Less Than Meets the Eye: Initiative 1098

“Cuts state property taxes BY 20%” touts the ad promoting I-1098 the income tax initiative. Quick grab the calculator: A 20 percent cut of a say $6000 property tax bill is $1200…that’s great!

But hold on. One of the biggest misperceptions of the initiative is that in addition to imposing the state’s first-ever income tax on high-end earners the initiative will take a big cut out of everyone’s property taxes. But the 20 percent cut only applies to the state’s portion of your overall property tax bill. The state share is about 21 percent as most of the property tax is local. So a 20 percent cut of a 21 percent share amounts to only a 4 percent overall cut.

This short KOMO-TV news segment tells the story.

Another misleading aspect of I-1098 has to do with B&O taxes. Initiative proponents claim the initiative is pro-business because it increases the B&O tax credit to $4800 per year. Claims that the initiative will exempt 118000 businesses from B&O tax overstate the case as many of those businesses are already exempt.

Nevertheless more businesses will be exempt from B&O taxes under the initiative but the overall impact will be small. In a survey of its members the Association for Washington Business found that only 11 percent of its member companies expect to benefit from the higher B&O tax exemption.

The flip side is this: I-1098 applies to income derived from sub S corporations LLCs partnerships trusts dividends capital gains rents etc. So while there is a small amount of B&O tax relief for the business community thousands of entrepreneurs and business owners will be hit with the income tax at a time when the economy needs them to increase production expand and hire new people. And because small employers often pay taxes as individuals rather than as corporations under I-1098 they could pay both income taxes and the B&O taxes on their business income.

Proponents of I-1098 tend to accentuate the tax cuts seeming to give the impression that the initiative is revenue neutral. It is not. Supporters cite estimates that the proposed income tax would have yielded $1.7 billion in revenue to the state in 2009 while the property tax reduction would have cost the state $357 million in that year. The small business B&O credit would reduce state revenues by $249 million in 2012. Thus I-1098 is a tax increase of more than $1 billion per year. (See Washington Research Council analysis.)

For these and other reasons AGC’s Board of Trustees voted to oppose I-1098. Find out more by visiting the Defeat I-1098 website.