WashACE Blog

Can't Stop Talking About Taxes

The Washington Technology Industry Association (WTIA) points out the B&O tax increases kick in tomorrow. They have more, including this:

What is probably most unfortunate about the tax increases that the legislature and Governor imposed on businesses and consumers is that the state is going to have another huge budget problem next year as lawmakers did not truly deal with the big cost drivers, such as state employee pensions and health care and social services program growth. K-12 and higher education were cut, which are the most important areas of state spending. We could be in for more tax increases next year and certainly more budget cuts across the board are in store.

While talking tech, Xconomy.com has an interesting take on Michigan's chances to overtake Seattle as the nation's #3 biotech center. Read it all. Two tax recommendations for Michigan struck me.

First, on business taxes:

...create a business tax structure which is friendly to startup, R&D oriented, money-losing businesses. ...The taxes collected from such companies in the state of Washington do not make a dent in the state budget, but they do make an appreciable and negatively noticed dent in the budgets of Washington startups.

And for individuals:

...create a personal tax structure and state infrastructure that is attractive to anyone thinking about relocating to Michigan. The taxes on individuals need to be on the low side of reasonable.

Finally, Olympia Business Watch takes note of the Small Business and Entrepreneurship Council's assessment of Washington's tax burden on business. (We've criticized the ranking before. Here's a Washington Research Council report that takes a hard look at the methodology.) Here's the key, as Jason Hagey writes at OBW:

Washington's lack of a state income tax appeared to be a major factor behind the strong showing. None of the states that ranked in the top five have an income tax, and seven of the top 10 states lack a state income tax.

He also observes:

Of course, that could change soon if Initiative 1077 makes it onto the ballot this fall and is approved by voters.

Right.

Benefit Gap Between Government Workers and the Private Sector

Kim Bradford has more on this emerging 2010 political issue in her blog for The News Tribune.

UPDATE Bradford posts more on this, responding to an email from Sen. Debbie Regala linking to a study that would seem to refute the findings that public employees enjoy higher wages and benefits. Except, there's this bit from Publicola about the "Cadillac" benefits pulled down by King County employees. 

More Editorials Skeptical (at best) of Income Tax Initiaitive

The Vancouver Columbian says the income tax would penalize success.

... if a state income tax is created in Washington state, from the political perspective it will be even worse than the proverbial camel getting his nose in the tent. It will be more like the camel has a grenade in his mouth.

That's because the editorial board believes, based on recent legislative experience, lawmakers won't stop with "the rich" if they get a chance to tax income.

The editorial concludes:

The absence of a state income tax is a glorious attribute for our state in many ways, most rooted in economics. To expect that this advantage can magically be replaced by a nonsolution to our state funding woes is pure fantasy.

The Yakima Herald-Republic continues the theme. 

Backers argue the measure's tax thresholds can't be changed without a majority vote of the Legislature and submission of the changes to a public vote. It looks good on paper, but recent events don't support that contention.

True, lawmakers can't alter an initiative for two years after passage. But when that two-year limit has been reached, any initiative can be amended. Consider what happened this past session, when legislators brushed aside Initiative 960's two-thirds requirement for tax measures and approved, through simple-majority votes, nearly $800 million in new taxes. Don't ever underestimate the powers of the Legislature with respect to initiatives.

What about the property tax break tucked into the initiative?

The cutback affects only the state's portion of the property tax -- which averages just 21 percent of an individual's property tax bill because most of the tax is local. In other words, property owners would get only a 4 percent tax break.

Not much. We'll hear a lot more over the next six months. But the early reviews are telling. When's the last time you saw an editorial board do a 180?

Taxes Passed and Proposed

With the governor last week signing the Legislature's tax package into law, the Bellingham Herald editorial board takes a last shot at the budget failure that was the 2010 session.

We have seen no significant reforms.

And so an opportunity has been lost. ... we have almost given up hope that the state will ever truly prioritize its spending and only spend money on the real priorities.

In Olympia, it seems, there is always something more to spend on and always some new way to get money in the coffers. Citizens should look at these new taxes, and the continued spending on things that are not government necessities, as a failure.

If that's not depressing enough, Jerry Cornfield writes in the Herald of Everett that the income tax initiative will be divisive.

Supporters’ not-so-subtle strategy will need to be, essentially, class warfare.

They think voters are frustrated with capitalism’s nobility and ripe for a battle to exact a little financial revenge in Washington state.

Whatever your opinions regarding an income tax, you should hope that we avoid that kind of destructive campaign.

Lots of Talk about the Income Tax Initiative

Initiative 1077 seems to have been the right gift for pundits and editorial writers looking for new fodder. Sunday's Seattle Times editorial left no doubt about the paper's strong opposition. I recommend reading the whole thing. Here's a sample:

The proposal is being sold as a tax on the wealthy. It is not, however, a tax on the already wealthy. It is a tax on becoming wealthy. On top of the 35 percent federal income tax rate, it would add a 5 percent tax on income above $200,000 by an individual, and a 9 percent tax on income above $500,000.

