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Washington State: You Don‘t Need an Income Tax

by John Stephenson / /

Washington, one of the seven states that don't have an income tax, could soon lose this economically advantageous distinction if Bill Gates Sr. and his big labor allies have their way.

This November, voters in the Evergreen State will vote on Initiative 1098 (I-1098), which would impose a tax of 5% on single people with incomes over $200,000 and couples with incomes over $400,000; the tax rises to 9% at the $500,000 and $1 million levels. I-1098 would also reduce state property taxes by 20% and increase the state's business and opportunities tax credit to $4,800. This will be the fourth time tax and spenders have tried to saddle hard-working Washingtonians with an income tax to pay for their spendthrift ways. Proponents of the income tax, namely Gates and the unions, say that the tax is necessary to stabilize the state's revenues and budget (Washington is looking at a deficit between $3 billion and $5 billion), provide tax relief for small businesses, and ensure "fairness" in the state's tax code.

However, the promises made about I-1098 are actually quite empty. Income taxes do not guarantee revenue or budget stability. California, which has some of the highest tax rates in the country and the fourth highest income tax collections per capita, has a $19 billion deficit that it cannot seem to bring under control. Also, Oregon recently raised its income and other taxes by $727 million, only to find out it is now facing a $577 million shortfall. What's more, states that have imposed or raised their income tax rates, such as New Jersey and Maryland, have experienced declines in population and millionaires.  Although proponents have touted I-1098's tax relief for individuals and small businesses, it's actually small ($700 million) when compared to the size of the tax hike ($2 billion). According to Paul Guppy at the Washington Policy Center, the reason for this is because the state property tax rates are small relative to the local property rates, from which Washington taxpayers will not see relief. So the 20 percent in property tax relief is actually only 4 percent. The argument that the tax will only apply to the rich is also weak. Under Washington law, after two years, the State Legislature will be able to adjust the brackets. What began as an income tax on the rich would likely become a broad income tax ensnaring the middle class as well.  Further, even though I-1098 is aimed at personal income, many small businesses pay taxes as S-corporations, partnerships, and LLCs, so they could end up subject to paying this tax or, worse, paying taxes twice. Perhaps that is why the small business community, including the Washington Farm Bureau, has come out in opposition to I-1098.

No income tax is an economic advantage that lures taxpaying residents and companies to the state from high tax jurisdictions like Oregon and California. In fact, it's such a strong selling point that Governor Christine Gregoire is touting it in her trade missions to Europe. If this tax passes, Washington will have an income, sales, corporate, and sin taxes, which will help discourage likely residents and business from relocating to an otherwise very beautiful state to create jobs and grow the economy, the only sure way to stabilize a budget.

I-1098 also has constitutional problems. As Amber Gunn at the Evergreen Freedom Foundation has pointed out, since 1933 Washington's State Supreme Court has interpreted the constitution as saying that property must be taxed uniformly. The court considers income property, so any attempt to tax it at different rates runs contrary to the constitution. Proponents say that I-1098 is an excise, not a straight income tax. But Mike Reitz, general counsel at the Evergreen Freedom Foundation, says, "The initiative's proponents want to erase 75 years of case history by claiming the income tax does not tax one's property but merely taxes the act of receiving property. This is not a constitutionally significant distinction." If I-1098 passes, legal challenges are expected.

But hopefully, there will be no legal challenge because Washingtonian voters will realize that their state doesn't need this income tax. You can learn more about I-1098 and how you can help defeat it by clicking here.