Would Proposition 1098 Favor National Chains Over Local Comapnies?

There have been numerous objections made to Proposition 1098, many of which we covered here. Seattle Times’ Danny Westneat offered a new argument in his column today, suggesting that any new tax should apply to all state residents. It does seem unfair to target such a narrow segment of the population as 1098 does. But it’s also impractical to tax everyone. By requiring everyone to pay, even if it’s only one dollar, as Westneat suggested, would add a huge amount of unnecessary paperwork, forcing many people to file taxes that might not otherwise be filing any taxes at all.

I’m more concerned about impact the tax might have on our tech sector, in particular our ability to attract talent to the region. (Although I’m not hugely sympathetic to the people who will have to pay taxes on their stock options. They are a lucky few who get to pay lower, capital gains rates on a substantial part of their income. The rest of us pay higher, regular income tax rates on all our income.)

But there is another more compelling case against Initiative 1098 made by Jean Bartell Barber, chief financial officer and co-owner at the Bartell Drug Company. Barber points out that if the new initiative passes, business income for many local firms like Bartell would be taxed regardless of whether the income is actually distributed to the owners, discouraging business owners from re-investing their profits. (Investments in things like inventory are not deductible against federal taxes. And since a new store has to be depreciated over 40 years, only one fortieth of an investment in a new store, for example, would be deductible.) Worse, the tax would put Bartell at a disadvantage against national chains like Walgreens, which, as a “C” corporation, would not have to pay the state income tax. Bartell is particularly vulnerable because it is in a low margin business. The B&O tax, which is based on revenue, is far harder on low margin businesses like Bartell than on high-profits businesses like Microsoft. If 1098 were to pass, Barber says, Bartell’s effective tax on corporate income would rise to 60 percent, which seems unreasonable by any measure. She suggests one solution would be to exempt “undistributed” income from that tax, so that money invested back into the business was not taxed.

Some accountants say the argument is disingenuous. Firms like Bartell, they say, could avoid the state taxe by converting to a “C” corporation, a relatively simple process. They prefer not to because they would then have to pay federal taxes on all business income and face double taxation when they distribute income to owners and partners. But their income would then be treated in the same way as the rival national firms. (But it remains true that a new income would be an added burden to lots of businesses that play a key role in creating jobs.)

Perhaps the best argument against 1098 is that the initiative doesn’t represent true tax reform, as former governor Dan Evans suggested in a recent editorial. True reform would involve implementing a broad-based tax that is progressive, provides stable revenues to the state and encourages the kinds of behaviors that we want to encourage. A carbon tax like that of British Columbia, for example, would encourage the use of public transportation, reduce the generation of carbon gases and encourage the creation of clean tech companies. But there has been little support for such tax reform. The national trend has been toward fighting any kind of tax. Perhaps this initiative, whether it passes or fails, will create support for a more comprehensive alternative.