Initiative 1098 Would Raise $2.5 Billion a Year by 2016 – Official Estimates Show Losses From Liquor Measures, Pop Tax Rollback

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Aug. 11.—Initiative 1098, this year’s income-tax measure, would raise even more money than its backers claim, and the take would nearly double in the next few years – to some $2.5 billion annually by 2016.

            That’s the word from the state Office of Financial Management, which Wednesday released its reports on the six initiatives that will confront voters this fall. Its “fiscal notes” reflect the official line on the ballot measures, and wherever they contained a hint of negativity, the campaigns were quick to challenge the state’s numbers.

           The new reports highlight a few striking points. Among them:

Income Tax Keeps Getting Bigger

The strangest thing about the income-tax finding is that it answers a question no one has bothered to ask. What happens to tax revenue after the first year?

Until this point, the campaign arguments have focused on the revenue that would be generated the first year the tax is in place. The measure would impose an income tax on persons earning more than $200,000 a year, and would offset it with a modest reduction in the state property tax and a small-business tax credit.

The campaign says the state would net about $1 billion in 2012, and OFM says the number is more like $1.5 billion. But the real impact comes in future years, as the economy presumably recovers. Every year the take gets bigger. In the fifth year it reaches $2.5 billion.

The measure’s supporters include labor unions, social service advocates and wealthy individuals, and they say the state findings confirm their arguments. But they’re looking at a different part of the report. The state says only 38,500 households would be taxed out of 3.2 million – that’s 1.2 percent, even fewer than they’ve been saying.

Bill Gates, Sr., the leading spokesman for the campaign, released a statement: "This report confirms the enormously beneficial impacts of Initiative 1098 for our state.  After taking a conservative approach in our early estimates of its impacts, we’re very pleased to see the Office of Financial Management establish that I-1098 will provide substantial tax cuts for the middle class while taxing fewer people and generating more funding for education and health care than we had estimated."

Opponents see a big gain for state coffers as a big bite on commerce and job creation. “Already it was the biggest proposal for a tax increase in state history, and now it’s doubled,” said Steve Mullin, president and CEO of the Washington Roundtable.

Opponents, primarily from the business sector, note that the OFM analysis does not estimate the impact of the tax on business activity. Nor does it consider the volatility of high-earner income and the yo-yo effect on the state budget. They say the first downturn would force cash-strapped lawmakers to extend the tax to everyone. 

            “I’m no economist, but assuming a tax like this one would have no negative impact strikes me as a bit far-fetched,” Mullin said. “There is nothing in this report that should give people comfort that they can trust Olympia with a massive tax increase.”

            Big Difference Between Liquor Initiatives

            There are two liquor-store privatization measures on the ballot this year, and they appear to do pretty much the same thing – both of them junk the system of state liquor stores through which booze has been sold in Washington state since the end of Prohibition. But there are plenty of differences in the details, starting with the fact that the retailer-backed I-1100 would end the requirement they buy from middlemen, and the distributor-backed 1105 would preserve it. It’s essentially a business conflict that is invisible to the general public, and so the campaigns – for the sake of anyone paying attention this early in the campaign season – have been playing up what appear to be modest differences in their taxation schemes.

            OFM says the difference isn’t modest at all. 1105 would cost the state a lot more in lost tax revenue – up to $520 million over five years, versus a high-end estimate for 1100 of $85 million. There’s another hit on local tax revenues – both would cost local governments around $200 million, OFM says.

The reason for the difference? Both end the state’s big markup on booze – about 50 percent. Under the present system, government gets to keep that money. But the distributor-backed 1105 also repeals liquor liter taxes and special sales taxes that are imposed on liquor, and it doesn’t impose any new taxes in their place. It just requires the state Liquor Control Board to present the Legislature with a new taxation scheme aimed at raising at least $100 million a year.

            You can’t count on that money, says OFM. The Legislature could say no. Said analyst Julie Murray, who wrote the reports for OFM, “We don’t speculate on future actions of the Legislature.”

            It’s a shot to the heart of 1105. For months now its spokespeople have argued that 1105 raises more tax money than the competition.

            Charla Neuman, spokeswoman for the distributor measure, blamed the bad report card on politics. “State employees are trying to protect state jobs, but the analysis shows they only read parts of the initiative and disregarded others, and those were the parts that increased state revenue.”

Of course the Legislature would raise booze taxes, she said – sin taxes have broad support among lawmakers. “To suggest they won’t tax liquor is so ludicrous it’s infuriating or laughable.”

Meanwhile, the supporters of the retailer-backed 1100 say they aren’t happy with the state’s analysis, either. The state’s analysis didn’t ding them as badly, but in neither case did it look at the business impacts of privatized booze sales. New jobs and business tax revenue would help offset losses to the state, said spokesman Ashley Bach. And it assumed huge costs for winding down liquor stores – an arguable assumption. The campaign maintains it would be closer to a wash – though it isn’t presenting a counter-figure.

            “Asking state government’s Office of Financial Management to give you the financial impacts of Initiative 1100 is a little like asking the Mariners management in April what the club’s chances are of making the playoffs,” Bach said. “They will be confident in their answer but they may not have looked at the whole picture.”

State Would Lose Half Worker’s Comp Business

This year’s worker-compensation measure, Initiative 1082, would have a big effect on the state-run insurance system, OFM says. The measure would allow private insurance companies for the first time to operate in competition with the state-managed system of industrial insurance. Business says the private sector can easily beat the state rates – and the most striking thing about the analysis is that it assumes the state program would lose half its business.

OFM says the measure would increase costs for state and local governments by about $250 million over five years. That’s largely because of the way the measure is written, said Patrick Connor of the National Federation of Independent Business. The measure repeals a requirement that workers pay into the system – a unique Washington-state arrangement that makes this state inconsistent with the national market. Under I-1082, employers pick up the full tab, as in other states – and that would include public agencies. Hence they would have higher costs. 

That accounts for most of the increase. Other elements include state estimates for data collection and regulation. Some of those costs appear to duplicate existing state efforts, Connor said; others are costs that could be recovered from private insurance companies.

And once again, OFM’s estimate fails to measure the impact of increased business activity – roughly $20 million a year in taxes, Connor said, which helps offset costs.

The most important thing is that the estimate demonstrates a vibrant insurance business would be created, he said. “I think it’s interesting that half the businesses in the state would flee the sinking ship that is the state system, looking for more affordable insurance in the private market."

Pop-Tax Rollback Measure Costs $352 Million

Initiative 1107, the tax-rollback measure sponsored by the soda-pop industry, would cost the state $352 million over five years, OFM says. The measure would roll back taxes imposed by the Legislature on soda pop, bottled water, candy and gum, and would revive a canceled tax break for producers of canned goods.

            No Fiscal Impact for Two-Thirds Vote Measure

OFM’s report says there is no fiscal impact for Initiative 1053, the measure that would require a two-thirds vote of the Legislature for tax increases. That’s because the measure neither imposes a tax nor takes one away. How do you put a dollar value on added difficulty in raising taxes? OFM doesn't try.