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I-1098: The Big (Business) Chill?

I-1098 opponents argue that “job creation will be harmed by Initiative 1098.” Supporters argue that there are business benefits in I-1098. Who’s right?

Economic Opportunity Institute Policy Director Marilyn Watkins endorsed I-1098 in The Columbian because of small business benefits:

For middle-class families as well as businesses, I-1098 also reduces the state portion of the property tax by 20 percent. That totals $400 million, money families and businesses can turn around and spend.

Washington’s Office of Financial Management estimates 118,000 businesses will be newly exempt from B&O taxes and 39,000 more businesses will see a B&O reduction.  According to Watkins, only 38,400 out of 3.2 million filers (top 1.2 percent) will pay the income tax.

Publicola’s Josh Feit makes a solid case for businesses thriving with the passage of I-1098. Feit concedes in his September 6 article that a business owner gets hit up front by the high-earners income tax if he or she decides to take home a salary of, say, $50,000 and leave $300,000 in the bank for reinvestment, but he cleverly plays touche by engaging in his own Q & A:

So, I-1098 takes the money before the owner gets a chance to reinvest. Might as well hold on to your profits instead of earmarking them for expansion if you’re going to owe money to the state regardless, right? Well, no … (Business) owners can simply deduct the investment from their income for tax purposes in the following tax year and get reimbursed.

However there are also data suggesting that the tax will cause a chill in the business climate:

The Association of Washington Business surveyed their 7,000 member businesses about I-1098. Thirty-three percent of respondents indicated they would reduce hiring and salaries if the income tax became law. Forty-seven percent said they expected to decrease investment in their businesses.

Job creation claim: neither side can do anything but hypothesize.

As to opponents’ claims that money and business owners will leave Washington if I-1098 passes, they have used apples-to-oranges comparisons to states like Minnesota and New Jersey. Whereas Washington’s I-1098 would tax the income of less than two percent of its citizens, the income tax laws of Minnesota and New Jersey affect almost all of their citizens.

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