By introducing an income tax on the state’s highest wage earners, Initiative 1098 sets out to correct two fundamental flaws of Washington State’s revenue system. The first problem is the crippled budget, which has faced $12 billion and counting in serious recession-induced shortfalls for the last couple of sessions. The legislature has responded by axing state services. (It is, sadly, easier to cut programs for the poor, than to raise taxes over the roar of newspaper editorials, talk radio jocks, and threats from big spenders like the American Beverage Association lobby and the oil industry).
Unfortunately, a cuts-heavy solution ($5 billion vs. $757 million in new revenue) has dangerous impacts. For example, public education, which makes up about half of the state budget, took $218.8 million in cuts to K-12 and higher ed funding in the 2010.
The second problem I-1098 addresses is the state’s regressive tax structure—because the state relies heavily on sales taxes for revenue, our taxes disproportionately affect those in the lowest income bracket. The bottom fifth income earners in Washington State pay approximately 17 percent of their incomes in taxes, while the middle class pays 11 percent. The top one percent of earners pay only 2.6 percent of their income in taxes.
I-1098 addresses both the revenue problem and the unbalanced tax equation. It deals with revenue by raising $2 billion annually, channeling the funds into state health services and the state’s education legacy trust account.
Second, by taxing the two highest brackets (five percent on individual income above $200,000 and partners’ income above $400,000, and nine percent on individual income above $500,000 and partners’ income above $1 million) and alleviating the burden of the state’s business and occupation taxes on small businesses (raising the exemption from $420 to $4800) the initiative aims to level the field slightly.
We think this action is long overdue. Washington State’s tax structure is unfair and inefficient, and this measure—giving small businesses a break while shifting some of the tax burden from the poor to the rich—is a good compromise. It’s generous toward businesses suffering from the recession, and sensitive to voters who have consistently shown ill will toward the idea of an across-the-board income tax.
Opponents have raised a few red flags about the initiative. They argue that Washington State attracts successful businesses and talent in part because there’s no income tax. People who make more than $200,000, or might someday make more than $200,000, are more likely to want to live here.
In reality, though, there are many other factors that attract businesses and talent here—our high percentage of educated adults, Seattle’s large research university, and the high proportion of big companies already located here.
And the thing is, 43 other states have income taxes—there aren’t a lot of places to move to avoid paying income tax. Based on data from the Tax Foundation, which studies income tax rates between states, the Sightline Institute and a few other stats nerds found that the correlation between states with higher effective income taxes for high earners and the presence of millionaires is exactly .00003—meaning, basically, high tax rates have no influence on the number of high income earners living in a state.
The No camp points out that the 9 percent highest marginal rate would put Washington State in the top four or five among states levying an income tax. However, according to a study by the liberal Economic Opportunity Institute, the effective tax rate—thanks in part to the exemption up to $200,000—would put Washington State at 26th out of all 44 states that levy an income tax on the wealthy.
Opponents also worry that the state’s Education Legacy Fund, which is slated to receive the 70 percent of the $2 billion, is easy for legislators to raid. True. The legislature has a history of pilfering from the fund. However, most of the state’s general fund pays for education and health—90 percent of it, in the 2009-2011 biennium. So, the argument that the Legacy Fund is vulnerable is, ironically, an argument for I-1098. The need for education funding there, and that’s where the money has been, and obviously, will be going.
The argument from the anti-1098 campaign that’s sticking and could ultimately defeat the measure is the fear that a high-earners income tax could become an across-the-board income tax in two years, once the legislature is legally allowed to review the measure. That seems unlikely to us, given the extreme difficulty legislators have faced in even proposing an income tax in recent years. (They tried in both 2009 and 2010. The proposals didn’t even make it out of committee.) The fact is, an income tax is the third rail of Washington State politics. If incumbents think they’re facing a backlash now, watch the house cleaning after they institute an income tax. It’s political suicide.
Our own concern involves so-called “S” corporations. S corps are businesses that are small enough—fewer than 100 shareholders—so there’s no distinction between the owners’ taxable income and their business’ revenue, meaning that S corps (for example law firms, small restaurant chains, or, for a less typical example, the Bartell’s chain of drugstores) would be subject to the tax just like people who personally earn over $200,000. Our worry: This could discourage owners from investing back into their businesses—if you’re going to get taxed either way, you may as well keep the money you can. However, there is no data available on exactly how many of these firms would be affected by the tax (although the opponents estimated that there are around 5,000). That number would include Bartell family, owner of Bartell Drugs, hardly a poster child for a small start up that needs a tax break. It’s also true that you can deduct business investments, and so, recoup some the of the money.
The fact that some of Washington State’s most prominent innovators and entrepreneurs, particularly at Microsoft and much of the state’s tech community, have come out against the tax also makes us pause. They say, with some weight, that the initiative penalizes those who are responsible for the prosperity of our region, for providing much of the high-paying jobs. We understand that criticism—Washington State should take pains to nurture its greatest innovators and job providers. But Steve Ballmer at Microsoft, one of the big contributors to the ‘No’ effort, is also on record repeatedly calling for education funding. How does he propose to fund education? Here’s a concrete solution. And he’s spent $425,000 to defeat it.
On a fundamental level, this initiative is about justice—creating a fair tax system where high earners pay their fair share, and the state continues its duty to provide basic education and health services to the people who live here. If the high-earners’ income tax constitutes some kind of class warfare because it targets one group of people—the highest income brackets—please consider then that the current system already targets one group of people—the lowest income bracket—by charging a flat sales tax. 1098 is an opportunity to set things straight.
Full Disclosure: Sandeep Kaushik, who co-founded PubliCola in January 2009, works for the “Yes” campaign. Sandeep has no editorial role at PubliCola.
PubliCola investor Rajeev Singh is the COO of Concur Technologies, which contributed to the “No” campaign. PubliCola investor Greg Smith contributed to the “No” campaign.
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