New Study on Washington’s Income Tax Initiative

In next Tuesday’s election Washington state voters will have a chance to weigh in on ballot initiative 1098, a measure that would impose an income tax for the first time in state history.

1098, if approved, would significantly worsen the state’s competitive tax climate by introducing a 5% on high income earners above $200,000 and 9% on income over $500,000. Such legislation serves as a short-term budget fix that also allows Washington to avoid cuts in spending.

A special report, released today by the Tax Foundation, reveals that Washington State scores 11^th best in State Business Tax Climate Index as of the snapshot date of July 1^st, 2010. However, if the provisions of 1098 had been in place at this time, the state’s tax system would have ranked third to last for economic activity.

Other key findings of the report:

-Washington voters have previously rejected constitutional amendments to adopt an income tax six times. Most recently, in 1973, 77% of Evergreen state voters opposed the tax despite approval by the legislature and the governor.

-The 9% tax rate on top income earners would be the 4^th highest in the United States, erasing the state’s major selling point to business owners.

-Enacting a new state income tax state sets a precedent for future tax increases. Nearly all of the states that have recently adopted an income tax have increased rates for both the highest and lowest brackets. In two years the Washington legislature would be permitted to expand the income tax structure and the provisions of I-1098

-Tax revenue will increase in the short term without a large effect on high income earners. However, their business and planning decisions in the future will negatively affect the state’s economy.

In September, Americans for Tax Reform issued a letter (link) to Washington legislators urging them to publicly oppose I-1098 if they had not already done so. As one of seven states without an income tax, Washington ranks as one of the best states to invest and start a business. If passed next week, I-1098 will permanently remove this advantage.