Washington state wrestles with tax-the-rich ballot measure

Imagine if the slash-and-burn budget cuts that have become a new way of life for recession-stricken state governments could be ended by simply soaking the rich.

Here in Washington, they’re taking that literally. A TV spot for a proposed new income tax on the state’s wealthiest citizens shows Microsoft founder Bill Gates’ 84-year-old father, William Gates Sr., plunged by giggling kids into a dunk tank and left to drip in his wet khakis and Oxford shirt.

“Some people say Initiative 1098 is about soaking the rich. But it’s really about doing something for the next generation,” Gates says. “You see, state cutbacks have put our kids at risk, and we can’t just sit here and do nothing about it.”

The fight over what would be Washington’s first state income tax since 1933 is shaping up as a battle of the titans: Both the elder Gates, a prominent retired lawyer and philanthropist, and his son, the richest man in America, are backing I-1098. But three of the state’s other biggest businessmen — current Microsoft Chief Executive Steve Ballmer, Amazon.com founder Jeff Bezos and John Nordstrom of the Seattle-based retail chain — are throwing big money into the campaign to defeat it.

Washington voters are being asked to endorse a tax philosophy that is in many ways similar to President Obama’s approach to shrinking the federal deficit: Keep the tax burden off low- and middle-income families while raising taxes on the wealthy.

The ballot measure would raise about $2 billion a year for education and healthcare by taxing gross income above $200,000 for individuals and $400,000 for couples, while trimming other taxes for small businesses and property owners.

Voters in neighboring Oregon earlier this year easily passed a similar tax-the-rich ballot measure, along with a tax hike on corporations. But Washington, one of only seven states with no income tax, has made its tax-free status an important selling point in attracting new business.

Opponents warn that new taxes on well-off entrepreneurs would make it harder to recruit talented employees and would eat into business owners’ ability to reinvest, raise wages and create new jobs.

“As a former Microsoft employee, I absolutely know it would damage Microsoft’s ability to compete. Part of their ability to attract talent from all over the world is because there’s no state income tax here,” said Scott Stanzel, a former deputy White House press secretary under President George W. Bush and a public relations manager for the software company who now is running the campaign to defeat I-1098.

Washington survives on a 6.5% sales tax (boosted to 9.5% in Seattle), taxes on candy, imported beer, bottled water and cigarettes (a separate initiative is on the November ballot to repeal that tax) and one of the nation’s only business and occupation taxes, levied largely on gross receipts rather than net income.

The decline in consumer spending has left the state government reeling under crippling budget shortfalls. Since 2009, the Legislature has approved $5.2 billion in cuts targeting schools, clinics, state employees and the state health plan.

That’s a large number in a state of only 6.7 million residents, and more cuts lie ahead: Projected revenues have shrunk by an additional $770 million since spring, and Gov. Chris Gregoire has ordered state agencies to prepare for additional reductions of 6.3% by Friday.

The impact has been felt perhaps most acutely in education. The state ranked 17th in the nation in per-pupil state funding for schools in 1992, but slipped to 33rd by 2008 — or 47th, if measured relative to the wealth of its residents.

“The real impetus is the huge, crying need for funding our education system. And immediately related to that is the opportunity to make a little move in the direction of changing the terrible regressivity of our sales tax,” Gates, co-chairman of his son’s philanthropic foundation, said in an interview.

Gates said skewing taxes toward the rich is nothing new.

“I have a very clear recollection of the days when we took for granted an income tax rate on the highest earners of 90%, 70%, at times when our country was just motoring along in very good style,” he said. “The notion of adding a couple of points to a 35% [federal] rate — it isn’t going to change the world.”

Opponents fear that the proposed tax — 5% on income above $200,000, 9% above $500,000 — could plunge Washington into the same economic traumas being experienced in states like California.

“Don’t Calitaxicate Washington,” the Seattle Times urged in an editorial opposing the measure, which polls show is a tossup.

They also warn it may not be a tax only on the rich for long. The initiative allows the Legislature to change its terms two years after passage. “What is billed as a high-earners tax is simply a backdoor way of extending an income tax to all Washingtonians in the future,” Stanzel said.

One key businessman the opposition has lined up is George Bartell, chief executive of the Bartell Drugs pharmacy chain, founded in 1890 by his grandfather.

Today, Bartell says, he faces competition from national chains like Wal-Mart and Safeway, whose owners wouldn’t be subject to Washington’s tax. Bartell Drugs, an S-corporation in which income is passed through to family shareholders, would effectively become a taxpayer.

“We’d be paying a 9% tax that our competitors wouldn’t be paying, and we’re already smaller than they are,” Bartell said. “For me, it’s a survival issue.”

Proponents say a big increase in the business and occupation tax credit could make small businesses the biggest beneficiaries.

“It’s going to save us about $1,900 in taxes a year, which isn’t a ton of money — but in these days, it all helps,” said Janine Vaughan, who runs a vintage-lighting business with 11 employees in Spokane. “As far as the income tax, that’s only on [couples] who make over $400,000 a year. Well, nobody I know is in that bracket.”

kim.murphy@latimes.com