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.

Initiative 1098

Washington State has a long and complicated history with state income tax. I won’t go into all of it in this post (you’re welcome), but it’s important to know some basics. When Washington became a territory in 1889, a system of taxation had to be implemented. During this time, most of the power in the state came from the landowners aka the farmers (you may remember our previous post on Charles Hodde and the WA State Grange Association). Property tax, which included farmland, accounted for most of the revenue in the state in the early 1900s. As the population and demand for services grew, the farmers’ concern (understandably) increased, and thus began the quest by the Grange Association, labor organizers, and others to get the state to adopt an income tax. In 1932, I-69 was passed by the voters but ended up being struck down by the State Supreme Court. (You can find much more information on I-69 by checking out Justin’s post.)

In 1935, the legislature passed a tax package that created Washington’s tax structure that we still use today (Justin also wrote a summary post on the revenue act which you can check out for more info). With the passage of the revenue act, the pressure was off the property tax for supporting most of the services provided by the state, although it still is one of the three major taxing sources.  If you want a very detailed and interesting account of the battle for an income tax in Washington State, check out Phil Roberts’ book A Penny for the Governor, a Dollar for Uncle Sam.

I know this is a lot of background, but that’s because income taxation in Washington is a really scandalous topic. All of the times the State Supreme Court overruled or the governor vetoed an attempt at a state income tax was because of a little clause in Washington’s State Constitution. In Article VII, Sec. (1), the constitution reads, All taxes shall be uniform upon the same class of property within the territorial limits and, the work ‘property’ as used herein shall mean and include everything, whether tangible or intangible, subject to ownership. This section creates definite limitations to taxation and has been the reason why Washington’s Supreme Court has ruled against a graduated income tax. All of this information really means that it’s a complicated and trying process to get massive tax reform passed for the whole state. 


Stay tuned for part II when we look at the latest effort to adopt an income tax—Initiative 1098!

Washington State Property Tax 101: History

This overview of Washington State property taxes is the first in a multi-part series focused on shedding some light on our state’s property tax system.  It is intended to condense and simplify the myriad of information already available.  If you are interested in more detailed information, head over to the Department of Revenue’s (DOR) webpage.

The Organic Act of 1853 not only established the territorial government of Washington but also required that taxes assessed on property be administered uniformly and provide exemptions for benevolent institutions, federal property, and churches.  Thus began the first tax in Washington’s history.  When Washington gained statehood in 1889, the property tax laws remained largely the same.  Property taxes were the principle revenue source for Washington from the Organic Act of 1853 to the early Depression years. 

In the 1920s and 1930s, property tax rates began to rise.  According to DOR, rates of 2.5% - nearly three times what they typically are today – were not uncommon during this time period.  During the Depression Era, efforts were made to reduce burdensome property taxes because they were no longer an accurate predictor of wealth.  As society moved from largely agrarian production to industrialization, property ownership changed.  Reliability on property tax revenue was at an all-time low in a time when demand for government resources and services was at an all-time high.

An effort made to help alleviate the tax burden (which you’ve read about multiple times on this blog) was an attempt to pass a graduated income tax.  Initiative 69 was passed by voters with 70% approval in 1932, but the state supreme court ruled the law unconstitutional because of the graduated rate structure.  Taxpayers did get some relief in 1933 and 1935 when the state sales and business & occupation taxes were passed. 

On the same ballot as Initiative 69, was an initiative to limit property tax rates, which passed.  During the following decade, voters approved multiple limitations on property tax rates which severely reduced the property tax revenue.  Additionally, a few exemptions were put into place: certain intangibles, household goods, and motor vehicles.  In the 1970s, even more exemptions were adopted: senior citizen and open space program being the most notable. 

In 2001, Initiative 747 (an Eyman initiative) was approved by voters.  This initiative placed further restrictions on taxing districts in regards to how much revenues may grow from year to year.  Before the initiative, growth rates were tied to inflation and not to exceed 6%.  Under the new initiative, growth could not exceed 1% annually.  Even though the law was deemed unconstitutional in 2007, the Legislature enacted a similar statutory limit of 1% and is currently still in place. 

In 2009, legislation requiring that all property be assessed for value annually by 2014, as opposed to every four years which had been the law since 1955, was enacted.

Overall, it’s clear to see that Washington’s property tax history is complex and ever-changing.  Stay tuned for a breakout of detailed property tax issues and a roundup of property tax stories in the news.  For a timeline of significant events go here. 

How Does Washington State Stack Up?

Think Washingtonians have it bad when it comes to taxation?  Have you ever wondered how Washington's taxes compare to other states and the U.S. as a whole?  As it turns out, we aren't the worst off in the U.S.  In fact, according to 2009 data (the most recent complete data available) Washington is below average in per capita state and local taxes.  As shown in the chart below, Washingtonians pay $4,049 in property, sales, and other taxes on average annually.  That is slightly below the national average of $4,141 per capita - a 2.2% difference.   

Washington's tax structure is different than many other states.  We are one of seven states that doesn't impose a state income tax.  However, Washingtonians are unduly burdened by the state's relatively high sales tax - one of the most regressive taxes out there.  On average, Washingtonians spend $1,850 on sales tax.  The U.S. average is only $948.  That is an astonishing 95% difference.

Compared to other states, Washington ranks 21st in the nation for the cost of state and local taxes per capita.  Only twenty other states have taxes higher than Washington.  As noted in "A Citizen's Guide to the Washington State Budget," an especially informative publication by the Senate Ways & Means Committee, this ranking has been used to gauge Washington's tax burden on residents.  However, in recent decades this measure has not been as reliable as it once was due to the explosion of wealth (aka stock options) in the late 1990s and 2000s.

