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Originally published October 17, 2010 at 10:02 PM | Page modified October 18, 2010 at 10:05 AM

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Initiative 1098: Frequently asked questions

Questions and answers about I-1098, the income-tax initiative.

Seattle Times Olympia bureau

Answers to some reader questions about Initiative 1098:

Q: What does I-1098 do?

A: I-1098 would create a 5 percent tax rate on annual taxable earnings exceeding $200,000 for individuals and $400,000 for couples, and a 9 percent tax rate on earnings of more than $500,000 for individuals and $1 million for couples.

It also would cut the state portion of everybody's property taxes by 20 percent and newly exempt 118,000 businesses from the business-and-occupation tax (B&O) on gross receipts by increasing the state credit to $4,800.

Q: If you make enough money to be taxed under I-1098, would it tax your entire income?

A: No. It would tax only the money earned above the thresholds. So, for example, if you're a single filer with an adjusted gross income of $250,000, you would pay a 5 percent tax only on the taxable income exceeding $200,000 In this example, that would be a tax of about $2,500.

Q: How many individuals would be affected by the tax?

A: The state estimates 38,400 filers would pay the income tax — 12,400 individual taxpayers and 26,000 joint, head-of-household and widower filers.

Q: If approved, when would the tax take effect?

A: For the 2012 tax year.

Q: How much money would be collected by the income tax, and where would the money go?

A: The tax is projected to bring in more than $2.9 billion annually by 2013. About 22 percent of that would be used to reduce property and B&O taxes. The remainder, more than $2 billion, would go to education and health care.

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The initiative would create a trust fund dedicated to spending on education and health-care services. The measure says 70 percent of the money spent must go to K-12 and higher education, and the other 30 percent must go to health care, including the state basic health plan and long-term care.

Q: What guarantee is there that the money would not be spent on other things?

A: If voters approve I-1098, any money spent from the trust by the Legislature would have to go to the purposes outlined in the initiative for the first two years, unless lawmakers muster a two-thirds vote in both the House and Senate to change the measure.

After two years, lawmakers could change the law with a simple majority vote and spend the money any way they want.

Q: How much would I-1098 really reduce your property taxes?

A: I-1098 directs the state to use some of the increase in tax collections to reduce state property taxes by 20 percent.

What that means is the measure would reduce the state portion of homeowners' property taxes, which for a King County homeowner would amount to about a 4 percent reduction in his or her annual property-tax bill.

For example, based on a breakdown of rates from the state Department of Revenue, a King County resident with a home worth $300,000 on average pays $2,362 in local taxes and an additional $667 in state taxes for a total of $3,029 this year.

If the initiative were in effect this year, the 20 percent reduction in the state portion of property taxes would lower the overall bill by $133.

Q: Could the state income tax created by I-1098 be deducted from federal income taxes?

A: The initiative on the Nov. 2 ballot refers to the proposed income tax as an "excise tax."

The initiative calls it an excise tax to conform with existing law and to avoid problems with the state constitution, according to I-1098 supporters.

Opponents of the measure say that, as a result, taxpayers may not be able to deduct the state income tax on their federal returns because there's no provision to deduct excise taxes.

"Because of the way the law is drafted, there is considerable uncertainty," said Joe Wallin, an attorney at Seattle law firm Davis Wright Tremaine. "In my world, if the government can use a law against you, it will."

Ann Murphy, a former IRS attorney now teaching at Gonzaga University's School of Law, said recently that the IRS doesn't care what it's called. "You can call it the tree tax, and they don't care. If it walks, talks and taxes like an income tax, it's an income tax. That's how they'll treat it, and so it would be deductible."

The IRS would not comment on the initiative.

Q: Would I-1098 eliminate sales-tax deductions on federal returns?

A: A bigger question is what Congress would do. The sales-tax deduction will not be available for the 2010 tax year if Congress does not renew it.

That said, federal tax returns in recent years have allowed for taxpayers to deduct either sales taxes or income taxes, but not both. So taxpayers who don't make enough money to pay an income tax would still be able to deduct sales taxes on their returns, if Congress extends the provision. Those who make enough money to pay the state income tax would have to make a choice.

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

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