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CONTACT SCBJ Kurt Batdorf, Editor kbatdorf@scbj.com

Proposed income tax would hit state’s entrepreneurs hardest

By Don Brunell
Association of Washington Business

Each year, the Small Business & Entrepreneurship Council publishes a list of the best to worst state tax systems for entrepreneurship and small business.

It pulls together 16 different tax measures and combines those into one tax score that compares tax burdens in the 50 states and District of Columbia. Among the taxes included are income, capital gains, property, death-inheritance, unemployment and various consumption-based taxes, including state gas and diesel taxes.

The overriding advantage for the states with the best tax ratings is they have no income tax. Since our state has no income tax, SBEC ranks Washington as the fifth-best system in the U.S. for 2010. California, Oregon and Idaho rank among the bottom 15, primarily due to the income taxes they impose.

That all could change if Initiative 1098 qualifies and is approved by Washington voters in November.

The initiative would impose a 5 percent tax on income above $200,000 for individuals and above $400,000 for couples. That rate would increase to 9 percent on income exceeding $500,000 for individuals and $1 million for couples.

I-1098 also increases the small-business tax credit for business-and-occupation taxes from $420 to $4,800, effectively exempting very small businesses from the tax. In addition, it cuts the state portion of the property tax by 20 percent — which sounds like a lot. But because the lion’s share of property taxes are local, the average tax bill would go down only by about 4 percent.

Interestingly, backers of the income tax decided to pursue an initiative rather than go through the Legislature. Adopting a state income tax in the Legislature requires amending the state constitution, which takes a two-thirds majority vote. The initiative avoids that.

The initiative route also means lawmakers can change the income tax rates and levels after two years with a simple majority vote. As we know, lawmakers recently suspended Initiative 960, the voter-approved measure requiring a two-thirds vote to raise taxes.

So what would be the impact of an income tax? It would take income away from individuals and families, of course. But it would also hurt entrepreneurs and small businesses because small employers often pay taxes as individuals, rather than as corporations. Under I-1098, they will pay income taxes and the B&O tax on their business income.

That matters because private-sector employers will lead us out of this punishing recession when they increase production, expand and hire new people. That is made more difficult if those employers are paying higher taxes.

The problems posed by income taxes on families, individuals and businesses in states such as Oregon and California hurt entrepreneurs and small businesses more, according to SBEC. In fact, much of SBEC’s good rating for our tax system is because Washington has no income tax — at least for now.

That is not to say all is rosy here.

Our B&O tax is levied on gross receipts, whether or not you make a profit.

We have the sixth-highest gas tax at 37.5 cents a gallon. Employers pay the second-highest unemployment tax in the nation, according to the Washington Alliance for a Competitive Economy. In fact, WashACE reports Washington has the 15th highest cost of doing business in the nation.

Because of those taxes, SBEC ranks Washington 46th on gasoline taxes and 44th on unemployment insurance taxes.

The point the SBEC makes is an income tax tends to be a negative, and that should be a strong warning sign for voters and elected officials in our state.

Raymond J. Keating, chief economist for SBEC and author of the report, said, “Quite simply, economic recovery will be restrained by high and/or increasing taxes, or boosted by low and/or falling taxes. Governors and legislators have a choice.”

Washington citizens have a choice as well, in whether they adopt a state income tax.

Don Brunell is the president of the Association of Washington Business. For more about AWB, visit www.awb.org.