Article by Erik Smith. Published on Thursday, September 02, 2010 EST.

AWB’s Argument on I-1098 is More Nuanced Than You Might Think

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Sept. 2.—When the Association of Washington Business says it opposes a tax, it isn’t exactly earth-shattering news. It’s hard to remember a proposal for a new tax that the state’s largest business organization actually liked. And yet – when it comes to the idea of a state income tax, there’s a bit of a nuance involved, says AWB president Don Brunell.

            Some businesses actually like the idea. “Our folks are all over the map on it,” he said.

It’s just that this particular idea, everybody hates.

            Initiative 1098, headed to the ballot this fall, would impose an income tax in Washington for the first time – a high-earner tax that applies to individuals making more than $200,000 a year. The right tax at the right time, its proponents call it.

            AWB, with 7,000 business members, is countering with a survey that indicates its members would slow their hiring, reduce salaries or benefits, and cut investment. That’s especially true for small businesses – the one sector of business that the measure’s proponents say they want to help.    

            “1098 sends the wrong message at the wrong time,” Brunell said. “We need to defeat 1098 if we want to start adding jobs and get this economy back on track.”

            Business Split on Income Tax

            What people might not understand about an income tax is that Washington business has been arguing about it for decades, Brunell said. Washington is one of just seven states nationwide that doesn’t impose its own income tax – the result of a 1933 state Supreme Court ruling that held a graduated-rate income tax is unconstitutional. In its place, to bail out the state budget during those Depression years, the state enacted a tax that is unique in the country – a tax on business gross receipts known as the business and occupations tax. It’s remained in place ever since.

            Junk the B&O and replace it with an income tax – corporate and personal, the way other states do it – and some businesses might pay more. Others would pay less, particularly retail and banking businesses, Brunell said. Much of the tax burden would be shifted away from businesses to individuals.

            It’s the sort of thing business might be willing to consider, Brunell said. Not that business would endorse it. But consider it? Sure.

“People have been talking about it for years and there’s no consensus,” Brunell said.

            The thing is – that’s not what’s on the table.

            The Double Whammy

            One of the confusing things about this proposal is that it’s not a corporate income tax. It applies only to individuals. So I-1098 leaves the B&O in place, to capture corporate money.

            But some small and medium-size businesses would be hit twice. Many small business owners report income on their personal income taxes – as sole proprietors, partnerships, limited liability corporations and “S” corporations.

            I-1098 would raise the threshold for B&O taxes, exempting more than 90 percent of businesses in the state. But those are the very smallest businesses, and they don’t account for most of the jobs or revenue. Under the proposal, the B&O starts kicking in when a business has more than $1 million in annual gross revenue.

            You have to totally eliminate the B&O before business can even think about getting behind an income tax proposal, Brunell said. You have to make sure it stays dead, too.

            No Guarantee in Place  

            Brunell is a longtime veteran of the Olympia scene, with 32 years in the state’s business lobby, and he has a bit of a historical perspective on the issue. He notes that the last serious effort to impose an income tax, under the administration of Gov. Booth Gardner in 1988 and 1989, offered a bit more of a trade-off. It was a broader, more traditional proposal. It would have eliminated the B&O and the state portion of the property tax, and it would have capped the state sales tax by law.

            But even that didn’t generate much enthusiasm, Brunell said. Nothing would have prevented the Legislature from reimposing or raising those other taxes in the future, because those features would not have been written into the state constitution.

            Makes Shortfalls and Tax Hikes More Likely

There’s a similar problem with the current proposal, he said. Nothing stops the Legislature from lowering the threshold of the income tax – especially after two years, when lawmakers can rewrite an initiative with a majority vote.

Or that new B&O tax exemption? That could go away, too.

            And he said those studies 20 years ago revealed a subtlety with a grave implication. The B&O tax is actually more stable and consistent than an income tax, which roller-coasters with the economy. The more the state depends on tax revenue from people at the high end of the spectrum, the more likely it is that the state will get into trouble. Meaning more pressure to raise taxes.

            “I think in dire times they are going to need that money,” Brunell said. “After two years all bets are off.”

             Survey Shows Small Business Scared

            The AWB member survey indicates that 33 percent would reduce hiring and salaries. Forty-seven percent said they expected to decrease investment.

            The effect is most pronounced on small and medium-sized businesses – those with 500 or fewer employees. They reported they would reduce hiring by an average 30 percent and salaries and benefits by about 15 percent. Forty-seven percent said they expected to reduce reinvestment in their businesses.

            The smallest businesses – those with 20 or fewer employees, and which might see some benefit from the B&O exemption – also said they expected to make significant cutbacks. Twenty-seven percent said they expected to decrease hiring, 29 percent would cut salaries or benefits and 39 percent said they would decrease reinvestment.

            Of the 900 AWB members who participated in the survey, sixteen employers said they would leave the state. Others said they would consider it.

            And 79 percent said they opposed the measure.

            Only Way to Reform Tax System, Say Backers

            AWB might have one thing in common with the measure’s backers. They say there has to be a better way. Trouble is, they say the Legislature will never do anything about it. Too many interests are at stake.

            AWB’s opposition is “not a surprise,” said I-1098 spokesman Sandeep Kaushik. “They’re a relatively small but powerful and wealthy group of business owners who are vocal opponents of I-1098. They want to preserve the tax advantages they enjoy under the current system. It’s as simple as that.”

            Sure, Washington businesses have been complaining about taxes for years, Brunell said, and certainly there might be a better system. “A tax they know might be the tax they hate, but it’s the one they would keep, if they don’t know what this new tax would do to them.”

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