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Herald endorsement / Initiative 1098

Not the tax reform we need

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The good intentions behind Initiative 1098 — creating a fairer state tax structure, dedicating new funding to education and health care — are quickly overshadowed by its shortcomings.
We recommend a “no” vote.
The proposal seeks to tax the income of Washington's wealthiest individuals, those earning more than $200,000 a year (or couples making more than $400,000). Its rate rises from 5 percent to 9 percent on income above $500,000 for individuals, $1 million for couples. Sounds OK so far.
At the same time, it lowers the state portion of property taxes for everyone by 20 percent, and increases the business and occupation tax credit to the point that the smallest 80 percent or so businesses in the state would pay no B&O tax. All right.
Finally, it dedicates its net proceeds to education (70 percent) and health care (30 percent).
Who wants to argue with all that?
Well, plenty of people, actually.
Like so many citizen initiatives that take on complicated subjects, this one suffers from several unintended, but decidedly negative, consequences:
•I-1098 would put many local businesses at a disadvantage against out-of-state competitors, because of how they're structured. Family-owned companies whose profits are taxed as individual income — Bartell Drugs and Bargreen Coffee are just two local examples — would have less money to invest back into business growth and hiring. Their main competition, meanwhile, because it is headquartered outside Washington, wouldn't be subject to the new tax. Companies like Bartell and Bargreen can't easily or affordably change their tax status, accounting experts say.
•The money directed to education and health care is essentially a blank check, because there's no accountability attached to it. We're all for providing more revenue to education at all levels — early education, K-12 and higher ed — but a huge infusion should be accompanied by reforms that have been thoroughly debated and received wide support.
The Legislature has made some progress on reform, but still has plenty to do. Taxpayers deserve greater assurance that new revenue will significantly improve results.
•The initiative depends on some of the most volatile income there is: capital gains and dividends. Its wild swings are notoriously hard to predict. That sets up an inevitable scenario where the Legislature budgets vastly more revenue than actually comes in, then has to cut drastically, raise taxes, or both.
•The property and B&O cuts aren't meaningless, but they're close. The average family would see about 10 bucks a month in property tax savings (the cuts don't apply to school, fire or other local taxes). The business tax cuts, while welcome, aren't enough to result in much new hiring, if any.
•Real, lasting tax reform should be more comprehensive. I-1098 does nothing to ease the sales-tax burden on the poor, something a broader proposal could do. Washington's tax system is already a dysfunctional patchwork of short-term solutions adopted over decades. I-1098 could make it even worse.
We don't think an income tax should be off the table, but it should be fairer and more stable than this one. Lasting reform should also include a lower sales tax, and be put to voters as a constitutional amendment. That's the only way to ensure that special interests can't have their way with it.

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