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Originally published June 30, 2010 at 10:01 PM | Page modified July 30, 2010 at 1:58 PM

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Income-tax battle expected to be costly, maybe nasty

It appears all but certain that voters will be asked to help bail out the state budget with an income tax that targets high-income earners.

Seattle Times Olympia bureau

Heading to the ballot?

Initiative sponsors have until Friday to collect at least 241,000 valid voter signatures to qualify a measure for the November ballot. In addition to the income-tax measure, several other initiatives could make the ballot.

I-1100, backed by Costco, would take the state out of the liquor-store business. Supporters delivered petitions with more than 390,000 voter signatures last week.

I-1082, backed by the Building Industry Association of Washington, would allow private workers' compensation insurance to compete with the state government system. Supporters submitted petitions with more than 340,000 voter signatures on Wednesday.

I-1107, backed by the American Beverage Association, would repeal recent tax increases approved by the state Legislature on soda, candy, gum and certain processed foods. Sponsors expected to turn in their petitions Friday.

I-1053, backed by Tim Eyman, would reinstate the need for a two-thirds legislative majority, or voter approval, to raise taxes. Sponsors expected to turn in their petitions Friday.

I-1105, a competing liquor-store measure, would close state liquor stores and license private parties to sell or distribute spirits. Sponsors expected to turn in their petitions Friday.

Initiative 1098

Supporters say the initiative would:

• Create a 5 percent tax rate on annual income above $200,000 for individuals and $400,000 for couples, and a 9 percent tax rate on income above $500,000 for individuals and on income above $1 million for couples.

• Cut the state property tax by 20 percent.

• Increase the business-and- occupation tax credit for small businesses to $4,800 from $420 per year.

• Generate about $1 billion annually in new tax revenue, with 70 percent going to education and the rest to health-care programs.

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OLYMPIA — It appears all but certain that voters will be asked to help bail out the state budget with an income tax that targets high-income earners.

Initiative 1098 supporters said they turned in 350,000 signatures Thursday morning and plan to turn in an additional 20,000 signatures on Friday, which should be more than enough to qualify the measure for the November ballot.

The upcoming campaign for I-1098 has all the makings of an expensive, and potentially ugly, battle between the business community and a coalition of labor and other groups seeking more money for state government.

Advocates for the income tax include Seattle attorney William H. Gates Sr., the Washington State Democratic Party, the Service Employees International Union, the Washington Education Association and the Washington State Labor Council.

Opposing the measure so far are the Association of Washington Business, which has more than 7,000 members, and the Washington Roundtable, an association of corporate executives.

Both sides are honing their messages to appeal to the average voter. Supporters say the wealthy should pay more so the state doesn't have to rely so much on taxes that hit lower- and middle-income folks the hardest. Opponents argue that the tax won't stop with high-income earners: Once an income tax is on the books, soon everyone will be paying it, they say.

I-1098 sponsors say the new tax would bring in about $1 billion a year for education and health care by imposing an income tax on individuals earning $200,000 or more a year and couples earning $400,000 and up. It also would cut the state property tax by 20 percent and increase the business-and-occupation tax credit to $4,800 from $420.

The measure comes at a time when the state faces a $3 billion shortfall in the next two-year budget, with more shortfalls on the horizon. Funding for K-12 and higher education account for more than half of the state budget, and both have been cut during the recession.

At stake, said Sen. Ed Murray, D-Seattle, chairman of the Senate Democratic Caucus and a supporter of the initiative, is "whether we have a public higher-education system and whether we have a K-12 system in the top tier."

Business leaders, though, say the initiative would only start with the rich and that the tax eventually could be broadened to include most taxpayers. If I-1098 is approved, state lawmakers would need a two-thirds vote in both houses to change it during the first two years it's in effect. After that, the Legislature could change it with a simple majority vote.

Business leaders also contend the tax would drive away talent, including people in the high-tech and biotech industries, that Washington needs to fuel the state's economy.

"This is about the worst thing you could do," said Steve Mullin, president of the Washington Roundtable.

I-1098 is likely to be on the ballot with a handful of other measures, including an initiative that would dump new taxes on candy, gum and pop that the Legislature recently approved, and a proposal by frequent initiative promoter Tim Eyman that would make it harder for lawmakers to raise taxes without a public vote. Also, the Metropolitan King County Council is still trying to decide whether to put tax increases on the ballot to help fund public safety.

Constitutional issue

Washington is one of five states that does not have personal or corporate income taxes. The others are Nevada, South Dakota, Texas and Wyoming.

It's not for a lack of trying.

In the past 78 years, Washington voters have been asked five times to adopt a personal or corporate income tax. The first measure was approved by voters in 1932 but tossed out the next year by the state Supreme Court on a 5-4 decision.

In the past, it's been conventional wisdom that an income tax targeting high-income earners wouldn't be allowed without a change in the state constitution, which would require a two-thirds majority in the state House and Senate, and approval by voters.

That's because the 1933 court ruling said an income tax is essentially a form of property tax and must, under the state constitution, apply equally to everyone, rich or poor, said Hugh Spitzer, a University of Washington affiliate law professor.

However, Spitzer has said there's a good chance courts now would uphold an income tax, given other court decisions. Others disagree.

Recent polls on the initiative have had mixed results.

A survey by Seattle pollster Stuart Elway in mid-June found voters split 46 to 46 percent, with 8 percent undecided. In his report, Elway wrote: "This is a rather surprising finding, given the history of the income tax on the state ballot. It has been turned back by voters by margins of 3:1 in previous ballot box attempts."

Elway said in an interview his poll suggests a window of opportunity for I-1098 supporters, but noted: "History is still not on their side."

A poll done by the University of Washington in May found 58 percent of voters said they would vote yes or leaned that way.

Other states OK taxes

I-1098 supporters say they're encouraged by voters in other states who have approved tax increases — including income taxes — to plug budget holes.

Oregon voters in January approved raising income-tax rates on people who make more than $125,000 a year in taxable income — $250,000 for joint filers — and on businesses. Oregon does not have a sales tax.

And in May, Arizona voters approved a 1-cent sales-tax increase, for three years, to help balance the state budget.

But Washington's vote is more than four months away, and both sides are still developing talking points.

Supporters argue an income tax on the rich is more fair than constantly relying on regressive and volatile sales taxes to finance much of state government. And they note that in addition to reducing property taxes, the measure's tax credit would eliminate the state's business-and-occupation (B&O) tax for most small businesses.

Opponents contend an income tax on high-income earners would make tax collections even more volatile because wealthy residents get much of their income from bonuses and stock-market investments that can fluctuate widely depending on the economy. And although I-1098 would eliminate the B&O tax for many, other small businesses would get hit by the income tax because of the way their corporations are structured. They also say it would be a punitive tax aimed at many of the state's most talented — and mobile — people.

State records show that the yes campaign, Washingtonians for Education, Health and Tax Relief, has raised about $792,000 and spent about $171,000. The Defeat 1098 campaign has about $356,000 in the bank. Both sides say they expect millions will be spent but would not say how much money they plan to raise.

"You'll see a major field and outreach campaign to bring our voters out," said Sandeep Kaushik, a spokesman for the I-1098 campaign. "I think it will be a costly campaign on both sides."

Mullin said the same: "I anticipate we'll need to raise and spend a very significant amount of money."

Andrew Garber: 360-236-8266 or agarber@seattletimes.com

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