Below is a post from the Sightline Institute critiquing a Seattle Times editorialopposing the Income Tax Initiative 1098

They’re arguing that the Times editorial is misleading by comparing the proposal of a 9% tax to Oregon’s income tax of 11%, making it seem like we would pay just as much or more as they do, when you factor in our sales tax (which Oregon doesn’t have). But that seems to only be the case if you make over $200,000 as a single person or $400,000 as a couple.

Sightline says:

“Oregon residents pay tax on the first dollar of income they earn and on every dollar thereafter (at a rate that ascends with income); while under 1098, Washington couples would pay nothing at all on the first $400,000 of income. (Single earners would pay nothing on the first $199,999.) In other words, unless you’re doing extremely well for yourself, your income tax rate under 1098 would be exactly zero percent.”

“A couple would have to crack $1 million annually to pay 9% in Washington, and then they’d only pay it on the dollars in excess of the million. In other words, it is mathematically impossible for Washington residents to pay 9% of their total income in taxes under 1098—even if someone earned a billion dollars a year.”

Regardless of this dispute over arithmetic, the Times uses a slippery slope argument, saying that once we let this income tax creep in, it will continue to expand.

Either way, I agree with Sightline that they shouldn’t use the 9% number without mentioning that it only applies to those with very wealthy incomes.

Also, Sightline makes a final point that the Times neglects that to mention that the revenue generated from 1098 would be used to lower taxes for small businesses and the middle class (this is their claim, not sure if it’s true).

The Times also prints guest editorials that match its editorial board’s bias without any critical assessment.

For instance (see http://seattletimes.nwsource.com/html/opinion/2012238971_guest30mercier.html), the directors of the Washington Policy Center claim to have used “economic modeling” to show that replacing the B&O tax with an income tax “modeled the worst, causing the most job loss and economic distortion.”

They went on to recommend a “single business tax” that would simply move the B&O tax downstream from taxing gross receipts to taxing (1) gross sales minus labor costs, or (2) total gross receipts less production costs except labor, or (3) 60% of gross receipts.

They conclude, “This proposal would result in radical simplification of current business taxes. It would eliminate the confusing multiple rates on business activities, and repeal the special-interest tax credits and exemptions for some industries that have built up over the years.”

I can’t believe that any rational model would show that this “radical simplification” of a tax that only one other state legislature in the country (WV) is stupid enough to impose on its citizens would be simpler than replacing it altogether with a flat personal income tax that would result in “radical simplification” of not only business (no tax is more simple than no tax at all) but also state government.

The property tax is another very complex anachronism that uses highly complex and arcane formulas in an attempt to fairly apportion a tax that nobody likes. In the final analysis, the tax has to come out of homeowners’ incomes, so why not just tax their incomes directly and eliminate 39 tax assessors’ offices?

Our high sales taxes drive potential customers who live near our borders to states like Oregon, which has no sales tax, and encourage active duty and retired military personnel and their families to drive past civilian stores to shop at tax-free exchanges at nearby military bases. Oak Harbor’s businesses lose thousands of sales every day to military stores inside its city limits. It’s almost like living in a ghetto with guards at the gates to keep civilian riffraff from spoiling the carefree life of the chosen ones in the Garden of Eden. Some military dependents who do come outside the gates have the gall to demand discounts from local merchants. I’m not kidding.

With 31 years experience as an engineer and technical editor, I am comfortable with scientific modeling, testing, and reporting results. I can smell a rat when there is one, and the WPC’s analysis smells rotten.

There is no description of the methodology, assumptions, boundaries, or anything else that might validate their model. If I were to believe their conclusions, I would also have to believe that their counterparts in 48 other states are less endowed with brains and that a tax system that saddles the poorest 20% of our population with 6.6 times as much tax burden as the richest 1% is somehow more fair than a system that taxes everyone at the same rate.

Nor does the WPC tell us who provides the funding for its studies. Remember, the scientists who claimed smoking doesn’t cause cancer had PhD’s. Studies by forest products PhD’s “prove” that clear-cutting forests is really advantageous, as well. And I’m sure you believe the ones who work for oil companies.

Sightline’s observation that “The Times neglects to mention” a couple of inconvenient details in another editorial pales in comparison to publishing on its editorial pages controversial conclusions from a study with no supporting data or peer review whatsoever, but happens to fit the editorial board’s personal standard of ethics on taxation (“Washington is one of only a few states that doesn’t tax success”) like a glove.