If you are interested in more information or seeing compelling visual comparison's, check out the "My Money Blog" post on state comparisons.  This post sources the information from The Tax Foundation, a self-described nonpartisan research group dedicated to "educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government." 

Donald Duck Wants You to Pay

Your federal income taxes, that is. 

In the midst of World War II, the American Government sought a way to finance its defense spending, which was roughly 70% of all federal spending in 1943 - this was markedly up from the 18% of total federal spending in 1940 (EH.net, 2010). 

As you can see from Table 1, the increases in manufacturing output in the U.S. were remarkable in the five years shown. Most of this increase can be attributed to boosted government subsidies that were funded by taxpayers. The government depended on this tax revenue and used it as a means to fight the war.

So what do you do when citizens aren’t paying their income taxes? Well, you use Donald Duck propaganda to scare people into paying their income taxes! The video posted above was released in 1943 in an effort to educate and encourage Americans to pay their federal income taxes. Maybe that’s why income tax collections in Washington Territory during the Civil War Era were a flop? 

According to Phil Roberts, author of A Penny for the Governor, A Dollar for Uncle Sam (2002), Washingtonians weren’t so cooperative when it came to paying their federal income taxes in the mid nineteenth century.  He attributed this to many factors such as geography, population demographics, and the collection agents assigned to Washington Territory.  Also, newspapers in Washington weren’t labeling tax evaders unpatriotic like they did in many other territories and states.  However, in an effort to get more people to pay their federal income taxes, the government did make all tax returns public, like the one shown below.  You can even see President Lincoln’s taxes paid, $1,296, from 1864.

Income tax initiative passes in Washington State!

Believe it or not, Washington voters once approved a people’s initiative to introduce a graduated income tax.  Not only did the initiative pass, but it won by a landslide, with over 70% approval.  However, it went on to be struck down by the courts and has been followed by 4 consecutive failed attempts to bring an income tax to Washington through the ballot. The People’s Initiative 69 was successful because of the blurring of the urban rural divide, dire economic realities, and a shifting domestic marketplace.  It was accompanied on the ballot by another tax reform initiative, People’s Initiative 64.  Initiative 69 was the first and only income tax initiative to pass in Washington State and set the stage for dramatic tax reform that culminated in the passage of the Revenue Act of 1935 (you can read more about the Revenue Act here), which remains as the blueprint for our current tax code.

Initiative 69 was placed on the ballot on November 8, 1932 and read as follows:

An Act relating to and requiring the payment of a graduated tax on the incomes of persons, firms, corporations, associations, joint stock companies and common law trusts, the proceeds there from to be placed in the state current school fund and other state funds, as a means of reducing or eliminating the annual tax on general property which now provides revenues for such funds; providing penalties for violation; and making an appropriation from the general fund of the state treasury for paying expenses of administration of the act.

There were a total of 5 initiatives on the ballot in 1932.   They represented a wide spread of populist interest addressing (in addition to tax reform) elections, campaigns, and alcohol consumption.

Initiative 69 sprang out of an anti-property tax sentiment that was spearheaded by advocates in the Washington Grange Association, including Charles Hodde, who worked diligently to gather the necessary signatures for placement on the ballot.  As its ballot description states, Initiative 69 was the direct result of an understanding that property tax alone was not going to fairly and adequately fund vital public programs - education being at the top of the list.  An overdependence on one revenue stream left rural Washingtonians feeling jilted as they saw their property tax bills continually raise. 

Supported by labor, agriculture, and education; initiative 69 earned 322,919 votes and won by a margin of almost 3:1! The success of this initiative is a key lesson in the importance of coalition building and working towards common interest.  Perhaps a glimpse backwards will give the bearing necessary to move forwards? 

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?

The Revenue act of 1935

The Revenue Act of 1935 is the origin of our contemporary tax code.  Passed by the legislature and signed into law by then Governor Clarence Daniel Martin, the act introduced dramatic tax reform.  With concerns about the stability of the previous revenue system, proponents of reform looked to develop a tax code that was in pace with the changing economy. The legislature at that time, had to wrestle with a dramatic economic downturn, a highly engaged citizenry, and a number of difficult state supreme court decisions. 

Governor Clarence Daniel Martin

Prior to the Revenue Act of 1935, Washington funded its core functions through property tax collections. Being that Washington was a predominately agricultural state, this provided the most reliable and consistent form of revenue.  However, this was proving inadequate, inequitable, and economically unsound as manufacturing increased and agriculture declined.

The notion of dysfunction in the state’s tax code carried far and wide and had largely populous support.  The reform discussion sprung from the successful passage of People’s Initiative 69 on November 8, 1932.  This initiative brought in sweeping revenue reform in Washington State, including a graduated income tax.  However, the initiative was challenged in court resulting in the removal of the income tax section.  As the economic situation continued to worsen, the legislature capitalized on the populous sentiment and put forth many of Initiative 69’s reforms in the legislative process.

The 1935 legislature introduced HB 237 with 17 titles and nearly 200 sections!  Within those titles were provisions for a B&O tax, a cigarette tax, a radio tax (that was vetoed at signing), a highly controversial sales tax, and much more.  In addition, the 1935 legislature introduced a second bill that instituted a graduated income tax with a 3% tax on all income over $4,000 and up to a 4% surtax on additional amounts. Reform proved to be difficult, creating more obvious divides between urban and rural communities. This divide played out in the legislature and discussions were difficult and controversial.

al. 

The income tax portion of the sweeping reform went on to be struck down by the Washington State Supreme Court because of its lack of uniformity (it wasn’t a flat tax), but other reform components still remain today. Only through intense and informed discussion was the Revenue Act of 1935 passed by the legislature.  Despite the difficulty of the discussion, the legislature and the people of Washington State pressed forward towards the changes that had to take place.

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