Gates, Gorton tangle over income tax Initiative 1098

TACOMA — Former Republican U.S. Sen. Slade Gorton didn't mince words Monday night, arguing that income tax Initiative 1098 would sap the state economy, reduce charitable giving and "add tens of thousands of people to our unemployment rolls."

Not true, Nicolas "Nick" Hanauer, a partner at venture-capital firm Second Avenue Partners, said at the I-1098 debate. "Nothing bad will happen to you as a consequence of me paying three, four million more in taxes," he said. "I won't cut back on the number of homes I own ... I probably won't even cut back on the number of hours I fly in my very own private airplane."

So it went for more than an hour at a debate held at the University of Washington, Tacoma. It was billed as a match between Gorton and William H. Gates, a prominent Seattle attorney who helped draft the initiative that targets the rich. But the event turned into more of a free-for-all among four panelists.

Gates and Hanauer represented the yes campaign while Gorton and Matt McIlwain, managing director of Madrona Venture Group, spoke against the ballot measure, which would create an income tax for the first time in state history.

The proposal would create a 5 percent tax rate on annual incomes exceeding $200,000 for individuals and $400,000 for couples, and a 9 percent tax rate on incomes that top $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 on gross receipts by increasing the state credit to $4,800.

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. Projections show the tax would bring in more than $2 billion annually by 2013.

Opponents say I-1098 would hurt businesses at the heart of the state's economy that are too big to benefit from the B&O tax breaks, and that the Legislature eventually will extend the tax to all income levels, not just the rich.

I-1098 supporters disagree, saying the tax breaks would benefit many small businesses, that the wealthy can afford to pay the tax and that the money is needed to help pay for education and health care, especially given several years of multibillion-dollar state budget shortfalls that have resulted in sharp cuts in spending.

Gorton and McIlwain argued during the debate that I-1098 would make Washington less competitive compared with states without an income tax.

Hanauer disputed that, saying, for example, that "no reasonable technology person is going to move from Washington state to South Dakota (which does not have an income tax). It's not going to happen ... that's because there's no there, there."

His side also noted that 43 other states already have an income tax. Research by the Tax Foundation shows that if I-1098 were approved, it would be the nation's fourth-highest state income tax for earners exceeding $500,000 per year. Income taxes in Hawaii, Oregon and California would be higher.

Gorton drew laughs from the audience of several hundred people when he said it was certain that state lawmakers would extend an income tax to everyone in the state.

"The Legislature is not afraid to increase taxes," he said. "When they are given this, it will be a bonanza the likes of which they have never seen — and they will go wild."

Under state law, it takes a two-thirds vote of the Legislature to amend an initiative the first two years after it's approved by voters — currently a political impossibility. After that, lawmakers can change voter-approved initiatives with a simple-majority vote.

Gates countered that extending the proposed income tax to all income levels was unlikely and that even if the Legislature tried, "there would be no difficulty in collecting signatures" to challenge such a move at the ballot box.

Gates said I-1098 is sorely needed to help fund an education system battered by years of budget cuts. "It makes all kinds of sense to have a modest income tax among the wealthiest among us to fix our education system," he said.

McIlwain noted that state funding for both higher education and the K-12 school system has steadily increased over the years, and he questioned whether it is being spent effectively.

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