Education income tax is costly, flawed

Just when the Olympia City Council was working collaboratively, moving ahead on revitalizing downtown, and making progress on parks and other city priorities, a Seattle think tank and its local allies have thrown a wrench in the works.

The Economic Opportunity Institute and local advocates are gathering signatures to put an initiative on the fall ballot to levy a 1.5 percent tax on households with incomes over $200,000. The estimated $2.5 million this might generate would be used to fund one year of community college tuition for all Olympia high school graduates or GED earners.

That may be an appealing idea at first blush. After all, higher education is good, our tax system is bad, and people who are well off currently pay a lower percentage of their income in state and local taxes than the rest of us.

Closer examination

But when you learn more, the idea withers.

First, there is the fact that our state Supreme Court has ruled twice that income taxes are unconstitutional in our state. The initiative effort is aimed at using the city of Olympia as a guinea pig to test whether today’s Supreme Court would rule differently, and thus open the door to a statewide income tax. That is the holy grail of a long line of tax reformers who point out that our state’s tax system is the most regressive in the nation.

If the initiative passes, the city of Olympia would be obliged to defend it in the courts, which is a potentially long and very expensive process. It would require the city to hire outside lawyers who are experts in constitutional law and tax policy. Initiative proponents are reported to have promised to help raise funds for this purpose, but the city can’t count on that.

Second, giving tuition money to all students, regardless of need, doesn’t make sense.

There are other sources of funding for student tuition, including Running Start, federal Pell grants, state need grants, and the state’s College Bound scholarship. There are certainly still gaps in financial aid, but the initiative doesn’t target those gaps; it just spreads the money like peanut butter.

Third, the city does not have a way to collect such taxes. The IRS won’t share tax data with the city, so there’s really no way to know who would owe the tax. The city would have to create a tax department, collect what they can, and figure out how to levy and collect a civil penalty for those who don’t pay. No one knows how to do this without IRS data. So far, the city has been working with data from the census, which is insufficient.

Because there are flaws and inconsistencies in the initiative language – and perhaps because there was a desire to get out in front of this populist parade – a narrow council majority (Nathaniel Jones, Jessica Bateman, Clark Gilman and Jim Cooper) voted to write a city-sponsored alternative. The city alternative would only be an advisory vote; the Council would have to pass an ordinance based on the result. The councilmembers who are pushing for this think that the initiative backers will withdraw their version if the Council puts something similar on the ballot.

Drain on staff time

About three weeks ago, this council majority directed staff to write a version that changed the $200,000 income threshold to a broader graduated income tax. So far, the city manager estimates that 100 hours of staff time have been devoted to this challenge.

But late in last Tuesday night’s Council discussion of the staff’s draft proposal, councilmember Nathaniel Jones successfully proposed a last-minute amendment to shift to a tax on “unearned income” from interest and dividends. He acknowledged that staff would need to clarify how those terms are defined so as not to tax ordinary people’s pension savings and interest on checking accounts.

At next week’s Council meeting, there will be yet another staff draft, another testy discussion, and another vote.

This heavy investment in drafting comes in spite of the fact that Hugh Spitzer, an attorney who is an expert on the state constitution, made it clear that there is a vanishingly small chance of a courtroom success with any version of this idea.

So far, this discussion has opened deep divisions in the Council, derailed city staff from other work, and alienated many civic leaders, business owners and potential investors needed to revitalize downtown.

The four-member majority of the Council is convinced by poll data and the success of the signature gathering that the initiative or their alternative will pass. But when voters are polled or asked to sign a petition, they probably take less than a minute to think about their response. We think public opinion will shift as people learn more.

Our regressive state tax system needs to be changed, but this is not an effective strategy for achieving that goal. We hope the Council will drop its futile attempt to make it work, and actively campaign for the initiative’s defeat.

This story was originally published June 18, 2016 at 6:30 PM with the headline "Education income tax is costly, flawed."