Initiative 1098 critic keeps striking out on the facts

So far, Don Brunell (President of the Association of Washington Business) has gone to bat against Initiative 1098 in nearly identical columns in at least three different newspapers (or is it five?). But he keeps striking out by missing — or misstating — three important facts.

1st Pitch: Even though Initiative 1098 will raise the small business tax credit from $420 to $4,800 per year — eliminating B&O taxes for an estimated 81% of all Washington businesses (up from 43% currently), and cutting taxes for another 12% — Brunell writes that I-1098 will exempt only “very small” businesses from B&O taxes. Foul ball.

B&O tax rates vary by business type (details here), but here are a couple of examples of the different kinds and sizes of businesses that would benefit from I-1098’s tax cuts:

  • Under I-1098, a coffee shop, other small retail business, or child care bringing in about $1 million per year or less in total revenue would be exempt from the B&O tax. To put that into perspective: A coffee shop could serve 700 customers a day (at an average $4.00 purchase per customer) every day of the week and still pay no B&O tax. Even if their gross receipts were twice that, under Initiative 1098 that business will still receive a reduction in its B&O tax.
  • Service businesses such as hair stylists or accountants would be exempt if they bring in a total of less than $320,000 annually. So under I-1098, a hair salon could serve 8000 customers (at $40 per cut) — 30 a day, Monday to Friday, every week of the year, with no business tax. Even with double the number of customers, under I-1098 their business taxes will still be reduced.

Perhaps these “main street” businesses look small relative to giants like Boeing, Starbucks, and Microsoft. But Washington’s small businesses vastly outnumber large ones — and they are no less important to our local economies and communities.

2nd Pitch: Brunell neglects to mention that I-1098 requires a majority approval by voters to change either tax rates or income thresholds, then criticizes the measure on the grounds that “lawmakers can change the income tax rates and levels after just two years with a simple majority vote.” Called strike.

Washington’s constitution explicitly allows a legislative majority to override or modify any portion of any initiative after two years. Those are the rules of the game. More to the point: the principle of a simple majority vote is a fundamental tenet of our democracy.

If Brunell considers that to be a flaw, it’s one he’s found in the state constitution, not in I-1098. (It’s ironic — though perhaps not surprising — that Brunell doesn’t voice a similar criticism of AWB- endorsed I-1053, which is subject to those very same constitutional rules.)

3rd Pitch: Apparently forgetting his earlier statement that I-1098 will exempt small businesses from B&O taxes, Brunell writes: “small employers…will pay both income taxes and the B&O taxes on their business income.” A swing and a miss to end the inning.

Remember that coffee shop example above? For Brunell’s statement to be true under I-1098, that business owner would not only have to gross over $1 million a year in business revenue before paying any B&O taxes, but also receive over $200,000/year (single-filer) or $400,000/year (joint filer) in salary and business income, net of losses/expenses**, before paying a penny in state income tax. Any business owner doing that well is a picture of business success, not an entrepreneur struggling to get a business off the ground. And even then, I-1098’s income tax only applies to the portion of adjusted gross income above those income thresholds.

**A taxpayer choosing to report business income on their personal income tax form usually does so in one of two places: either Line 12 or Line 17 of Form 1040. While the former uses Schedule C and the latter Schedule E, both forms report not only business income, but also business expenses like the cost of goods sold, labor costs, vehicle expenses, etc. In other words, only net business income (or loss) gets reported on Form 1040. And under I-1098, potential state income tax isn’t based on that figure, but on “adjusted gross income”, which provides yet other opportunities to reduce total taxable income.

Color Commentary: The Small Business & Entrepreneurship Council report cited by Brunell ranks states only according to the costs of their tax systems, ignoring other factors crucial to quality of life and business climate — like an education system that provides students with skills for 21st century jobs, and public health structures that keep our communities strong.

By dedicating over $1 billion annually in new revenue to public education and health, over the long run Initiative 1098 will improve educational opportunity and public health, both of which are crucial to creating a healthy business climate. But if Brunell can’t see those upsides for Washington’s businesses, it’s probably a good thing that he’s a ballplayer — and not an umpire — for this state’s economy.

Looking for more information about Initiative 1098? Visit the Economic Opportunity Institute website.

 

· A coffee shop, other small retail business, or child care bringing in less than about $1 million per year in total revenue would be exempt from the B&O tax.

· Service businesses such as hair stylists or accountants would be exempt if they bring in a total of less than $320,000 annually, because they have a different tax rate.

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