Most people at these levels of income are running a business. They are the ones who can invest and create jobs. Our tax system should encourage them to do that here.

I-1077 encourages them to go away.

Clearly, the initiative's authors hope the small B&O break will garner them business support. We'll see. I'm sure there are plenty of discussions being launched now.

And that's what the Herald of Everett hopes to see, plenty of talk about the income tax.

The proponents of I-1077 have given us something to truly debate. Let’s do just that.

The Wenatchee World thinks there's no reason to fear a tax debate. They are, however, a bit skeptical.

Is the primary goal to make the state’s tax system more fair and equitable, or is mostly about raising more state revenue faster? If the goal is the latter, it should be more prominently and honestly displayed. Then we can talk about it.

The governor is clear: She thinks the state needs more money. And she's going to sign the petition.

She won’t commit to full support yet – but suspects she’ll wind up as a supporter, because it would provide more money for education.

The Kitsap Sun likes the idea, but thinks it's premature. There needs to be more "sacrifice" from Olympia before we see new taxes.

This initiative, or any income tax in Washington state, or for that matter any further sales tax increase, should only come after our Legislature proves to its constituents that we are clearly only paying for well-defined priorities of government.

And, in Crosscut, Ted Van Dyk lays out his views of why the income tax is a tough sell here.

All this talk and, as yet, virtually no analysis. It's going to be a long campaign.

First Poll Shows Strong Support for Income Tax Initiative

Sam Taylor's blog for the Bellingham Herald links to a SurveyUSA poll that should bring a smile to the faces of income tax backers. Taylor notes it's early and not definitive.

Obviously this poll is early, before any major campaigning has occurred on this issue and before the initiative has even made the ballot for that matter...

Another concern.

The poll did have a larger composition of independent (39 percent) and Democratic-identifying voters (31 percent) than Republicans (24 percent).

But those identifying with the GOP still overwhelmingly supported the measure at 57 percent.

At the Evergreen Freedom Foundation, Amber Gunn says the initiative will harm economic growth. 

Floyd McKay, writing at Crosscut, thinks this could be the "breakthrough" year for fans of a progressive income tax.

The Spokeman-Review editorial board won't go that far, but looks forward to the debate.

In one of the most surprising early not-quite endorsements (because it's a news story) Jeff Mapes writes in the Oregonian of a possible happy consequence for the Beaver State.

... imposing a state income tax on well-to-do residents would take away much of the incentive for wealthy Oregonians to move across the Columbia River to avoid state income taxes in Oregon.

Well, yes, there's that.

Reactions to the Income Tax Initiative

Yesterday's announcement  by Bill Gates, Sr., of a high-earners income tax initiative helped fill the news this morning. Tim Eyman, an (I suspect) uninvited guest at the press conference thinks it's a very bad idea and questions why the initiative doesn't reduce regressive sales taxes.

In The News Tribune, Brad Shannon reports on the anticipated legal hurdles. 

“I think probably a state income tax would be good for this state. But I thought it was good before and the state Supreme Court (twice) said no,” said Jennings Felix, a retired Olympia lawyer who served as state Tax Commission counsel during the 1960s for then-Gov. Albert Rosellini.

Felix told Shannon he thinks the proper vehicle is a constitutional amendment. But that would have to be proposed by a supermajority vote of the Legislature and approved by the people. Unlikely. But, Gates's colleague on the 2002 income tax recommending Tax Structure Study Committee thinks the constitution is no longer a barrier.

...Hugh Spitzer, who teaches constitutional law at the University of Washington and also served on the Gates Commission that looked at state tax policy in 2002, has taken a different view. Spitzer contends that legal precedents relied on by the Supreme Court would not be binding in a modern case.

Guess we'll find out if it passes. Dueling think tanks have already honed their arguments on the merits of the proposal. The liberal Economic Opportunity Institute thinks it's nifty. The Washington Policy Center believes it would make Washington less competitive and hurt job creation.

Austin Jenkings at the Washington Ledge notes the governor's reaction. 

Gregoire today issued the following rather bland statement on the effort:

“I have tremendous respect for Bill Gates, Sr. I agree with him that we need to find additional funding for education. I also appreciate his concern for small businesses and our need to create jobs. Cutting property taxes would be important to our families. I will review this proposal with interest and I look forward to a thoughtful debate about how we fund education.”

The News Tribune raises an important point in this editorial, sounding a theme that will surely be developed over the next several months as critics evaluate the proposal. 

Historically, Washingtonians simply don’t trust lawmakers to ratchet down other taxes to the extent that they ratchet up taxes on income. Initiative 1077, which would package an income tax as a squeeze-the-rich plan, is already running afoul of this ingrained suspicion.

