Initiative 1098 take II

Click here for part I of Initiative 1098.

A hot issue in 1932, state income tax remains a volatile topic today. Initiative 1098 was the most recent major push towards implementing a graduated income tax in Washington State. The initiative was put to a vote of the people in November of 2010 and failed, but once again it sparked contentious debate about whether or not Washington State needs an income tax.

The intent behind the initiative was, “to create a new trust fund dedicated to improving education and health services and providing middle class tax relief.” Initiative 1098 proposed to:

• ·      Reduce state property tax by 20%
• ·      Do away with the B&O tax for small businesses
• ·      Tax joint income over $400,000
• ·      Tax individual income over $200,000

By increasing taxes on the wealthiest 1.2% of the state’s population, this initiative also aimed to make Washington’s taxing mechanisms less regressive (read more about WA’s regressive taxes).

William H. Gates, Sr. was the Chair of the Washington State Tax Structure Study Committee that released a report to the Legislature in November of 2002 on taxing alternatives. He was also a staunch advocate of Initiative 1098.  The Gates Commission Report, found that a graduated income tax would lessen Washington’s regressive taxes by taking some of the burden off of other regressive taxes, and the overall fairness of the tax system would improve; however, the proposals put forward in the Gates Commission Report from 2002, look vastly different than what was being presented to the voters in Initiative 1098.

The Gates Report advocated for a flat income tax plan that would replace a large portion of the state’s reliance on a sales tax. The flat income tax would also do-away with some of the property tax (Initiative 1098 did include a 20% reduction of state property tax). This type of tax plan would also make Washington’s taxes more progressive and less regressive. Bill Gates, Sr. responded to critics that suggested we should try to implement one of the tax structures put forward in the Gates Commission Report by saying:

The fact of the matter is, this is something designed to happen. Those were just models set up in a report from a committee as a way to look at how taxes could be changed in this state. It doesn't represent something that I'm wed to. I'm wed to doing something that works, and this works.

William Gates Sr.

The Office of Financial Management estimated that Initiative 1098 would bring in $11.6 billion over the next five years. Out of the monies collected, 70% would be dedicated to education purposes and placed in the Education Legacy Trust Account while the other 30% would be used solely for health services.

State Revenue Increase
Calendar Year	2012	2013	2014	2015	2016
Income Tax	$2,213,000,000	$2937,000,000	$3,025,000,000	$3,116,000,000	$3,209,000,000
Business & Occupation Tax Credit	($250,000,000)	($259,000,000)	($261,000,000)	($271,000,000)	($281,000,000)
Property Tax Relief	($383,000,000)	($393,000,000)	($403,000,000)	($414,000,000)	($425,000,000)
Total Net Revenue to Trust Fund	$1,580,000,000	$2,285,000,000	$2,361,000,000	$2,431,000,000	$2,503,000,000

Source: OFM

Not surprisingly, the initiative had supporters and strong opposition. Groups supporting Initiative 1098 donated $6,423,302 while those against contributed $6,370,002 to use towards opposing the initiative. Most of the opposition’s money came from large contributions from the Microsoft and Amazon Corporations.

Several television ads aired on both sides of the issue. You can view a couple of them below:

On November 2, 2010, the state voted on whether or not to establish a state income tax. The results were 64.15% (1,616,273 votes) against to 35.85% (903,319) votes for. San Juan County was the only county in the state where Initiative 1098 was passed by the majority of voters. Given the vote count was overwhelmingly opposed to a graduated income tax, and considering Washington’s view on income tax from a century ago, it seems as though we still are not ready to restructure our taxes.

Scott Stanzel was President George W. Bush’s media affairs spokesman and led the opposition to Initiative 1098. Less than a week after the election, Scott said:

Clearly, [Washington’s] middle-class residents understand an economic reality that eludes Mr. Gates and many other already-rich advocates of higher taxes: The absence of an income tax has been Washington’s greatest comparative advantage over its high-income tax neighbors in California and Oregon.