Monday’s (Aug. 16) “Special to the Times” columnists pose as friends of Washington’s small businesses while blaming vague “special interests” who want to “preserve Olympia’s status quo” for our state’s loss of jobs and other economic problems.

Sixty-nine percent of the state government’s revenue comes from taxes, almost exactly the national average, but without an income tax, our sales and property taxes must provide twice as much of the state’s revenue as the national average.

The number of people who shop at our tax-free military stores is exploding as “lifers” retire and move to “tax havens.” Many Washingtonians who live near the Oregon and Idaho borders gladly drive a few miles to avoid paying high sales taxes on big-ticket items. To boost sales, our legislature allows out-of-state shoppers to avoid paying sales tax and passes the loss on to Washington taxpayers by increasing the taxes they can’t legally avoid.

I-1098 would give everyone a 20% break on every homeowner’s state school tax ($208 for me, check your own tax bill), exempt up to $4800 of the current B&O tax (80% of the state’s businesses would pay nothing), and add $1 billion for education and Medicaid, just by requiring our most successful “special interests” to pay a modest income tax on earnings above $200,000 for an individual or $400,000 for a couple filing jointly. Those are changes to the “status quo” that real friends of small businesses would provide.

The Times editorial board and its preferred op-ed columnists will never tell you that, under I-1098, (1) individuals who pay state income tax would get 35% of it back upon filing their annual federal income tax returns, (2) amounts once taxed would be sheltered from future state taxes, just like a federal Roth IRA, and (3) a B&O tax that is “less than 10 percent of the state’s B&O tax collections” would be a much larger part of an individual business’s expense. Real friends would tell you that.

On Aug. 14, the Wall Street Journal weighed in with its opinion on I-1098 in support of the “liberal” Seattle Times and went down the same crooked path of claiming I-1098 is “socking it to the richest 3%” and describes the new tax as “not just a toe-in-the water tax. They’re diving into the deep end with a proposal that would immediately impose . . etc.” It also twists the benefits to small businesses, saying “Small business taxes are cut, but they are also hit with a whopper of a new tax: a personal income tax paid out of their profits. Over half of the tax will be paid by Washington businesses.” Finally, it says, “The liberal Seattle Times accurately describes the state’s zero income tax as ‘a selling point. An asset. A bonus for living here.’”

In addition to Sightline’s analysis of a typical tax on a household in the top 1% of Washingtonians, another point that I think is pretty huge is the federal income tax offset for those who would pay income tax under I-1098. All of those people would be in the 35% federal income tax bracket (and maybe 39% next year). Schedule A, line 5, allows taxpayers to deduct either state sales tax or state income tax. Since we in WA don’t have an income tax, we have no choice but to deduct sales taxes. The maximum allowable deduction for a King County taxpayer with income over $200K, married filing jointly, is only $3,339 without proof of actual taxable purchases. Under I-1098, someone with an AGI of $2 million would pay to the state, and be able to deduct from federal tax, $30,000 on the amount earned from $400K to $1 million plus $90,000 on the amount over $1,000,000, for a total deduction of $120,000. The taxpayer would get 35% of it back as a federal offset, leaving a net outlay of $78,000, or only 3.9% of the couple’s AGI. I’d call that a “toe in the water.”

The “whopper” of a tax imposed on businesses is a whopper all right, a whopper of a distortion. How many business owners would be affected by an income tax on MFJ’s who make over $400K? Darn few, but the WSJ tries to make it look like most “small businesses” will be affected. Again, NO taxes would be levied on a small business whose B&O tax is now under $4,800, so the owner would have NOTHING deducted from his income unless his personal income from the business and other sources is over $400K.

The selling point of “no income tax” is wildly overstated. Most of the people who are lured to Washington by its lack of an income tax are retirees looking for a tax haven. Most of those will never go into business but will live out the rest of their lives trying to avoid spending unnecessarily. Many of those are military retirees who settle near military reservations so they can shop tax-free at exchanges and commissaries, thereby robbing local businesses of sales and the state of any sales taxes they might otherwise pay. Indeed, the only taxes most of such people pay in Island County are property taxes, and they gripe about those, too. People who are interested in going into business would be more likely to want a place that is friendly to customers rather than one that drives potential customers to tax-free stores on military installations and to bordering states that have no, or lower, sales taxes. Highly educated computer scientists and engineers will go where the good-paying jobs are, regardless of a modest income tax.