That, again, is where the constitution comes in.

No legal firewall would prevent an income tax that begins at $200,000 from creeping down eventually to $180,000, then maybe $150,000, as the Legislature faced future fiscal crises. There’s also the fact that many Americans of middling income don’t envy wealth so much as they aspire to it.

A constitutional amendment would be a far better guarantee of a wide-and-thin tax structure. Conceivably, such an amendment could freeze the scope of an income tax, indexing it to keep middle-class families exempted.

While this post is about the income tax, the Seattle Times editorial this morning reminds us that the nation and the state had best first address their spending problems.

The research of two Harvard professors of economics underlines the simple, old-fashioned idea that the best way to close a deficit is to spend less money. The professors, Alberto Alesina and Silvia Ardagna, have been studying this question on and off for more than a decade. Back in July 1999, they presented evidence that public spending, particularly money spent on government salaries, tended to suppress private investment.

Private investment and job creation must be the state's top priority. The challenge to income tax boosters is to explain how their proposal helps the economy.

Voters Likely to Have Say on State Income Tax

It looks like the November ballot will feature an income tax initiative. That's something we've not seen since 1973. In 37 years, the electorate has changed a lot. And this income tax proposal will be quite different from previous efforts, narrowly targeting that group of people known as "the rich."

In fact, that's how SeattlePI.com headlines its story on this morning's press conference: Gates Sr.: Time is now for income tax on the rich.

Initiative 1077 may become the highest profile ballot issue in years. Here's how SeattlePI.com summarizes the initiative.

I-1077 would tax couples with adjusted gross incomes greater than $400,000 annually, or incomes of more than $200,000 for individuals. Supporters say that represents the top 3 percent of earners in Washington. It also would cut the state property tax by 20 percent and increase the business-and-occupation tax credit to $4,800. The proposed initiative sets out two tax brackets. The first tax rate would be 5 percent of the portion of joint income that exceeds $400,000, or $200,000 for individuals. The tax would increase to 9 percent on the portion of income that exceeds $1 million for couples or $500,000 for individuals.

That's a very high top rate.

The Seattle Times has a good story on the morning press conference.

Here's the "Yes on 1077" website. Backers say that they want to raise $1 billion dollars a year, dedicated to education and health care.

This morning, my column in the Everett Herald included a comment on tax-the-rich policies. 

The Christian Science Monitor recently reported that eight of the nine states with “millionaire's taxes” (high tax rates on the rich) lost population in the last decade. On the other hand, eight of the nine states without an income tax saw population growth. Jobs follow wealth.

It's possible we'll get a chance to vote on some form of a “high earners” income tax this fall. As I've said before, I don't think Washington voters are in the mood for it.

Looks like we'll find out in a little more than six months.

Washington Research Council Publishes Report on Legislative Tax Package

It's an excellent overview of the myriad taxes imposed by state lawmakers in the 2010 session. Highly recommended.

More Editorials Call for Reform, Vision, Leadership

The Columbian thinks the Legislature missed a bet when it failed to get out of the liquor business.

The Columbian has long advocated that Washington join the more than 30 states that have open-market liquor distribution and sales, and instead focus only on liquor-law enforcement and education programs. Legislators typically hem and haw and flirt with the idea, but lack the courage to act. Now it appears voters might act for them. There are rumblings that an initiative on the Nov. 2 ballot could empower voters to privatize the state’s liquor distribution and sales.

The editorial takes a particularly dismissive turn when it comes to labor's arguments against privatization.

The union representing liquor store clerks and assistant managers opposes such a change; that reveals a lot about the potential benefits that an open market could provide.

The Wenatchee World also looks at missed opportunities. 

Under the circumstances — the greatest economic crisis in 70 years — it would be reasonable to expect more energy, innovation, strength of leadership. Instead the Legislature’s first great move was to suspend the 60 percent supermajority requirement for tax increases. It’s second great move, after weeks of special session haggling, was to raise taxes by nearly $800 million while statewide unemployment stood at 9.5 percent.

The Yakima Herald-Republic also sounds the theme. After recounting the saga of lawmakers wrangling among themselves over what taxes to raise and noting the inevitability of another shortfall next year, the editorial cites the furlough bill. On first glance, they say, this could be a sign legislators understood the need to control labor costs. Then ...

Feast your eyes on this partial list of state agencies whose workers are exempt from taking unpaid furloughs: state corrections, social service institutions, child protective services, law enforcement, military operations, state hospitals, state parks, highways, ferries, the Department of Revenue, insurance commissioner, attorney general, higher education classroom instruction, state liquor stores, state lottery, agricultural commodity programs and, during the legislative sessions, state legislative agencies, the Office of Financial Management, the governor's office and the lieutenant governor.

That, in a nutshell, is what's wrong with Olympia. Too many exceptions and not enough exceptional action.

Small wonder at least one member of the majority party is changing his label for the coming election.