Perhaps Washington will see another initiative in the next few years. What do you think? Did you vote for Initiative 1098, and if you didn’t, what other ways can the state fix our taxing structure?


Curious to see if you would have been impacted by Initiative 1098? Use this handy calculator to see if you would have paid more.

Regressive Taxes

A regressive tax is a tax that takes more from the lower and middle income brackets than it does from the highest income earners. Washington State’s tax structure is considered regressive for a plethora of reasons. One of the main reasons is that Washington does not have a personal income tax (which would take into consideration the amount that each individual makes), instead, Washington relies on other forms of taxation that do not take income disparities into account.

Forty-one states have an income tax structure which accounts for a majority of state funding. Washington, Nevada, Alaska, Wyoming, South Dakota, Texas, and Florida do not have a personal income tax. Not surprisingly, five of the seven states are ranked as having the most regressive taxing structures in the United States.

Personal income taxes are less regressive since the taxes are based on how much each individual makes, rather than a flat, across-the-board tax. These states derive between half and two-thirds of their tax revenue from these taxes, compared to the national average of 35%. Unfortunately, Washington comes in #1 (or last place, however you want to look at it) for having the most regressive of taxes. Washington citizens that fall within the lower and middle economic bracket pay 17.3% of their income in taxes, while the highest income earners pay merely 2.6%.

Another extremely regressive tax is the excise tax (or sales tax) because the same rate is imposed on everyone, regardless of discrepancies in income.  Washington State also relies heavily on excise tax revenue for state funding. For more information, check out these past posts on excise taxes in Washington.

Most states tend to receive the bulk of their funding support from the lower and middle income groups, leaving the highest-income earners to pay for a considerably smaller proportion.

The higher the income your household has, the less of their overall income goes towards taxes, whereas the lower income households have to pay a significantly higher proportion of their annual income in taxes. The Gates Commission report shows that a family that makes $150,000 a year pays 4.4% of that in taxes. A family that makes under $20,000 pays 15.7% of it in taxes. Not only is the lower income family clearly paying a higher percentage than the middle and upper-income bracket, but paying the taxes is so much more of a struggle for the lower income family without them being disproportionally taxed.

Continuing to tax our citizens in this manner is not sustainable. What kind of solution(s) do we need to fix this problem? What can we do as citizens to engage and initiate this kind of conversation so that we can begin to work towards a solution?

What is the B&O tax?

Chances are you’ve heard of the Business and Occupation (B&O) tax if you own a small business or do taxes for a business in the state of Washington. The B&O tax is a gross receipts tax, which means the State collects taxes on the total amount of money a business earns from products sold or services provided. This means companies can’t subtract expenses like labor, materials, taxes, or other costs from the amount that the taxes are collected from.  The Department of Revenue (DOR) says that the B&O tax is measured on the value of products, gross proceeds of sale, or gross income of the business.  This tax is pretty complex and my goal over the next few posts is to provide you basic information regarding this tax, its origins, and where to find resources that can give more detailed answers to B&O questions. I’ll also briefly talk about opinions of the tax and alternatives that legislators and other groups are discussing.

So, basic information: Aside from the definition above, it’s important to know that with this tax not all businesses are taxed at the same rate. For example, the tax rate for retailers is 0.471 % while real estate brokers are charged a rate of 1.5 %.  DOR has a list that covers tax classifications for common business activities including everything from accounting to yard maintenance. When doing your business taxes, it’s important to know which group you belong to or know if your company fits under multiple groups so you’re paying the right rate. Also, I won’t go into detail about these but you should know that there are quite a few exemptions and other parts for this tax and businesses in Washington. When looking at the chapter of Washington State law that covers the B&O tax, there are 75 exemption sections, 34 deduction sections, and 20 credit sections of the tax that the legislature applied to specific parts of Washington State’s economy.

