Escaping the Income Tax

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Voters in my home state, Washington, have rejected a state income tax. The vote at press time is 65% no.

This is a watershed vote.

Washington is one of only seven states with no personal income tax. The others are Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming. In addition, New Hampshire and Tennessee tax only interest and dividends.

The Tax Foundation ranks states by their tax burden as a percentage of gross state income. Not by accident, eight of these nine are the lowest-tax states in the union, ranking 43rd to 50thon this list.

Washington is the outlier. It ranks 35th.

The eight lowest-tax states are all “red” states. In the presidential election of 2000, all eight voted Republican. Washington voted Democrat, as it has in all presidential elections since 1988.

If it were up to the state’s politically active Democrats, Washington would have had an income tax long ago. But an income tax requires a public vote. And Washington voted 68% no in 1970, 77% no in 1973, and 67% no in 1975.

There was a message in those numbers, and politicians heard it. For most of 25 years, an income tax has been seen as impossible.

The people of the state continued mostly to vote Democrat, many of them out of a fondness for the redistributive state, but also for other reasons. Washington is one of the least religious states. In 1970 it voted for abortion, and in 2008 it voted for assisted suicide. It was not the first state to offer gay civil unions, but in 2009 it was the first state to do so by vote of the people. It was an early medical-marijuana state, following California’s historic vote in 1996 by its own in 1998. In 2010 a group called Sensible Washington circulated petitions for a ballot initiative to repeal the marijuana laws entirely, and though they had no money, they collected more than 200,000 signatures. It wasn’t quite enough — they are trying again — but that it happened at all shows there is a libertarian streak in this “blue” state.

A liberal group quietly worked for several years on a tax proposal that could be put to Washington voters. In January 2010, income tax proponents sensed it was time to act.

An income tax has long been an electric fence of Washington politics (we have no “third rails” here), and few Democrats running statewide have dared to touch it. One who did was King County (Seattle) Executive Ron Sims, who ran for governor in 2004 supporting an income tax. He lost the Democratic nomination to Attorney General Christine Gregoire, who took no such stand, and was elected. (Sims is now Obama’s deputy secretary of HUD.) Under the previous governor, Gary Locke (now Obama’s secretary of commerce), tax “reform” got no further than a study. In 2002, a majority of the tax-study commission recommended a flat-rate income tax levied on virtually all income. The income tax was envisioned as revenue-neutral to the state, its collections offset by large cuts in the property tax and the sales tax. The study was talked about, but Democrats did not dare act on it.

A liberal group quietly worked for several years on a tax proposal that could be put to Washington voters. In January 2010 the group was encouraged by Oregon Measure 66 to create a new high-earners’ bracket in Oregon’s personal income tax: 11% on individual income above $125,000. Facing a large deficit in their state budget, Oregon voters passed it.

In the 2009–2011 biennium, Washington’s budget had fallen one-fourth short. For the following period, another big deficit was forecast. Income tax proponents sensed it was time to act.

The chairman of the 2002 tax study had been Seattle attorney William H. Gates, Sr. He is the father of Microsoft founder Bill Gates, the richest man in the state. In 2010 the senior Gates, age 84, became the public face of the measure to create an income tax in Washington.

In its final form the measure was called Initiative 1098. It was very different from the tax recommended in the 2002 study. It was not a flat tax. It was steeply progressive, with three rates: 0%, 5%, and 9%, the high rate being one of the highest among the states. The proposed rate was zero on individual income below $200,000 and 9% on income above $500,000. This was a “high-earners tax.”

Initiative 1098 also proposed two tax cuts: an exemption for very small businesses from the state tax on business revenue and a 20% cut in the state tax on property. Together, these cuts offset 22 cents of every dollar the new income tax was expected to collect.

Neither of the two cuts benefited the poor, a group often invoked by supporters of “tax reform.” The cuts were for the middle class. They were there so proponents could say that under Initiative 1098, “the wealthy pay more and the rest of us pay less.”

It was not a flat tax. It was steeply progressive, with the "high-earner" rate being one of the highest among the states.

And what better face to put on it than Bill Gates — even though it was not the famous Gates, but his dad. Gates plunked down $600,000 to pay for signature gathering and ads. (Late in the campaign, his billionaire son announced that he agreed with his father, but contributed nothing.)

I-1098 had a handful of other $100,000-plus contributors: Nick Hanauer, a venture capitalist who had made his grubstake by investing in Amazon.com; Ann Wyckoff, an heiress to the Kenworth and Peterbilt truck fortune; and Bill Clapp, an heir to the Weyerhaeuser fortune. But most of the money raised to sell the state income tax was contributed by public-employee unions. The Service Employees International Union, the largest contributor, put in $2.2 million. In total, the amount raised was nearly $1 for each of the 6.5 million residents of Washington.

Opponents knew they had to match that, and they did. They got some money from corporations, but the biggest checks were from CEOs. These included $425,000 from Steve Ballmer of Microsoft, and $50,000 to $100,000 from former Microsofties Paul Allen, Nathan Myhrvold, and Charles Simonyi, who now have their own companies. Amazon’s Jeff Bezos, who is known as a libertarian, put in $100,000. There were others. CEO contributions were not easy to get, particularly at first. Most CEOs were not people who wanted public attention on an issue like this. But they also did not want a "high-earners" income tax.

