Taxing the rich now, taxing you later?

Oct 12, 2010, 2:58 AM | Updated: Mar 28, 2011, 3:46 pm

The most high profile initiative on the November ballot features Bill Gates Sr. promoting a plan to tax only the wealthy in our state. His billionaire son, Microsoft co-founder Bill Gates Jr., is also in favor of Initiative 1098. But opponents say it’s a foot in the door toward taxing the rest of us too.

Gorton Gates 3 small JCD10

Almost 300 people attended a debate last night between former U.S. Sen. Slade Gorton, left, who opposes Initiative 1098 and Bill Gates Sr., who wrote the measure. Photo: Jill Carnell Danseco, University of Washington Tacoma

Checking yes on 1098 imposes a 5 percent tax on individuals who make over $200,000 a year or couples earning over $400 grand. There is a second tax bracket of 9 percent on income above $500,000 for individuals or $1 million for couples.

“This initiative would cost me and my family millions of dollars a year,” says Nick Hanauer. Even so, he supports it. “If you care about the community and its future, you’re willing to put your money where your mouth is.”

Hanauer is a Seattle tech entrepreneur and venture capitalist with Second Avenue Partners. He’s the guy behind the money that started Amazon.com. More recently, he founded aQuantive which he sold to Microsoft for $6.4 billion in 2007.

He says I-1098 straightens out a messed up tax structure in Washington. He believes we have “the most unfair tax code of any state in the nation.”

“By unfair I mean the poorer you are the more you pay,” he says. “If you’re wealthy you pay a very small proportion of your income to the state.”

Matt McIlwain, with the Medrona Venture Group, opposes 1098. Set aside the issue of who’s paying the tax for a moment, he says, and realize this is an income tax.

“Once you create an income tax it lasts forever,” says McIlwain.

Connecticut had a similar plan to tax the rich. Their measure was a temporary tax imposed on high earners at a rate of about four percent. That was 20 years ago, McIlwain says. Today, Connecticut has a permanent income tax that tops out at six percent and begins for those making over $13,500 annually.

Opponents of the initiative ask, what’s to stop our legislature from eventually taxing residents who make under $200,000 per year?

“After two years our state legislature, with a simple majority vote, can apply that state income tax to anyone and everyone in the state,” McIlwain says.

There is no guarantee written into I-1098 preventing lawmakers from expanding the tax, but initiative supporters don’t think that will happen.

“The idea that our timid legislators are going to enact a general tax increase on everyone as a result of this passing is just ridiculous on the surface,” says Hanauer. “They’d get voted out of office in a moment.”

Staying with Connecticut as an example of what can happen when a tax is imposed on wealthier individuals, Hanauer points out their tax system yields a capacity to invest $3,000 more per child in public education.

“As a consequence, they’re kicking our butts in every dimension in public education,” Hanauer says. Their reading scores are 27 percent higher than ours and graduation rates are 14 percent higher. And the average family in Connecticut is 17 percent wealthier than those in Washington.

If approved, the measure would generate $1.1 billion for education and health care in 2012 and over $1.6 billion each year after that. It cuts property taxes by 20 percent, and exempts about 118,000 companies from a portion of the Business and Occupation tax

What Connecticut doesn’t have is significant business growth. Between 1990 and 2006, during the height of economic boom in the U.S., Connecticut’s job growth increased less than 1 percent. During the recession, which began in 2007, job growth has declined nearly 6 percent.

Two of Washington’s most high profile companies oppose the tax plan. Executives for Boeing and Microsoft say the taxes would harm businesses by raising costs for suppliers and making it harder to attract talent. Leaders with Amazon.com, Weyerhaeuser and Alaska Airlines also oppose the measure.

Who’s funding the campaigns?

Washingtonians for Education, Health and Tax Relief has raised more than $5.7 million for the initiative. Along with money from Gates Sr., Gates Jr. and other wealthy individuals, the largest contributions come from the Service Employees International Union and the National Education Association.

The effort to defeat I-1098 has about $4.5 million in contributions, including donations from Barry Ackerley, Steve Balmer, Jeff Bezos, John Nordstrom, Russell Investments and Paccar.

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Taxing the rich now, taxing you later?