What does this all add up to for state government? During the biennial budget for 2009 to 2011, the B&O tax brought in $5.6 billion for the state’s general fund. This equals 19.9 % and was the second largest contributor behind the sales tax that collected $13.1 billion. The B&O tax provides an important revenue source and is used to fund agencies and services that state government provides. Also, the B&O tax is somewhat unique when compared to taxes collected by other states. Ten years ago, the legislature authorized a study of tax alternatives for Washington State that was chaired by Bill Gates, Sr. (also known as the Gates Commission). In the Commission’s final report, they talk about what other states use:

The truly unique element of Washington's tax system is the B&O tax: a gross receipts tax levied on businesses. Forty-five states impose a traditional corporate net income tax, similar to the federal tax. Of the other states, Michigan levies a form of value added tax, Nevada relies on taxes on the gaming and entertainment industry, South Dakota utilizes special taxes on contractors and banks, and Wyoming receives significant revenues from severance taxes (e.g. taxes on oil and minerals).

Next week we’ll talk about why Washington went against the grain compared to other states when taxing businesses and look at a few perspectives on the B&O tax.

Alternative proposals to the B&O tax, Part I

So what are some alternatives to the B&O tax in Washington? I’ll discuss some of the alternatives that came out of the latest study on Washington taxes, the Gates Commission report.  Their major recommendations included two around the idea of a Value Added Tax (or VAT) and a goods and services tax. A quick example of VAT is to use the wooden furniture scenario from last week. Instead of taxing the entire item at its different stages in production, VAT would only tax the ‘value added’ at each step, which would reduce the amount of taxable business revenue.

The first option that the report looked at was called a ‘subtraction method business VAT.’  This alternative included completely eliminating the B&O tax and replacing it with a 2.2 percent subtraction method business VAT. The main benefit of this included the removal of any pyramiding. However, some of the downfalls are that it would have been harder to administer than the B&O tax and would probably be easier for businesses to evade the tax. Also, Michigan use to have a VAT in place but ended up phasing it out in 2009.  In 2002, The News Tribune asked business organizations in Michigan to comment on the Gates proposal. Some comments included: "The tax that they want to replace had better be one bad tax," and "The Single Business Tax (Michigan's name for its value-added business tax) taxes all the wrong things." Also the complexity of the Single Business Tax was one of the reasons for its demise, said Tricia Kinley, director of tax policy and economic development for the Michigan Chamber of Commerce. The Commission ended up endorsing this over the other VAT model, the progressive VAT.

For the progressive VAT, the Commission’s alternative was to institute a 3.9 percent tax, reduce the sales tax to 3.5 percent, and eliminate the B&O tax. A progressive VAT is similar to an income tax, since employed citizens would pay a tax on their wages (the study described employees as value-adding entities in their own right), companies would also pay the same rate as employees. The benefits are the same in terms of pyramiding and leveling the playing filed, however, this idea hasn’t been tried in the United States. Combined with appearing as an income tax, it’s likely that gaining traction for implementing this would be a tough battle.

The last proposal discussed by the Commission was a goods and services tax (or GST), which they didn’t end up endorsing.  For this option, there would be a 9 percent GST and no sales or B&O tax. The tax base would be equal to sales at every stage of production, including wholesale and retail transactions, with a credit for taxes paid on intermediate goods and services purchased by registered taxpayers. The biggest benefit of this choice would be the streamlining of Washington’s tax system. However, there is no example of this being done by a sub-national government and considering how connected we are to other states, there would most likely be problems implementing this and dealing with cross-border and online transactions.

Even though this report was widely discussed upon its release, it did not lead to any tax policy changes in the Legislature or the ballot box. As you’ve read in numerous entries on this site, changing our tax code has been a slow process that usually ends up in dead ends for ideas like the three listed above. Next time, we’ll look at some recent proposals that have been discussed in the Legislature regarding the B&O tax and also mention how the cities use this tax.

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