I-1098’s Impact on Economic Development in Washington?

 

Sep. 22, 2010

You’ve heard the rhetoric. Initiative 1098 , the controversial income-tax proposal, has become one of the most divisive issues in Washington state.

It would impose a 5 percent tax rate of $200,000 on individuals and $400,000 on couples with a 9 percent tax rate on $500,000 for one person and $1 million on families. The state’s share of the property tax would be lowered by 20 percent and the business and occupational tax would exempt 118,000 more companies.

Bill Gates, the c0-founder of Microsoft, joined his father Bill Gates Sr. in advocating passage of I-1098. Notable opponents include Microsoft CEO Steve Ballmer and Amazon.com founder Jeff Bezos.  

Ironically, as an economic development tool, the state’s Department of Commerce has a Web site (www.chooseWashington.com) that states Washington has a “Favorable Business Environment.” One of the advantages: “No income tax in Washington.”

So what’s the impact of I-1098?

 The Citizens’ Guide to Initiative 1098 is a policy brief by written by Paul Guppy. He’s the vice president for research at the highly respected think tank, Washington Policy Center. It’s voluminous and thought-provoking with heavy documentation.

To summarize, here are Mr. Guppy’s 10 salient conclusions:

1. Initiative 1098 Creates a New Way to Tax. Essentially he believes it does nothing to fix the inequities of the state sales tax, which is regressive for businesses and low-income families.

2. The Income Tax would Likely be Extended to More People. Is this a surprise? No.

“Unlike past efforts, Initiative 1098 is drafted as an ordinary law, not as an amendment to the state constitution, Mr. Guppy writes. “This makes it easier for the income tax to be extended to more people in the future. The legislature could change Initiative 1098 in the short-term with a two-thirds vote, and after two years could change it by a simple majority vote, just like any other part of the legal code.”

3. Income Tax Revenue May Not Go to Promised Purposes. He cites Washington Secretary of State’s data that indicates the Legislature has over-ridden 30 voter-approved initiatives.

“Lawmakers often divert tax revenues from their intended purposes,” he explains. “This year the legislature transferred tax revenue totaling more than $1 billion from 33 dedicated trust accounts, some created by voter initiative, and spent those funds on general programs.” 

4. More Money Will Not Help Public Schools. He points out school children will not learn more.

“Taxpayers contribute over $10 billion per year toward the education of slightly less than one million public school students in Washington,” he writes. “Public school districts currently spend an average of $10,100 per student per year, the highest level in state history. 

“The largest budget item, comprising 83 percent of spending, is devoted to salaries and benefits. The statewide average for teacher pay with benefits is $79,200,” he asserts. “Average pay with benefits for school administrators is $117,000.”

He adds Seattle’s school spending of $12,746 per student annually has increased more than a third since 2005.

“In Seattle average teacher pay with benefits is $92,100. Average administrator pay with benefits is $106,900,” he adds.

5. Initiative 1098 and the State Economy. He lists numerous examples how the initiative would hinder the state’s economic climate.

“By enacting an income tax, Washington would be giving up a significant competitive advantage in relation to other states,” he advises. “Washington has a high sales tax. Adding an income tax means Washington would join the states that impose all the major forms of tax on their citizens.”

6. Some Residents would Leave Washington to Avoid the Income Tax. He points out a new income tax would be the fourth-highest in the U.S.

“High-earners targeted by the tax would suddenly have a strong financial incentive to move out of state,” he writes. “A change in residence would include pulling investments out of the state as well, since Initiative 1098 would tax non-residents who derive income from Washington businesses. In a survey of business owners and their views of Initiative 1098, 1.8 percent of respondents said they planned to leave Washington if the income tax measure passes, even though this was not one of the survey questions.”

He cites New Jersey and Minnesota as examples where high-income residents felt compelled to leave for greener pastures.

7. Initiative 1098 would Reduce Charitable Giving. Because the controversial proposal would be higher than the federal tax and would be applied to adjusted gross income, he writes the affluent would fewer funds for charity.

“Adjusted gross income includes wages, salaries, tips, interest income, rental income, capital gains, income from pensions and retirement accounts, and alimony payments received by divorced spouses,” he suggests. “Adjusted gross income is calculated before the taxpayer is allowed to lower his reported income by claiming deductions such as the federal standard deduction, the child tax credit, the dependent care credit, local property taxes, motor vehicle taxes, mortgage interest payments, contributions to retirement accounts and donations to charity.”

That means that $2.2 billion next year and $11.1 billion over the next five years would not be available for nonprofit giving.

8. Initiative 1098 and Tax Fairness. He writes, contrary to proponents’ claims, the proposal is unfair – 98 percent of the state’s population would escape an income tax.

“Initiative 1098 is not unbiased or impartial in its treatment of Washington citizens,” he explains. “It specifically targets a minority, as defined in economic terms, to shoulder the full cost of a new tax, while using state power to redistribute the benefits to others.”

9. State Income Taxes Do Not Lead to Fiscal Stability. He points out Oregon, New Jersey and California all have major budget woes despite an income tax.

“Oregon’s personal income taxes – based on 2009 returns due on April 15, 2010, were down by $472.3 million, or 16.4 percent less than the previous year,” he writes.

