Income tax initiative worth pondering
Bill Gates Sr. is touting an initiative that would introduce an income tax to Washington state. It’s not a new debate, but it’s an important one, because we have one of the strangest tax codes in the country.
We are one of seven states without an income tax. We have a business and occupation tax that targets gross receipts, instead of the net. We rely heavily on the sales tax and have an inordinately high rate to show for it. We tax the poor as a percentage of income more than we tax the rich.
Our tax system is probably more popular in nearby states, because it allows them to pick off Washington shoppers and potential and existing businesses that loathe the B&O tax. This negative impact is especially felt in border communities like ours.
However, as tax reformers have discovered over the years, complaining about a tax code is far easier than changing it. We’ve long championed a “three-legged stool” of taxation (sales, property and income) for stability and flexibility. It would also allow the burden to be spread wider and put us on more competitive turf with other states.
But the details matter.
Initiative 1077 was just introduced on Wednesday. On its face, here’s what it would do: Impose an income tax on the top 3 percent of earners in the state, with a 5 percent levy on the amount of adjusted gross income above $200,000 per year for individuals and $400,000 for couples. The rate would increase to 9 percent for that portion of income that exceeds $500,000 for individuals and $1 million for couples. Along with those tax increases would be an across-the-board state property tax cut of 20 percent and an increase in the B&O tax credit from $420 a year to $4,800, which would eliminate this levy for 80 percent of businesses and provide a cut for 10 percent more, according to initiative supporters.
If it’s enacted, supporters say, such a change could raise an extra $1 billion annually, which would be earmarked for education and health care.
We’re sure this proposal will raise many questions, but two quick ones arise.
First, the sales tax provides the biggest burden for Washington state’s low-income families and is one of the highest in the nation. So why wasn’t it cut instead of the state property tax?
Second, will this initiative pass constitutional muster? A graduated income tax enacted by initiative in 1932 was thrown out by the state Supreme Court, which pointed to the state Constitution’s provision for uniform taxation of all property. Some legal scholars say that subsequent rulings could signal a reversal if the court reconsidered whether income is property. If not, this issue could return to the Legislature, which would have to propose an amendment to the state Constitution.
The state has several months to hash over these issues, but this is a debate worth having. Just remember to cut through the emotional appeals and exaggerations, because it will be the details that determine whether this is worthy of support.