If I-1098 were to pass, beginning in 2012, it would impose an excise tax based on federal adjusted gross income (AGI). For individuals and married couples filing separately, the tax rate would be 5% for AGI above $200,000 up to $500,000 plus 9% for any AGI above $500,000. For married couples filing jointly, the tax rate would be 5% for AGI above $400,000 up to $1,000,000 plus 9% for any AGI above $1,000,000.
The tax receipts would be used to provide a tax credit to offset business and occupation (B&O) taxes on business gross income for the smallest small businesses, to reduce state property taxes, and to fund education and health services.
FYI: Small businesses are defined by the state of Washington as those business employing 50 or fewer employees.
I thought I'd look at the claims on both sides of this initiative, try to evaluate them for accuracy, and put my perspective on the issue.
SUPPORTING I-1098
Here are the primary claims of those who wrote and support the initiative:
1. I-1098 eliminates the B&O tax for small businesses.
SOMEWHAT TRUE: It does eliminate the B&O tax for the smallest (in terms of gross income) estimated 118,000 small businesses and reduce the B&O tax for an additional estimated 39,000 small businesses.
BUT ALSO FALSE: At the same time, the largest small businesses will end up paying higher taxes, due to the excise tax. Sixty-eight percent of those earning more than $200,000 or more are small business owners. They would gain no B&O tax reduction and have to pay the new excise tax.
2. I-1098 reduces everyone's property tax by 20%.
DECEPTIVE: It reduces only the state portion of everyone's property taxes, but that is only a small portion of the overall property tax. In Seattle, the effect is expected to be only a 4% reduction in overall property tax. In addition, local property tax districts will then be able to increase their property taxes to take advantage of this drop while remaining within the constitutionally mandated limit of 1% increase per year in property taxes without voter approval. Property taxes might not drop at all in some areas.
3. I-1098 provides $2 billion per year for education and health care.
TRUE, BUT MAYBE NOT: It does require the net increase in tax revenue to be spent 70% on education and 30% on health care. However, there is nothing to stop the legislature from reducing budget allocations to those services from the general fund by similar amounts and using these "savings" in the general fund for other purposes. They shouldn't, but they can. The legislature could also use those funds for other purposes, as they have in the past: taking educations funds designated from I-620 (death tax), I-728 (class sizes), and I-732 (teacher pay), and health services funds designated from cigarette taxes.
4. I-1098 taxes apply only to the wealthiest 1.2% of Washingtonians.
MOSTLY TRUE: Wealth is generally considered to be net worth and not current year income. However, income does not correlate perfectly with wealth. People with much lower than $200,000 average annual income will be subject to the new taxes whenever their AGI rises above those levels. For example, those who have volatile incomes (e.g., farmers) and those who may have an unusual one-time bump in AGI (such as converting all of their Traditional IRAs into Roth IRAs, or selling long-term stock holdings for a big capital gain) will have to pay the new excise tax.
OPPOSING I-1098
Here are the primary claims of those who oppose the initiative:
1. I-1098 could result in income taxes for everyone in as little as 2 years.
LITERALLY TRUE, BUT GREATLY EXAGGERATED: I-1098 does not allow changes to the rates or income levels for the excise tax without a public vote. Of course, two years after I-1098 is passed, the legislature can change it by a simple majority vote, and then apply any income tax rates at any levels, but they wouldn't do that all at once. The legislature will inevitably desire in the future to spend more, and adjusting an existing income tax will be a tempting means of paying for it.
Even if a public vote is required, you can be pretty much assured that once in place, an incremental change is likely to pass. The funds will be intended for another good purpose, and mostly only the people who would be newly subject to the tax would vote against it -- the people already subject to the tax likely would vote for it (on principle of fairness) and the people who would still not be subject to the tax would likely vote for it because it costs them nothing.
2. I-1098 proceeds will be spent for other purposes.
UNLIKELY: While the legislature can change the use of funds in dedicated accounts, they don't do this often. However, see my comments about claim #3 of the supporters.
3. I-1098 B&O tax relief will not be permanent.
DECEPTIVE: Yes, the legislature can take it away the tax credit, but it seems improbable they would do so anytime soon, given the huge state revenue increase from I-1098.
4. I-1098 will result in lower job growth.
PROBABLY: The new B&O tax credit is good for start-ups and low income small businesses, but it is bad for highly profitable small business and high income small businesses (that may or may not be profitable), where you would expect much of the job growth. It's probably a net negative on jobs, with fewer private sector jobs partially offset by some additional government jobs.
5. I-1098 will make it harder to attract great talent.
UNLIKELY: State income tax rates are not a primary consideration for most potential employees, although it may increase the costs for businesses to attract and keep the best high wage employees in highly mobile fields such as technology and upper management executives.
6. I-1098 will reduce charitable contributions.
LIKELY TRUE: Since charitable contributions are not deducted before calculating adjusted gross income, it seems likely that there will be some reduction in charitable contributions. According to 2007 IRS returns, 85% of all charitable contributions were made by those with adjusted gross incomes of $200,000 or more.
MY OPINION
Although in its current form it may never apply to me, I am voting against I-1098.
- Based on history with other taxes in Washington (sales tax, property tax, gasoline tax, etc.) and income taxes in other states, a new Washington income tax will inevitably be expanded.
- Washington has a regressive tax system in which people with lower incomes pay a much higher percentage of their income in tax that those with higher incomes. Ideally, we'd have a fair tax system, in which everyone paid the same percentage of their income. A progressive tax such as that proposed by I-1098 would improve the tax fairness situation in Washington, but I don't believe this is the way to achieve it.
- There are better alternatives to an income tax for raising revenue, such as increasing use taxes and luxury taxes.
- I-1098 seems more likely to hurt the Washington economy than to help it.
- We should stop creating restricted government funds and instead let our legislators do their best to prioritize across the entire budget.
- We should require budget surpluses that are saved during expansions and allow limited budget deficits during recessions that may use up those savings.
Please let me know if anything above is incorrect, if you think I've made an error in evaluating a claim, or if you just have an opinion to share. Thanks!
Here is the full text of Initiative 1098 and here is the Washington State 2010 General Election Voters' Guide.
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