Washington State Income Tax (Initiative 1098): Who’s Affected?

Updated. See below. Again, Aug 12.

There’s been some debate going back and forth recently on how many Washington State taxpayers will be affected by the proposed income tax. The two sides have done a good job of providing the source data (you can follow their links), but the debate’s been inconclusive because:

1. Single filers would pay the tax above $200K in adjusted gross income, and married filers pay above $400K in AGI.

2. We (I) don’t really know how many filers make more than $400k

Curious as always, I decided to run the numbers assuming that 30% of >$200K filers make more than $400K (probably a generous assumption). I’m also using the percentages provided by EOI in the debate: 85% of >$200K filers file joint returns.

Here’s the arithmetic that results (and here’s the spreadsheet [XLS]):

Washington Federal Income Tax Returns Filed
Total 3,371,086
With business income 520,565
>$200K with business income 54,306
>$200K 111,258

>$200 Filers with Business Income
Income % Estimate Number % affected based on marital status Number Affected
$200-399K 0.7 38,014 15% 5,702
>$400K 0.3 16,292 100% 16,292
Total 54,306 21,994

What Percent of Filers are Affected?
% of >$200K filers with bus income 41%
% of filers with bus income 4.2%
% of >$200K filers 20%
% of filers .65%

So, with the property-tax and business excise-tax reductions in 1098:

59% of >$200K filers with business income will have lower taxes.

80% of >$200K filers will have lower taxes or no change. (Anyone care to break this out?)

95.8% of  filers with business income will have lower taxes or no change.

99.35% of  filers will have lower taxes or no change.

Update: It turns out my 30% estimate was remarkably accurate — but not generous as I suggested. The actual number is closer to 33%. I’ve updated the spreadsheet, including the source link (XLS) for these calcs.

Top 1% of filers Top 3% of filers
AGI Floor $410,096 $207,560
# of Returns 1,410,710 4,232,129
% of Returns: Top 1% as % of top 3%: 33%
This alters the bottom line results, but only slightly:

What Percent of Filers are Affected?
% of >$200K filers with bus income 43%
% of filers with bus income 4.5%
% of >$200K filers 21%
% of filers .69%

57% of >$200K filers with business income will have lower taxes.

79% of >$200K filers will have lower taxes or no change. (Anyone care to break this out?)

95.5% of  filers with business income will have lower taxes or no change.

99.31% of  filers will have lower taxes or no change.

Update August 12:

The state Office of Financial Management estimates that 38,400 filers will be affected by the income tax — significantly higher than the 22,000 I estimated.

But still: 99% of Washington’s 3.4 million filers will see lower taxes or no effect under this initiative. The lower taxes will be primarily on small businesses.







6 responses to “Washington State Income Tax (Initiative 1098): Who’s Affected?”

  1. jjjpl Avatar

    Great to see someone digging into the numbers.

    I’ve tried to tackle some of the same math, but come to different answers for a couple of reasons:

    1) The B&O credit phases out at just about where the personal income tax threshold kicks in. The property tax cut is dwarfed by these two. So business owners pretty much fall into two buckets – you get a B&O cut OR you get an income tax. As written in 1098, the B&O credit isn’t really a “credit” for all business owners. If you owe <=$4800 in B&O, you pay nothing. If you owe $4800-9600, you pay something less. If you owe $9600 or more, you pay in full. $9600 of B&O ~$500K revenue for a service biz, ~$2M revenue for others.

    2) There are two statistics that are both accurate, but appear conflicting. a) ~10% of business owners earn over $200K and will pay the tax (pro argument) and b)~67% of those earning over $200K are business owners (defeat argument). The question "is this good for business?" depends on perspective. If you are a very small business owner who gets the B&O cut, yes. If you are a small-mid sized business owner who earns, with all of your other investment income, etc, over $200K, then no. There are way more of the former (~90% of business owners), but the latter have a much bigger impact on the economy (~80-90% of the B&O tax base and ~70% of wages).

    Here is the IRS site that actually breaks out the data. It's US wide, but more granular than the state level data. It appears both sides are using the same source.

    (table 1.4)

    For "business owner" I used columns (R+T+CN+CP)/B (# of returns with Sole proprietor income + loss + S-corp/partnership income + loss / total returns)

    You can also use the $'s of business/Scorp/LLc income to get a picture for how that piece of high-earners' income stacks up with capital gains and other components.

    I think what you'll find is that ~3% of filers will see higher taxes, and that those filers are disproportionately business owners.

    If you poke around that site, there's also good data on S-Corp filings, which is a good profile of business owners by size of business.

  2. Asymptosis Avatar

    Good comments, though I think there’s danger here of being lost in the minutae. (Certainly something I’m prone to…cf my update to this post.)

    Putting aside for the moment the question of fairness: This all comes down to economic efficiency (based on resource allocation): does a particular tax mix allocate resources better, making everyone better off/raising all boats/creating a bigger pie? (*Every* tax regime is social engineering, of course; the idea is to engineer the best one.)

