I-1098 Washington State Income Tax – Does It Help Small Business?

September 29, 2010 by  
Filed under Blog

There has been a lot of coverage in the media either praising or denouncing I-1098, the initiative that would establish an income tax in Washington State.

But what would the initiative actually do? How would it affect small business?

Initiative 1098 would establish an income tax on amounts of income greater than $200,000 for single people, and $400,000 for married couples. It would reduce the state property tax by 20%, and increase the exemption amount from the Business and Occupation Tax for small businesses from $841 per year to $4,800.

It has been estimated that this increase in the small business credit will exempt 118,000 more businesses (an additional 37%) from paying the state B&O tax. (Seattle Times, September 19, 2010, Election 2010 ) This would result in a total of roughly 80% of small businesses in the state not having to pay Washington State Business and Occupation Tax. An additional 39,000 businesses would have a reduction in the amount of B&O taxes that they pay, and the 24,000 highest-grossing businesses in the state would continue to pay the full amount.

The state would pay for the reduction in the property tax rate and the increased small business credit by taxing income above $200,000 for single people, and $400,000 for married couples.

What will count as taxable income? The taxable income amount will be figured using the Adjusted Gross Income amount from the federal tax return, minus any interest from US securities such as savings bonds. Only people with AGIs of over $200,000 for single people or $400,000 for married couples on their federal tax returns will have to file.

Interestingly, the initiative also puts a size limit on the state tax return form – it can be no more than 2 pages long.

How much would people with AGIs over the income limit have to pay?

Single people would pay 5% of the amount of taxable income that is above $200,000, and 9% of any amount over $500,000.

Married couples would pay 5% of the amount of taxable income that is above $400,000, and 9% of any amount over $1,000,000.

The Economic Opportunity Institute has a tax calculator on their website that shows how much your total tax burden would change under the proposed law.

http://www.eoionline.org/tax_reform/calculator.htm

So what’s the state planning to do with this money?

First, they will replace the lost revenue from the property tax cut and the B&O tax credit. Any money left over would go to a trust fund, 70% to be used for education, and 30% to funding the state’s basic health plan.

The initiative also includes a provision requiring that a monthly accounting of how the funds were spent is to be posted on the state’s website. It would certainly be informative if the state did that for all the tax funds they spend.

Text of I-1098i1098-5