WSB Readers:
Greetings. David Preston here.
Some time ago, I posted a short piece on I-1098, an initiative that will be on the November ballot asking voters if they want to implement an income tax on wealthier Washingtonians.
There was much interest in the topic. Good questions were raised and thoughtful arguments were put forward on both sides. Based on that, I decided to put together some of the concerns WSB readers had raised about I-1098, add a few of my own, and ask I-1098's sponsors for an official reply.
(Disclosure note: I am in favor of 1098 but am not affiliated with the campaign in any way. I simply want to encourage a vigorous debate on this important issue.)
Below are my questions, along with the I-1098 staff's responses. I hope you will find their answers as helpful as I have.
Many thanks to Yes on 1098 staffers Jake Faleschini and Sandeep Kaushik for their time and effort in getting this information to me.
More information on I-1098 is available at this link:
For a PDF document containing this information, go here:
http://roominate.com/blogg/1098_Q_and_A.pdf
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Q: What do you think I-1098’s chance of passing in November is?
A: This is going to be a hard-fought battle, and we expect it to be close. The opposition, which is being funded by a small group of very wealthy CEOs, venture capitalists, and big developers, has pledged to spend millions to stop 1098 because they want to preserve the massive tax advantages that they get under the current system. But we are confident that Washington’s voters will see through the misinformation. When they learn what I-1098 actually does -- cut taxes for the middle class and small businesses while requiring the very wealthy to pay their fair share so we can restore the deep cuts to education and health care -- they like the idea. Given the recent cuts to education and health care services in Washington State, voters realize that we can no longer afford to give the richest Washingtonians a pass on paying their fair share of taxes.
Q: How many Washingtonians will have to start paying income taxes if 1098 passes? (I’m not looking for a percentage figure here; I’m looking for a head count.)
A: The limited income tax provision under 1098 will affect less than 3% of Washingtonians: about 75,000 households out of more than 2.5 million in the state. However, many of those households would also receive tax cuts from the reduction in their property and B&O taxes (although the exact number is difficult to quantify). Thus, the number of households that will pay more tax after initiative 1098 is passed would be significantly fewer than 75,000. And those are the households that are benefitting from our current unfair system, where the wealthy only pay 2.6 percent of their income in state and local taxes while middle class families pay four times that rate.
Q: How much do you estimate it will cost to collect and administer the new tax? How many new government positions will need to be created to do it? Will those expenses come directly out of the revenue raised?
A: The income tax on the wealthy will be simple to administer. That is because it will be based directly off of adjusted gross income on the federal tax form. Only those who owe any tax will have to file a state tax form, and it will be simple and take only a few minutes to fill out. Section 902 of Initiative 1098 states: “PERSONS REQUIRED TO FILE RETURNS. (1) Only taxpayers with joint income in excess of $400,000 ($200,000 for individuals) are required to file a tax return with the department. The department must utilize such taxpayer's federal tax returns as a primary tool for obtaining taxpayers' information. The department must prescribe a simple supplement of no more than two pages for computing the excise tax owed under this chapter.” Given this simple system, administrative costs will be minimal.
Q: A state income tax has been challenged (and beaten) in our courts before. Do you anticipate any specific Constitutional challenges to I-1098 if it passes? (If so, what might they be based on?)
A: After consulting with some of the leading tax and constitutional law experts in the state, we are confident that I-1098 is constitutional. There is a state Supreme Court decision from the 1930s that declared an income tax unconstitutional, but all of the precedents that led to that decision have been overturned in subsequent decades. Other states have faced the exact same question and their courts have all decided that an income tax IS constitutional. We expect a challenge if I-1098 passes but we believe the courts will rule in our favor.
Q: I-1098 imposes an arbitrary income threshold of $200,000 ($400,000 for couples.) How did you come up with those numbers?
A: We studied our current tax system to understand who pays our current tax burden. We found that those who make above those thresholds are paying a far lower percentage of their income in state and local taxes than working and middle class households. In fact, Washington State ranks dead last -- 50th out of the 50 states -- in basic tax fairness, with the middle class paying four times the tax rate of the wealthy. I-1098 will help to restore some fairness to the system.
