Tax plan faces legal hurdles

Decisions: State's high court twice has found income tax unconstitutional

April 22, 2010 

Washington voters have rejected income taxes four out of five times since 1932, and the state Supreme Court twice found that a graduated income tax is unconstitutional.

That might paint a bleak picture for tax-reform advocates, but wealthy lawyer Bill Gates Sr. and other advocates announced Wednesday that they are pushing ahead with an income tax proposal, Initiative 1077, for the November ballot.

The proposed tax would be limited to the top 3 percent of earners in the state – costing a couple earning $1 million about $30,000, proponents say. I-1077 would tax the earnings above $400,000 for couples at 5 percent and above $1 million at 9 percent. Thresholds would be half those for individuals.

“The last time any kind of income tax was proposed was back more than 35 years ago, and this is a different proposal,” I-1077 spokesman Sandeep Kaushik said Wednesday.

I-1077 also would reduce the state’s share of property tax by 20 percent and create big tax credits for small businesses that would let the majority of them avoid paying any business and occupations tax, he said. Despite those cuts, it would generate an estimated $1 billion a year in new money for education and health programs.

I-1077 already is drawing opposition, and a former Republican political consultant who led the 1975 campaign to reject a corporate income tax is organizing to fight I-1077 if it gets onto the ballot.

“Basically, it’s a discriminatory tax. It singles out one group of taxpayers for a special tax. It basically is unfair on its face,” said Richard Schrock, the consultant who served four years under Republican Gov. John Spellman as the director of the state’s commerce and economic-development agency.

“I’m going to work to organize an effort to oppose it if they get it on the ballot. I’m not going to help them get it on the ballot by stirring things up. I think they’ll have a not necessarily easy time getting signatures,” Schrock said.

Kaushik, Gates and other advocates rolled out their plan in a news conference at SoHo Coffee, a small business that would be exempted like thousands of others from the B&O tax if I-1077 qualifies for the ballot and passes, Kaushik said.

The I-1077 campaign also has filed papers this week with the state Public Disclosure Commission to raise money. And it named Kelly Evans, the manager of Gov. Chris Gregoire’s 2008 campaign, as campaign manager.

Kaushik said they expect to use volunteers and paid signature gatherers to collect more than 241,153 valid voter signatures by July 2. He also said they think they have a good chance to qualify for the Nov. 2 ballot and to win over voters.

“This is a package of tax reforms that includes middle-class tax cuts and exempting hundreds of thousands of small businesses across Washington state from the B&O tax,” Kaushik said.

But those questioning the wisdom of the move weren’t just Republicans or business groups that spoke out earlier this year at the Legislature against a high-earners’ tax. There are legal questions about enacting an income tax without a constitutional amendment.

“I think probably a state income tax would be good for this state. But I thought it was good before and the state Supreme Court (twice) said no,” said Jennings Felix, a retired Olympia lawyer who served as state Tax Commission counsel during the 1960s for then-Gov. Albert Rosellini.

“I think it’s a waste of time unless they go for a constitutional amendment. That’s the only sure way of doing things,” he said.

Felix based his comments on the Supreme Court ruling in 1933 and again in 1950 that dealt with a finding that income is property. As a result, the constitutional requirement for uniformity of property taxes meant a constitutional amendment would be needed to authorize a graduated income tax.

But Hugh Spitzer – who teaches constitutional law at the University of Washington and also served on the Gates Commission that looked at state tax policy in 2002 – has taken a different view. Spitzer contends that legal precedents relied on by the Supreme Court would not be binding in a modern case.

The high court “would likely take a ‘clean slate’ approach to the income tax today,” Spitzer wrote in the two-volume Tax Alternatives for Washington State that the Gates committee produced in its 2002 report to the Legislature. Spitzer said Pennsylvania and Washington courts were the only ones that had not reversed earlier rulings that treated income as property.

Schrock said that the public is likely to oppose it simply because it’s an income tax.

“Voters know there are no constitutional safeguards. They could raise the rates at any time. They could raise the tax base at any time, to apply it to other income groups,” Schrock said.

Brad Shannon: 360-753-1688

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