Washington Policy Watch

In a couple of days, the Yes on 1098 campaign will turn in somewhere north of 360,000 signatures for Initiative 1098 — far more than enough to qualify for the ballot — and the campaigns for and against the measure will begin to heat up. Opponents of I-1098 claim the measure will excessively impact businesses, but they’ve overlooked an important fact in their rush to condemn it.

Since I-1098 proposes a modest tax on adjusted gross income (AGI) above $200K for individuals or $400K for joint filers, it neither favors nor punishes businesses — or any other income source for that matter. Whether received from daily wages, winning the lottery, or taking a share of a corporation’s profits, the same rates and thresholds apply to all.

Washington’s current business tax (the Business and Occupation, or “B&O” tax), on the other hand, is a different story. Since B&O taxes are levied on gross receipts — before expenses, before depreciation, etc. — businesses pay tax regardless of whether they turn a profit. Moreover, small and medium businesses pay a disproportionately high share of their income in business taxes.

I-1098 addresses those issues in two different ways:

• First, by taxing high incomes (earned after a business has turned a profit), instead of taxing gross receipts (regardless of whether a business has turned a profit), I-1098 will make it easier for entrepreneurs to find an economic foothold and grow their business.

• Second, by increasing the B&O tax credit from $420 to $4,800 per year, and reducing the state portion of the property tax by 20%, I-1098 will make it easier for the state’s existing small businesses to make ends meet.

Only a small proportion of high-income individuals who claim net business income will be affected by I-1098′s income tax. In 2007, just 1.6% of all Washington tax returns reported over $200,000 in adjusted gross income while claiming net business income. Put another way, of all Washington tax filers claiming any net business income in 2007, only 10.6% showed an AGI of more than $200,000. And since 85% of high‐income returns are filed jointly, a substantial proportion of those tax filers would be exempt from paying state income tax on adjusted gross income up to $400,000 per year.

In other words, I-1098 will make it possible for more businesses than ever to start and succeed in Washington State.

Looking for more information about Initiative 1098? Visit the Economic Opportunity Institute website.

Filed under: tax and budget, business, I-1098, income tax, revenue, taxes