Some donated after reading an Aug. 14 editorial in the Wall Street Journal, which said: “Washington would move overnight from one of the nine states with no income tax to having the eighth highest rate in the country. Mr. Gates, a wealthy lawyer whose son is among the richest men on the planet, is pitching the proposal as a chance for 97% of the voters to pay the state's bills by socking it to the richest 3%. What he doesn't say is that Washington's lack of an income tax is among its main comparative advantages in luring those top 3%, along with their businesses and jobs, into the state.”

The pro-tax campaign was not going to talk radically. It needed to wrap “soak the rich” in a warm, progressive blanket.

The Journal was not alone. All the big newspapers in the state opposed Initiative 1098, and for some of the same reasons. The Seattle Times claimed in an editorial headline that the income tax would “Calitaxicate” Washington, a play on an old environmentalist slogan, “Don’t Californicate Washington.”

In presenting its case to the public, the proponents had to make a radical tax sound non-radical. Their supporters could do the dirty work. The Stranger, an alternative Seattle paper famous for its sex columnist, Dan Savage, ran a cover story called, “Tax the Filthy Rich!” But the I-1098 campaign was not going to talk that way. It needed to wrap “soak the rich” in a warm, progressive blanket. And for that, it had the rich man who wanted to be soaked: old Mr. Gates.

He was front and center in the first big TV ad: “Hello. I’m Bill Gates senior. And I love our state. That’s why I helped write Initiative 1098. Middle-class families are struggling. 1098 will cut state property taxes by 20%. And eliminate the B&O tax for small businesses. It will dedicate two billion dollars a year to improve education and health care. And only the wealthiest 1.2% will pay more. Support Initiative 1098. It’s good for Washington.”

Opponents hooted at this. Gates had made Initiative 1098 sound like a tax cut, which it was not. He had been too chicken to use the electric words, “income tax.”

The classic was his next ad, with Gates in blue shirt and khaki pants. He opens: “Some people say Initiative 1098 is about soaking the rich. But it’s really about doing something for the next generation.”

The camera pulls back, and you see Gates sitting above a plastic pool of water, in bare feet. Kids are next to the pool, throwing softballs at a target. Gates says: “You see, state cutbacks have put our kids at risk, and we can’t just sit here and do nothing about it. 1098 will dedicate two billion dollars a year for education and health care, and only the wealthiest 1.2% will pay more.”

A softball hits the target, thwap, and the old man drops into the pool of water. The kids cheer. Gates makes an underwater face through the pool’s plastic wall. He surfaces, streaming with water, and says: “Vote yes on 1098. It’s good for Washington.”

It’s a cute ad with a hard message: soak the rich.

The other side’s ads were also carefully constructed.

Their money had come from CEOs who cared about how a high-earners tax would become a corporate income tax for companies such as privately held Bartell Drug, an “S” corporation that flowed its earnings directly to its shareholders; about how the tax would handicap out-of-state recruitment for technology employers such as Microsoft and Dendreon, a Seattle biotech company; and about how it would simply enable more state spending, making Washington like California.

A softball hits the target, thwap, and the old man drops into the pool of water.

In the fight in Oregon, Nike founder and CEO Phil Knight had bought a fold-over-page-one ad in the Portland Oregonian to make an economic case against Measure 66. It was a fine pitch, but it hadn’t resulted in a sale. The Washington No-on-1098 campaign was not going to make CEO-type arguments.

The No people did not have rich guys in their advertisements. In their signature ad, they offered a middle-aged white woman, overweight, plainly but nicely dressed, in a modest suburban kitchen, pouring herself a cup of coffee from a $79.95 Cuisinart coffeemaker. No Italian espresso machine. She looks straight at the viewers and says: “Times are tough these days. And sure, Initiative 1098 might sound good, but supporters don’t even tell us what it really is: an INCOME TAX. And the problem is that after two years, Olympia can extend the income tax to everyone, including people like me. Look what’s happened with the sales tax. It keeps going up and up. I just don’t trust Olympia. So I’m voting no on 1098.”

The message is that the people pushing the tax are tricksters. They hide the words “income tax.” They hide the fact that in two years the state legislature can pile the tax on the middle class by a simple majority vote. When the woman says, “I just don’t trust Olympia,” the viewer thinks, “Yeah, and I don’t trust the weasels behind this tax.”

It was an effective ad. Before the two sides’ ads began, Initiative 1098 had support in the low 40s, with opposition lower than that. As both types of ads unrolled, the percentage opposed grew but the percentage supporting did not. Sometime between mid-September and early October the two lines crossed. By mid-October, the proponents pulled the Gates ads and were using other ones, but nothing worked for them. It was clear that Initiative 1098 was going to lose.

And it did. It was not a narrow loss. It was a big loss. It was a very big deal for Washington, which remains the only “blue” state with no personal income tax.

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