are high owners may claim a large income but in reality that money goes right back into paying for business expenses like equipment, feed and operational costs.

“They really get whacked by the S corporation classification,” Funk said. “(The tax) would come right off their bottom line.”

But Watkins said that while it’s true that the income tax might stress some S corporations, that if they plan accordingly it will not threaten the long-term health of their business.

“With S corp money you are allowed to carry losses forward for 10 years,” Watkins said. “Over time – over the life of your business, it all evens out.”

Scott Dahlman, a public policy analyst with the Washington Farm Bureau, said while many of the many of their members’ businesses fall under S corporation status, the proposed income tax is high enough that it would not affect very many of them. But he said their position is no new taxes and since farmers do not pay B&O tax, the tax credit provided in the initiative is a no win for them.

The initiative would be a win for state schools, however, and Kim Howard, government relations spokeswoman with the state Parent Teacher Association said that with 30 percent of high schoolers dropping out before graduation, this legislation will help fill the void left by ever-decreasing education funding. She said the state PTA has supported education legislation for the past several elections because the cuts to public education have been too great.

“This is gonna help us make up for what we’ve lost,” Howard said.

Dr. David Weber, CEO and chairman of the Wenatchee Valley Medical Center, said that as a high wage earner he would not be happy about an income tax but said the current tax system is very regressive. He said the tax would impact a lot of physicans and could influence doctors thinking of moving to the state. He said it looks like the state legislature has two choices in dealing with the tough economic times – reduce spending or increase taxes. But he said the current system is blatantly unfair.

“The privledged few should bear a bit of the burden,” he said.

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