The Business Divide: Will Initiative 1098 help or hurt small business?

If you’re not a regular reader of the Pacific Northwest Inlander, then you probably missed yesterday’s article on Initiative 1098 and small businesses. The article cuts through much of the rhetoric about the measure (pro and con) — and that makes it worth a read:

It´s hard to get a straight answer on Initiative 1098, which would tax the wealthiest 1.2 percent of Washingtonians.

Bill Gates Sr., father of the Microsoft co-founder, is for it. The Association of Washington Businesses, the state’s chamber of commerce, is against it, calling it “devastating for Washington’s overall competitiveness.” Main Street Alliance, which represents 2,000 small Washington businesses, promises it will “reform our upside-down tax system.”

Talk to Janine Vaughn, owner of Revival Lighting in downtown Spokane, and she’ll tell you the initiative will be a financial boon for her business. Talk to Matt Sonderen of Sonderen Packaging, and he’ll tell you the measure will hurt his.

Clearly, the measure is complicated: Initiative 1098 would reduce state property taxes and the number of businesses paying Business and Occupation taxes, while adding state income taxes for wealthy individuals.

If passed, it would add around $2 billion for funding of education and health care across the state. If passed, 1098 would create Washington’s first-ever income tax.

That tax, however, would hit only the rich. For those filing singly, only income over $200,000 — more than three times the salary of the average Inlander reader — would be taxed. For those filing jointly, only income over $400,000 would be taxed.

Opponents note, however, that some small businesses are “pass-through” corporations, for which the state counts business income as their personal income. So any profits made by the corporation are “passed through” to the owner, who counts it as income. In most cases, reinvestments can be counted as a business expense, which means the money wouldn’t be counted for the tax. The trick is ensuring it’s done properly.

“Any business owner with a halfway decent accountant should only pay federal and state income tax on the portion of their business profits that pass through as their personal income,” says Marilyn Watkins, policy director for the Economic Opportunity Institute.

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