Summary of I-1098, Income Tax Initiative

Bill Gates Sr. and the Service Employees International Union (SEIU) are among the major backers of Initiative 1098 a measure on this year’s ballot that will be the first time since 1973 that voters will be asked to establish a state income tax.

On the ballot information about I-1098 will read as follows:

Statement of Subject: Initiative Measure No. 1098 concerns establishing a state income tax and reducing other taxes.

Concise Description: This measure would tax “adjusted gross income” above $200000 (individuals) and $400000 (joint-filers) reduce state property tax levies reduce certain business and occupation taxes and direct any increased revenues to education and health.

The following summary of I-1098 is excerpted from a comprehensive analysis by the Washington Research Council. For the full analysis click here.

Income subject to tax: Defined as adjusted gross income (AGI) as calculated at the bottom of the first page of the federal 1040 income tax form less interest received on federal obligations (which the state is prohibited from taxing). This covers all income. For a taxpayer who invests in S corporations LLCs or partnerships all income derived from those entities is taxable even if it is not distributed to the taxpayer.

Calculation of the tax:

For a married couple filing jointly: If taxable income is less than or equal to $400000 no tax is due; If taxable income is greater than $400000 but less than or equal to $1000000 the tax equals 5 percent of the amount by which income exceeds $400000; If taxable income is greater than $1000000 the tax equals $30000 (the tax for a couple with exactly $1000000 of taxable income) plus 9 percent of the amount by which income exceeds $1000000.

For an individual filer: If taxable income is less than or equal to $200000 no tax is due; If taxable income is greater than $200000 but less than or equal to $500000 the tax equals 5 percent of the amount by which income exceeds $200000; If taxable income is greater than $500000 the tax equals $15000 plus 9 percent of the amount by which taxable income exceeds $500000.

Vote of the people required to raise rates: The initiative specifies that income tax rates “may not be increased for any income level without a [simple] majority vote of the legislature and submission of the changes to the people for approval.” After two years however it will take only simple majority votes in the State House and Senate to suspend or repeal the voter-approval requirement.

Tax relief: The initiative modestly reduces the state property tax rate and increases the business and occupation tax credit for small businesses. The state property tax levy would be reduced by 20 percent beginning in 2013 for collections of the 2012 levy. As the state tax is little more than 20 percent of total property taxes I-1098 will reduce the typical property tax bill by about 4 percent.

Currently small businesses are relieved of obligation to pay business and occupation tax via a small business tax credit of $70 per month ($840 per year) for businesses in the services category and $35 per month ($420 per year) for businesses in all other categories. Beginning in 2012 I-1098 increases the credit to $4800 per year for small businesses in all categories. Although initiative backers boast that the credit will relieve 80 percent of small businesses of a B&O tax liability the estimated value of the expanded credit amounts to less than 10 percent of annual B&O collections. Further because many of these businesses are organized as “pass through” entities business income will flow through to owners’ AGI and be subject to the income tax.

Dedication of revenues: The initiative creates a new state account called the Education Health Services and Middle Class Tax Relief Trust into which the income tax revenues are to be deposited. Again this provision may be overturned by a simple majority vote of the legislature after two years.

Click here for the “Vote No on I-1098” website.