Initiative 1098 Will Give the Left a Cause on a Ballot Crowded With Business Issues

Bill Gates, Sr., John Burbank of the Economic Opportunity Institute and Sandeep Kaushik, spokesman for I-1098 speak to reporters outside the state elections office Thursday morning.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, July 1.—Income-tax supporters Thursday turned in more than enough signatures to put the issue before voters and give the left a piece of the action in what is looking like a crowded ballot this fall.

            Initiative 1098, a soak-the-rich tax that would hit those making more than $200,000 a year, is backed by a coalition of labor, social-service and progressive organizations. That makes it unique among the half-dozen ballot measures that appear headed for a vote in November. The other five are backed by business interests – and this one most assuredly is not.

            Supporters turned in petitions with 350,000 signatures Thursday, well in excess of the 241,000 that are required by state law and more than enough to assure a margin of safety when signature-checkers begin verifying names and addresses. And what it means is that the attitude of Washington state toward an income tax will be tested once again, as it has every decade or so since the Great Depression. Someone always blinks – voters, lawmakers or the courts – but backers are hoping the ninth time will be the charm.

            Touching the Third Rail

            Washington is one of only seven states that don’t have an income tax, and some call the issue the third rail of state politics, just as social security is on the national level. There are a few new wrinkles this time out. The first is that this one wouldn’t hit everyone, at least as initially designed. A hundred percent of voters will be asked to impose a tax on the wealthiest three percent of the population – an element designed to give it more appeal.

            That shifts the usual argument. Typically the income tax is presented as a way to bring more stability to state tax revenues. Backers are making that argument again, even though they are hitting the segment of the population whose incomes are most volatile, and the experience of other states raises doubts on that score. But their central argument is that it is a matter of “tax fairness,” and a way of leveling the disparities between the rich and poor.

            And most importantly, it comes at a time when state government revenues are in their tightest squeeze ever, and something has to give – either state spending or state resistance to tax increases. Washington has faced $12 billion in shortfalls over the last two years, and the easiest cuts have been made. But new projections from the state Office of Financial Management indicate that the state will face another $8 billion shortage of funds through the 2013-2015 biennium. That sets the stage for dramatic cuts in state spending unless another new source of revenue can be found.

The tax proposal is accompanied by a modest property-tax cut – about four percent overall – and an increase in a business and occupations tax credit for the smallest businesses. But overall it is designed to raise dramatically more money for state government, some $1.7 billion a year – representing roughly a 10 percent increase in tax collections.

It is backed by interests that would be hit the hardest in the next round of cuts – the poverty lobby and the unions. The Service Employees International Union and the Washington Federation of State Employees have put up a little over half of the $800,000 that it has taken to get the initiative this far.

            The Camel’s Nose?

            Supporters staged a rally outside the state elections office Thursday morning as they presented their petitions. Bill Gates, Sr., father of the Microsoft founder and the spiritual leader of the movement, said the income tax is the only way to protect education and social service programs. And he got testy at times when reporters peppered him with questions.

            The biggest one is how long it would take before the tax is extended to the rest of the state’s population. Many argue that the proposal is the camel’s nose under the tent – that once the Legislature becomes dependent on income-tax revenue, the next economic downturn will force it to broaden the tax. Though the initiative requires a public vote before the tax can be extended, lawmakers can rewrite any initiative after two years by taking a simple majority vote. They did it this year when they suspended Initiative 960, which would have made it all but impossible to raise taxes – and then they raised taxes.

            It is the most common criticism of the proposal, but Gates bristled when challenged by reporters. No one can predict what future Legislatures will do, he said.

            “How do they know that?” Gates said. “They say that, but who knows? There’s no way to make any changes in that without a vote of the people.”

            Business is ‘Inimical,’ Gates Says

            Gates chaired a blue-ribbon panel on the state’s tax structure back in 2002, but it should be noted that the tax proposal this time out is substantially different than the one recommended by his committee. Among its recommendations was a flat-rate tax on the state population as a whole, together with reductions in the state sales tax and elimination of the state property tax.

            Gates said, “Those were just models set up in a report from a committee as a way to look at how taxes could be changes in this state. It doesn’t represent something that I’m wed to. I’m wed to doing something that works, and this works.”

            The report of the Gates commission also pointed out that a system dependent on a broad-based income tax would be no more stable than the current system. It stated, “The sales tax, although volatile, is less volatile than a graduated personal income tax. There is no evidence that a flat rate personal income tax in Washington would be less volatile than the sales tax.”

            Other states, Oregon among them, are finding that more narrowly based taxes that hit the wealthiest hardest are even more vulnerable to up-and-downswings in the economy.   

But Gates said Thursday he believed an income tax would make state revenues more stable. “I think having a variety of sources does to contribute to that, yes,” he said.

And he said he thinks opposition being mounted by business organizations, particularly the Washington Roundtable, is motivated by self-interest. “This is a world in which people have different ideas about things,” he said. “There’s no getting around that. That’s what politics is about. Those are all fine people. Friends now and forever to be, but the fact remains that their interests are just inimical for what’s best for this state and they’re wrong.”

            And So Begins the Fight

As supporters carried their boxes of petitions inside, Mark Funk, a spokesman for the opposition campaign, Defeat 1098, said the income tax is going to provoke an enormous fight this year. Already the opposition has raised nearly $300,000, much of it from venture capitalists who view the tax as a threat to small startup businesses. Although the tax targets only personal income, it would affect owners of sole proprietorships and “S” corporations because they are required to report business income on their personal taxes.

“This one strikes at the heart of the most innovative part of our economy,” Funk said. “They say it’s a small tax increase. It’s a large tax increase. I’ve honestly got to believe they don’t understand business very well.”

It doesn’t take much imagination to see that ultimately the tax will be extended, he said. There haven’t been many initiatives that haven’t been tampered with by the Legislature, he said.

But what it really comes down to, Funk said, is a debate over state spending as a whole. The income tax plan is designed to give lawmakers an out in an era when it has become clear that government and special interests need to reduce their expectations. The income tax plan is really a plan to protect the status quo, he said.

 “We’re looking forward to a debate over how government’s money is spent,” he said. “Everyone’s learning curve is going to go up.”