Will Washington State Raise Taxes on the Wealthy?

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In addition to the bevy of Congressional battles and state-legislature clashes with consequences for redistricting, voters hitting the polls next week will be confronted with an array of state-ballot initiatives. One of the most interesting is in Washington state, where residents will consider a measure that would impose a new income tax on the state’s wealthiest residents.

Washington is one of seven states with no personal income tax. The ballot initiative, I-1098, would impose a 5% tax on income earned above $200,000 per year for individuals and $400,000 per year for couples. An additional 4% tax would be levied on individuals pulling in more than $500,000 per year and families who earn more than $1 million. The tax would directly affect the richest 1.2% of Washington residents. The proceeds — an estimated $2 billion per year — would be devoted to propping up the state’s flagging education and health-care systems. Though rare–Washington would be the first state to implement a new income tax in nearly two decades–the measure wouldn’t be unprecedented. Earlier this year, Oregon voters upheld the state legislature’s decision to increase the income tax burden on wealthy residents.

Proponents argue the measure would correct a regressive tax system, reduce the state property tax rate and cut the business and occupation tax on most small businesses (who would also get a larger tax credit), in addition to improving health-care and education. “We don’t want to see an entire generation lost because we lack the resources to fund our schools,” Bill Gates Sr., a leading supporter of the “Yes on 1098” push, told reporters during a conference call Wednesday morning. Gates, a retired attorney whose son, Bill Gates Jr.,  is the world’s richest man, acknowledged that in a year when anxiety over the fragile economy is the preeminent concern for most voters, many will be hesitant to impose any new taxes. That’s one major reason many Democrats have joined Republicans in supporting the extension of the Bush-era tax cuts for the wealthy. “People are feeling some pessimism,” Gates Sr. said. “I think it may be that in many cases that may influence them to vote no. On the other hand, the people in this state are anxious to to have the best public education system possible.”

Not surprisingly, some of the state’s richest citizens and major employers aren’t fans. They’re deploying an argument that seems near-bulletproof this election cycle. “I-1098 will significantly erode Washington state’s competitiveness and job creation, and hurt small and medium businesses,” argued Boeing VP Laura Peterson.  Microsoft VP Brad Smith made a similar case. “As an employer, we’re concerned that I-1098 will make it harder to attract talent and create additional jobs in Washington state.” In a survey conducted by the state’s chamber of commerce, one-third of responds said that if passed, the initiative would decrease hiring; nearly 50% said it would hamper reinvestment.

The clash over the initiative has been dubbed (blame the alliterative media) as the “Battle of the Billionaires.” And while the uber-rich aren’t the only ones with a stake in the initiative–a Wall Street Journal columnist notes that much of the pro-1098 support has come from unions–several have taken sides. While the Gates family is a major supporter of the initiative, Microsoft itself forked over $75,000 to oppose I-1098. CEO Steve Ballmer, and Amazon honcho Jeff Bezos also ponied up six-figure checks against the measure. Microsoft co-founder Paul Allen is another foe. In a Wall Street Journal op-ed, Arthur Laffer said opposition isn’t just the rich bristling about getting soaked. But it’s easy, of course, to drape a popular public policy argument over one’s own self-interest; one suspects many members Washington’s wealthy set aren’t keen on opening their wallets, which Laffer tacitly acknowledges. “If Mr. Gates and his son feel so strongly about taxing the rich, they should simply give the state and chunk of their own money and be done with it,” he writes.

Listening to Gates, I was struck by how he calibrated his pitch. The initiative, he said, would help your pocketbook or your quality of life (better schools, lower taxes, etc.); at the very least, the financial burden would be shouldered by others, not you. He largely skirted the moral case for the policy, though one obvious subtext was his belief that regressive taxation is unfair. In any event, the self-interest theme is probably the better sell. In this season of economic uncertainty, it often seems there’s no room in our public debates for anything but money.

Meanwhile, if you want to see a wealthy octogenarian endure a dunk tank, I recommend this clip. (The water, by the way, was heated.)

And here’s one of the “no on I-1098” ads.