    All my research (just start following “Related Posts” from here to see it) suggests that business taxes are not economically efficient (I came to that conclusion reluctantly, but it’s pretty inescapable), but — this is contrary to the popular narrative but resoundingly supported by the professional econometrics literature — progressive taxes on income *are* economically efficient.

    States and countries with more progressive tax regimes grow at the same rate or faster than ones with less progressive regimes.

    This makes sense to me.

    1. More widely dispersed prosperity puts resource-allocation (spending) decisions out there in the hands of the broad populace, rather than a reputedly smarter or more omniscient 1%.

    2. Especially now, what businesses need (business owners say this unequivocally) is demand, a.k.a. sales. The only place those sales come from is a widely prosperous populace.

    Back to fairness: what all this says to me is that the supposed equality-versus-efficiency/prosperity tradeoff, at least in this discussion, is a mirage. We can have more of both. The market truly is magical, when well-engineered.

    A lesser point because the numbers in this discussion are smaller: taxes on land are very economically efficient, and almost completely nondistortionary once implemented. Taxes on improvements are otherwise: we don’t want to discourage improvements. So the cut in land taxes as a proportion of our tax mix is unfortunate, but the cut in taxes on improvements is a good thing.

  3. jjjpl Avatar

    Generally agreed- however you get there, economic growth cures a lot of ills.

    A few thoughts-

    1. A measure of economic efficiency should probably include stability of tax revenue since education, infrastructure, etc are core government functions which impact raising all boats as you describe. A high earner income tax is about the most volatile tax there is. Trading property tax and gross receipts tax revenues for high earner income tax revenues (ie, 1098) is increasing volatility without the benefit of diversification. That strikes me as bad policy. Interesting paper just out from the NY Fed on NY & NJ’s reliance on narrow base high-income personal taxes: http://www.newyorkfed.org/research/current_issues/ci16-6.html

    2. Because of the way 1098 is written, this particular income tax *is* in large part a business tax (the point of my original response). The vast majority of projected taxable income is coming from business owners’ profits and capital gains. So not only is it unstable tax policy, it is economically inefficient as you describe.

    Should we trade the entire B&O for a broad based, low rate income tax? Great question with a lot of puts and takes. But this particular initiative strikes me not as a well engineered tax policy, but as an excercise in “what can pass” without much attention paid to the economic ramifications.

    3. I wonder if the country growth data can be applied to state tax structures in isolation, given that graduated federal taxes are part of the equation. That also raises the fairness question. As an aside, I have some serious questions about how regressive our existing structure actually is. There are some arguments and analyses that counter the chart you have in a previous post and suggest a flat to progressive structure in WA. Again, just an aside.

  4. Jim Vaughn Avatar
    Jim Vaughn

    I wrote three tongue and cheek initiatives that in spite of the initial humor have a serious message. My most recognized was Initiative 1069 to change the state seal to a tapeworm dressed in a three piece suit attached the rectum of the tax payer. Around the vignette the words,
    ” Committed to Sucking the Life Blood Out of Each and Every Tax Payer.”

    My second initiative is about Pick Pockets and is a rebuttal to Bill Gates Sr. Initiative 1098. Ask yourself the following questions before you vote yes for Initiative 1098.

    1. Why would Bill Gates Sr. sponsor an initiative that would tax the rich?
    2. Does it have anything to do with the fact the legislature is preparing to give Microsoft a $100 million tax break and amnesty for $1 BILLION in tax evasion?
    3. After two years do you believe that the legislature would change the law to tax everyone?
    4. After reading section 1. below, do you believe our state is any different than Connecticut?

    Panhandling and Pick Pocket Tax For State Legislatures In Lieu of a State Income Tax

    Sec. 1. Whereas Initiative 960 was approved by the voters to prevent the following:

    In 1991, Connecticut was facing a revenue shortfall of about $2.7 Billion. Using that crisis, Connecticut’s governor pushed hard for a state income tax. The bill eventually passed. At the signing ceremony, Governor Lowell Weicker sounded optimistic. “When I sign this budget, Connecticut will be closing the book on its past and it’ll be facing toward the future.”

    17 years later, we have a good idea of what that future looks like: The income tax that was passed to close a $2.7 Billion deficit has been raised several times and now brings in over $7.5 billion a year. Add in the $350 million a year that the state currently receives from Indian Casinos, and Connecticut now collects nearly $8 billion more in revenue than it did in 1991.

    Despite all of those extra billions, Connecticut is still facing massive deficits $1.2 Billion this year and another $6 to $8 Billion over the next two years. How could this happen? In Connecticut’s case, out-of-control spending was the culprit. The point is that government knows how to get bigger. Try as they might to slim down, the natural order of things will always take over and ensure they grow larger than anyone thought possible. The only way to stop that, or at least slow it down, is by taking away their source of food: money and power. For this very reason the voters of Washington State passed Initiative 960 in an attempt to remove the tapeworm that is attached to the lower intestine of the taxpayers.

  5. robi Avatar

    I hate to sound ignorant, but if 1098 passes, what tax year would it begin in? Income earned in 2011, taxed in 2012, or income earned in 2012?

  6. Asymptosis Avatar


    Sorry, I don’t know this.