“During the strong economy lawmakers increased state spending by over 33 percent in a single four-year period,” he reminds us. “Access to a new revenue stream would likely encourage Washington lawmakers to return to enacting large, permanent spending increases in each budget cycle. When economic activity slows or declines in recessionary years, personal incomes fall accordingly, and leave income tax states like Oregon and California with far less revenue than officials expected to receive.”

10. Initiative 1098 is Unconstitutional under Current Case Law. Opponents argue passage of I-1098 would be thrown out by the courts.

From the Coach’s Corner, you can visit the Defeat 1098 campaign here.

How to Alleviate Business Uncertainty in Washington State



 July 25, 2010


Washington state is comparatively healthy. But don’t tell that to most employers. They won’t buy it. Washington state has lost more jobs, 16,000, in the past year than 41 other states.

Unemployment rates are a huge drag holding back economic development. There are many reasons why job creation is sputtering.

Actually, it’s symptomatic and related to many economic problems. The overall common denominator is uncertainty – from declining sales revenue, threats of a double-dip recession, tax increases, and unproductive public policies.

Yes, Washington faces another $3 billion shortfall.

A July Op Ed piece in the Seattle Times by State Auditor Brian Sonntag made an excellent case for decreasing the size of state government and improving its inefficient budgeting process.

“We need to resize government’s footprint to reflect what it can and should do, balanced with what it can afford to do,” Mr. Sonntag wrote. “We will not get there unless we stop, now, the petty partisan bickering that erodes citizens’ trust in government and inhibits meaningful solutions to our greatest challenges.”

A frequent complaint on this site is the mega unfunded public pensions. Mr. Sonntag points out Washington state public pensions are skyrocketing and $8 billion is unfunded.

“Our work at the Office of State Auditor uniquely positions us to understand the state’s broad financial condition,” Mr. Sonntag explained. “For example, we know even in good economic times as well as bad, the state has not systematically funded all its long-term financial obligations.”

It’s not just the unfunded aspects of pensions, which I contend are too generous vis-à-vis the retirement plans available in the private sector.

Mr. Sonntag cited a related example: “A $4 billion liability in the health-and life-insurance benefits paid to retired public employees without any accumulation of revenue to pay for it.”

Political “courage” and “leadership” is needed, he wrote.

“It is time to end the current era of political polarization and extreme partisanship. We must transform government together,” he asserted. “We must put aside the premise of ‘I’m right, you’re wrong.’ We must do what is right instead of doing what makes the other side look bad.”

His points are astute and accurate. The tendency, as it is at the national level, is to focus on personalities and not principles. It’s time to stop shooting the messenger instead of the message, and to be honest in campaigns.

For example, it took legal action by the Association of Washington to clean up the ballot title for Referendum 52. To win passage of $505 million in bonds for energy-saving school construction projects, the wording would have tricked voters into extending the new tax on bottled water. A Thurston County judge ruled that the phrase, “job creation,” was disingenuous and removed it from the ballot title.

Alleviating uncertainty

Voters have an opportunity to start implementing solutions this fall. The most salient is transparency and voter protection against disingenuous taxation. In essence, Initiative 1053 will again require a two-thirds majority on any legislative tax increase, and approval by voters.

I-1053 must be passed. Plus, voters have to make it clear to lawmakers that they will not put up with any more games.

Three times voters have passed this protection, and each time the Legislature has circumvented it.

Initiative 1082 deserves voter approval. It would pave the way for private insurers in Washington state workers’ compensation.

Liquor sale privatization is important, too, in I-1100. It would end the state’s monopoly on liquor sales and put it in the hands of the private sector. That includes the 1,500 state-liquor employees.

The class warfare implications of I-1098 are troubling. That’s the income tax on the affluent. A similar 2010 measure in Oregon has failed to help that state’s economy.

Another opportunity to alleviate uncertainty is to comment at two remaining events: The Governor’s Committee on transforming Washington’s Budget. So far, only the special interests advocating the status quo are showing up to comment.

The final two hearings:

  • July 27, 7-9 p.m. in Vancouver – Washington State University-Vancouver, Administration Building Room 110, 14204 NE Salmon Creek Avenue.
  • July 29, 7-9 p.m. in Spokane  – Spokane City Hall, City Council Chambers, 808 W. Spokane Falls Boulevard.

Will you participate.

Meantime, productive public policy will do a lot to alleviate concerns about business uncertainty, and will make it easier for businesspeople to solve their declining sales revenue.

From the Coach’s Corner, admittedly, I haven’t budgeted the time to review the dozens of initiatives on the November ballot, but have read a few others.

For some levity, here are two extreme initiatives:

  • I-1079 – “This measure states that it is an act to require state and governmental agencies, publicly owned companies, and non profit groups to pay all mandatory overtime at the rate of three times the employees’ hourly rate.”
  • I-1069 – “This measure would require the Seal of the State of Washington to be changed to depict a vignette of a tapeworm dressed in a three piece suit attached to the lower intestine of a taxpayer shown as the central figure. The seal would be required to be encircled with the following words: ‘Committed to sucking the life blood out of each and every tax payer.’ The illustration would be selected from submissions submitted by taxpayers.”

And to see dozens other public-policy columns, visit this section.

Seattle business consultant Terry Corbell provides high-performance management services and strategies.