Why Proposed Washington Income Tax Will Kill Jobs


Updated April 26, 2010 9:12 a.m.

When Bill Gates Sr. last proposed a Washington state income tax in 2002, he was chair of the Washington State Tax Structure Committee that was created by the Legislature. Comprised of academics and legislators, the committee studied how the tax system could be altered in the 21st century.

The committee was charged with studying “fairness, stability, adequacy and the effect of the tax system on Washington’s economic vitality.” However, the idea failed to get any traction. It was not perceived as fair, stable, and adequate. And it would have hindered the state’s economy as it emerged from the economic hangover from 9/11 and the dot-com bust.

Mr. Gates’ new income-tax proposal, Initiative 1077, won’t work either. On the surface, it sounds feasible. But the state’s unemployment rate is 9.5 percent. An income tax would discourage investment in the creation of jobs, and it emboldens more bad behavior by spend-and-tax legislators.

Already, Washington ranks among the worst states in sales and business taxes. Consider states like California and New York with their high sales and business taxes. They also have an income tax, and they’re nearly bankrupt.

Moreover, there are many reasons why an income tax is not to be trusted in Washington state.

After waiting out the two-year time limit to for overturning initiatives in 2010, Washington lawmakers jumped at their chance to suspend the transparency provisions of the Taxpayer Protection Act, Initiative 960.

Never were there serious discussions about reducing the footprint of government or even prioritizing the core services of government in the $2.8 billion shortfall. We are still saddled with unnecessary, expensive services including state retail liquor stores, the state printer, and the associated employee payroll costs and unfunded state-worker pensions.

Instead, with unlimited chicanery, the legislators violated the will of voters in a variety of ways:

  • They passed a ghost tax bill with just a title and literally no text – a blank bill.
  • Lawmakers refused to remove their disingenuous exemption from the state’s public records law.
  • Public hearings were scheduled without 24 hours notice.

Then, the legislators passed more than $808 million in new taxes in their unsustainable budget. They relied heavily on federal government funds to balance the budget, and it’s already well-known that the next biennium budget also faces billions in red ink. What will they do then?

Was the Legislature’s dysfunction a surprise? No. For years, the Legislature has circumvented the will of the people.

State’s pattern of ignoring voters

In 2006, state officials were proven guilty in Superior Court – their secretive, incriminating government e-mails were part of a shell game that circumvented spending limits. They included state officials and employees – including members of the Legislature, Office of Financial Management, Expenditure Limit Committee, the governor, and even the attorney general appeared to oppose the will of voters on state spending.

A coalition of business and consumer watchdog groups took them to court for violating the state spending limits of Initiative 601. The coalition included: The Washington Farm Bureau, the National Federation of Independent Business, the Washington State Grange, the Building Industry Association of Washington, the Washington Association of Realtors, and the Evergreen Freedom Foundation.

Snohomish County Superior Court Judge James Allendoerfer ruled the state’s collection of certain taxes was illegal and that the Legislature improperly increased the state’s spending limit in 2005 by $250 million.

The incriminating e-mails showed budget writers knowingly violated the law and shifted funds around to artificially increase the spending limit. Other e-mails also revealed a furtive dialogue involving Office of Financial Management strategies that manipulated funds for new spending in the 2006 supplemental budget.

The losing side sarcastically poked fun at a coalition’s complaint that the spending increase was approved after just 25 minutes of consideration by the state’s Expenditure Limit Committee, which has authority to increase the state’s spending limit.

The committee was comprised of Victor Moore, director of the Office of Financial Management; Maureen Hart, the Attorney General’s representative; Sen. Margarita Prentice, chair of the Senate Ways and Means Committee; and Rep. Helen Sommers, chair of the House Appropriations Committee.

Minutes from the committee’s meeting on November 25, 2005 illustrate why the coalition was concerned. The meeting ran short because all the substantive discussions took place earlier, which the incriminating e-mails demonstrated. With Hart recusing herself, the brief meeting concluded with a unanimous vote to increase the state’s spending limit in I-601.

Why did voters pass I-601? Times were tough in 1993. Figuratively, Washington voters erected a big red stop sign at the state capitol and passed I-601 to halt skyrocketing tax increases. Voters were concerned about public-sector indifference.

Even the Washington State Association of County Assessors took note of voter attitudes. In late 1994, the group invited me to advise them on strategy to persuade the Legislature to reduce property taxes. As I sat down following my pro bono seminar, I’ll never forget my disappointment when I heard Scott Noble, who was the then-interim King County Assessor, sitting across the table, refuse to participate in the effort.

“It will never work,” he said. But most assessors were receptive to lowering property taxes and they successfully persuaded state lawmakers to reduce property taxes in the ensuing 1995 session. And we know what happened to Mr. Noble, who was forced to resign in disgrace following his drunk-driving accident that resulted in injury to others.

Income tax – another $1 billion burden

The new income-tax proposal, in this uncertain economy, would dump another $1 billion in tax burdens on many of the very businesspeople who are capable of creating thousands of badly needed jobs.

It would be an additional 9-percent tax on income of $500,000 or more and a 5-percent tax on income of more than $200,000. They are already paying exorbitant fees for unemployment insurance and workers’ compensation.

In economic development and job creation, the great equalizer has been the lack of an income tax.

Proponents of I-1077, perhaps unknowingly, are instigating class warfare in claiming they want to lower taxes on most people while taxing the rich. But I-1077 would not eliminate the sales tax, which indelibly hurts the livelihoods of low-income people.

It would lower the state’s portion of the property tax by 20 percent. But that would only slightly reduce a property owner’s taxes – 96 percent of the property tax would remain. The slight reduction, of course, would be negated by the ever-increasing property assessments. So it’s a disingenuous argument.

Micro businesses, the self-employed, would not be liable for the business and occupation (B&O) tax. Larger businesses would receive a $4,400 tax credit. However, as any entrepreneur knows, $4,400 is a negligible amount as a business cost in the hiring an employee in salary and benefits.

Incidentally, an income tax was thrown out in 1933. Voters have since refused income-tax proposals five times. Seemingly, voters have known an income tax would be increasingly burdensome.  Taxes never go away. Government incessantly grows bigger.

The B&O tax was introduced as a temporary measure in the 1930s, but you guessed it. Businesses have been saddled with it ever since. The B&O tax is grossly unfair. It does not tax profits. It taxes revenue. Even if a business loses money, it’s subject to the tax.

It’s especially regressive on new businesses. Imposing B&O taxes on a startup makes it harder for it to succeed. And it’s a major factor why Washington is a leader in startup failures. We don’t need failures. We need entrepreneurs to be successful to create jobs.

In essence, Washington state government has a documented propensity to trample on the economic freedom and political freedom of businesspeople and voters. There is not a voter-approved agreement regarding the state’s core services.

Until there is agreement, state government shrinks significantly and voter wishes are upheld, here’s a resounding no to an income tax. An income tax would threaten more danger for the state because it chases ill-economic health. The proposed income tax won’t work – because it won’t put Washingtonians to work.

From the Coach’s Corner, do you need more evidence why the Washington State Legislature cannot be trusted?

See this blog from Jason Mercier of the Washington Policy Center regarding transparency.

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