Q: Under the proposed new tax structure, what would be the difference, in dollars of tax owed, between a single person with a taxable income of $199,999 and another single person with an income of exactly $200,000?
A: There would be no difference, in dollars of tax owed, between a single person with a taxable income of $199,999 and another single person with a taxable income of exactly $200,000. Neither would owe ANY income tax because the new proposed income tax would only apply to the taxable income a single person makes ABOVE $200,000.
For example, a single person making an ADJUSTED gross income of $200,100 would pay five dollars in income tax and a person making $200,200 would pay ten dollars in income tax because the first $200,000 is exempt from the income tax. Furthermore, a single person making $200,200 would also likely see a tax reduction from the initiative’s reduction of the Property and B&O taxes and so would still likely pay less in taxes overall.
Q: Historically, one reason Washingtonians have been against a state income tax is that Washington State already has one of the steepest sales taxes in the nation. The sales tax is the most regressive tax there is, hitting the poor the hardest. Why does I-1098 reduce property taxes and the B & O tax, instead of reducing the sales tax?
A: I-1098 is the best initiative citizens have put forward in over seven decades to improve Washington’s regressive and outdated tax system. It is not going to solve every problem with our tax code, but it is a huge step in the right direction.
[You are] correct that the Sales Tax is regressive, but so are property taxes. And many economists actually list the B&O tax as the most regressive tax because it is nearly always passed on to consumers (like a sales tax) and can tax the same object or service multiple times. Thus, the effect of a B&O tax is often that of a sales tax on steroids. Eliminating the B&O tax for small businesses makes sense because it will stimulate job creation and help put Washingtonians back to work. Thus, the citizens who put the initiative forward felt that eliminating the B&O tax was a more pressing concern in the short run.
The citizens who proposed this initiative also spent a lot of time listening to the concerns of average Washington citizens, who felt that property taxes caused them the most hardship. Particularly at a time when so many people are in danger of losing their homes, we wanted to ensure that this Initiative alleviates some of that pressure.
Q: When Washington voters were asked to vote on a state lottery several years ago, they were told by lottery supporters that the money raised would be dedicated to paying for education, but in the end, lottery money was comingled with the general fund and we ended up cutting education funding anyway. I-1098 sponsors say this kind of comingling won’t happen with money raised by a state income tax, but is there any provision in Washington state law that expressly forbids the Legislature from eventually comingling the trust fund money with the general fund if it wants to do that?
A: When writing 1098, we were very aware of previous actions by the legislature. That is why we built such strict transparency and accountability measures into the initiative. By law, revenues raised by 1098 will not go to the general fund but instead will be directed to a special trust fund that will be dedicated to funding education and health care. The fund will pay for priorities like reducing class sizes, helping students afford a college education at community and four-year colleges and universities, and pay for the voter-approved Basic Health Plan.
Q: Will the money in the trust fund fully restore recent cuts to education and health? If not, what percentage will it restore?
A: Initiative 1098 will generate enough resources to restore ALL of the money that was recently cut from the Education Legacy Trust Fund for K-12 Education. It will also restore a significant amount of the funding for the recent cuts to health care and higher education.
Q: Some people see I-1098 as creating a potential cash cow for the Legislature. They worry that, two years from now, politicians in Olympia could gradually begin lowering the taxable income threshold set by I-1098. Beyond whatever language you have included in the text of I-1098 is there language anywhere in Washington state law that requires a public vote on new taxes?
A: Section 1004 of Initiative 1098 states: “The excise tax rates in section 501 of this act may not be increased for any income level without a majority vote of the legislature and submission of the changes to the people for approval.” If the legislature tried to change this language, they would be committing political suicide. And if they did it anyway, it is all but certain that another initiative will be filed to make sure that the public has the final say on any change to the income tax.
Q: When will I-1098 take effect if passed?
A: If passed, both the tax cuts and the limited income tax provided for in Initiative 1098 will take effect in fiscal year 2012.
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