In­come tax plan is richly de­bated

In Washington state, a vote on tax­ing the wealthy more has some un­likely back­ers.

Los Angeles Times - - Front Page - Kim Mur­phy re­port­ing from seat­tle

Imag­ine if the slash-and­burn bud­get cuts that have be­come a new way of life for re­ces­sion-stricken state gov­ern­ments could be ended by sim­ply soak­ing the rich.

Here in Washington, they’re tak­ing that lit­er­ally. A TV spot for a pro­posed in­come tax on the state’s wealth­i­est cit­i­zens shows Mi­crosoft founder Bill Gates’ 84-year-old fa­ther, Wil­liam Gates Sr., plunged by gig­gling kids into a dunk tank and left to drip in his wet khakis and Ox­ford shirt.

“Some peo­ple say Ini­tia­tive 1098 is about soak­ing the rich. But it’s re­ally about do­ing some­thing for the next gen­er­a­tion,” Gates says. “You see, state cut­backs have put our kids at risk, and we can’t just sit here and do noth­ing about it.”

The fight over what would be Washington’s first state in­come tax since 1933 is shap­ing up as a bat­tle of the ti­tans: Both the elder Gates, a prom­i­nent re­tired lawyer and phi­lan­thropist, and his son, the rich­est man in Amer­ica, are back­ing I-1098. But three of the state’s other biggest busi­ness­men — cur­rent Mi­crosoft Chief Ex­ec­u­tive Steve Ballmer, Ama­zon .com founder Jeff Be­zos and John Nord­strom of the

Seat­tle-based re­tail chain bear­ing his name — are throw­ing big money into the cam­paign to de­feat it.

Washington vot­ers are be­ing asked to en­dorse a tax phi­los­o­phy that is in many ways sim­i­lar to Pres­i­dent Obama’s ap­proach to shrink­ing the fed­eral deficit: Keep the tax bur­den off lowand mid­dle-in­come fam­i­lies while rais­ing taxes on the wealthy.

The bal­lot mea­sure would raise about $2 bil­lion a year for ed­u­ca­tion and health­care by tax­ing gross in­come above $200,000 for in­di­vid­u­als and $400,000 for cou­ples, while trim­ming other taxes for small busi­nesses and prop­erty own­ers.

Vot­ers in neigh­bor­ing Ore­gon this year eas­ily passed a sim­i­lar tax-the-rich bal­lot mea­sure, along with a tax hike on cor­po­ra­tions. But Washington, one of only seven states with no in­come tax, has made its tax-free sta­tus an im­por­tant sell­ing point in at­tract­ing new busi­ness.

Op­po­nents warn that new taxes on well-off en­trepreneurs would make it harder to re­cruit tal­ented em­ploy­ees and would eat into busi­ness own­ers’ abil­ity to rein­vest, raise wages and cre­ate new jobs.

“As a for­mer Mi­crosoft em­ployee, I ab­so­lutely know it would dam­age Mi­crosoft’s abil­ity to com­pete. Part of their abil­ity to at­tract tal­ent from all over the world is be­cause there’s no state in­come tax here,” said Scott Stanzel, a for­mer deputy White House press sec­re­tary un­der Pres­i­dent Ge­orge W. Bush and a pub­lic re­la­tions man­ager for the soft­ware com­pany who now is run­ning the cam­paign to de­feat I-1098.

Washington sur­vives on a 6.5% sales tax (boosted to 9.5% in Seat­tle), taxes on candy, im­ported beer, bot­tled wa­ter and cig­a­rettes (a sep­a­rate ini­tia­tive is on the Novem­ber bal­lot to re­peal that tax) and one of the nation’s only busi­ness and oc­cu­pa­tion taxes, levied largely on gross re­ceipts rather than net in­come.

The de­cline in con­sumer spend­ing has left the state govern­ment reel­ing un­der crip­pling bud­get short­falls. Since 2009, the Leg­is­la­ture has ap­proved $5.2 bil­lion in cuts tar­get­ing schools, clin­ics, state em­ploy­ees and the state health plan.

That’s a large num­ber in a state of only 6.7 mil­lion res­i­dents, and more cuts lie ahead: Pro­jected rev­enues have shrunk by an ad­di­tional $770 mil­lion since spring, and Gov. Chris Gre­goire has or­dered state agen­cies to pre­pare for ad­di­tional re­duc­tions of 6.3% by Fri­day.

The im­pact has been felt per­haps most acutely in ed­u­ca­tion. The state ranked 17th in the nation in per-pupil state fund­ing for schools in 1992, but slipped to 33rd by 2008 — or 47th, if mea­sured rel­a­tive to the wealth of its res­i­dents.

“The real im­pe­tus is the huge, cry­ing need for fund­ing our ed­u­ca­tion sys­tem. And im­me­di­ately re­lated to that is the op­por­tu­nity to make a lit­tle move in the di­rec­tion of chang­ing the ter­ri­ble re­gres­siv­ity of our sales tax,” Gates, co-chair­man of his son’s phil­an­thropic foun­da­tion, said in an in­ter­view.

Gates said skew­ing taxes to­ward the rich is noth­ing new.

“I have a very clear rec­ol­lec­tion of the days when we took for granted an in­come tax rate on the high­est earn­ers of 90%, 70%, at times when our coun­try was just mo­tor­ing along in very good style,” he said.

“The no­tion of adding a cou­ple of points to a 35% [fed­eral] rate— it isn’t go­ing to change the world.”

Op­po­nents fear that the pro­posed tax — 5% on in­come above $200,000, 9% above $500,000 — could plunge Washington into the same eco­nomic trau­mas be­ing ex­pe­ri­enced in states like Cal­i­for­nia.

“Don’t Cal­i­taxi­cate Washington,” the Seat­tle Times urged in an ed­i­to­rial op­pos­ing the mea­sure, which polls show is a tossup.

They also warn it may not be a tax only on the rich for long. The ini­tia­tive al­lows the Leg­is­la­ture to change its terms two years af­ter pas­sage.

“What is billed as a hig­h­earn­ers tax is sim­ply a back­door way of ex­tend­ing an in­come tax to all Wash­ing­to­ni­ans in the fu­ture,” Stanzel said.

One key busi­ness­man the op­po­si­tion has lined up is Ge­orge Bartell, chief ex­ec­u­tive of the Bartell Drugs phar­macy chain, founded in 1890 by his grand­fa­ther.

To­day, Bartell says, he faces com­pe­ti­tion from na­tional chains like Wal-Mart and Safe­way, whose own­ers wouldn’t be sub­ject to Washington’s tax. Bartell Drugs, an S-cor­po­ra­tion in which in­come is passed through to fam­ily share­hold­ers, would es­sen­tially be­come a tax­payer.

“We’d be pay­ing a 9% tax that our com­peti­tors wouldn’t be pay­ing, and we’re al­ready smaller than they are,” Bartell said. “For me, it’s a sur­vival is­sue.”

Pro­po­nents say a big in­crease in the busi­ness and oc­cu­pa­tion tax credit could make small busi­nesses the biggest ben­e­fi­cia­ries.

“It’s go­ing to save us about $1,900 in taxes a year, which isn’t a ton of money— but in these days, it all helps,” said Ja­nine Vaughan, who runs a vin­tage-light­ing busi­ness with 11 em­ploy­ees in Spokane.

“As far as the in­come tax, that’s only on [cou­ples] who make over $400,000 a year. Well, no­body I know is in that bracket.”

kim.mur­phy@latimes.com

JEFF BE­ZOS

Ted S. War­ren

The Ama­zon.com founder is help­ing fi­nance an ef­fort to de­feat the tax.

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