Washington Tax Initiatives After the 2010 Midterm Elections

By Garry Fujita

On November 2, 2010, the Washington voters made several decisions.  These decisions impact both immediate and future tax and budget issues for the State of Washington.  The voters reviewed and voted on three key initiatives.  One proposed an income tax, another repealed various taxes imposed in the last legislative session and the third initiative severely limited the possibility of new tax revenue to meet pending budget concerns.

Initiative 1098 created the most attention because it proposed an income tax on the highest wage earners.  The historic wisdom was that Washington voters would never approve an income tax.  The proponents hoped to change history, intending the income tax (1) to provide modest tax relief of property owners and significant tax relief for small businesses and (2) to fund education and healthcare, all areas that the proponents felt the state’s existing financial resources underserved.  To assure that the modest income tax would apply only to the wealthiest residents and fund only education and healthcare, the initiative included protections.  First, the initiative could only be amended by a majority vote in the legislature and a vote of the people.  Second, the money would be deposited into a dedicated account.  Though the final vote count has not concluded, this initiative did not come close to changing the view of this state’s voters on an income tax.  It is difficult to know why voters rejected the initiative but many reasons probably accounts for its dismal performance.  The fear that it could apply to more than the wealthiest citizens was not likely alleviated by the provision that only a majority of the legislature and a vote of the people could cause the income tax to spread to other levels of income.  The fact that legislatures can amend an initiative after two years meant that the legislature could eliminate the requirement to put the increase to a vote of the people.  The additional fear that the funds might be diverted to other state objectives was not assuaged by the trust fund, because the legislature has “borrowed” from existing dedicated funds many, many times  There was also fear that the dedicated funds would be used for education and healthcare as advertised but the legislature would decrease discretionary allocations to education and healthcare by amounts funded by the dedicated funds.  So, the funds would not necessarily be an addition to the level currently allocated to education and healthcare.  The current vote count rejects this initiative: 65% to 35%.

Initiative 1107 also garnered substantial attention.  It unraveled the taxes or tax increases recently imposed by the legislature on certain products or business activities.  In 2ESSB 6143, the legislature placed greater burden on candy, bottled water, carbonated beverages and food processors.  Specifically, 2ESSB imposed complicated taxes on candy because of the definition of candy, using flour as a distinguishing characteristic on non-candy.  As a result, according to the initiative proponents, a Snickers bar was taxed but a KitKat bar was not, a kiwi Jelly Belly was taxed but a licorice Jelly Belly was not and the other distinctions similarly ridiculous.  Rather than defend the peculiar application of taxes (can there be a good defense?), the opponents attacked the motives of initiative proponents (primarily, large snack food businesses) and promoted the good things (education and healthcare) that the new taxes supported.  The defense apparently was not persuasive.  This initiative is losing:  62% to 38%.

Initiative 1053 got less attention but was also very important to legislators who wanted the resource of raising taxes and citizens who did not want legislators to have that option without substantial legislative support or a vote of the people.  However, because initiatives can be amended two years after enactment, the requirement can be eliminated or suspended by legislative amendment.  Suspending the two-thirds approval is what happened in the last legislative session, opening the door to an $800 million tax increase.  The initiative opponents claimed that the initiative would create gridlock like California.  (California is different because both taxes and a budget must be approved by a two-thirds vote; this initiative allows a budget by a simple majority but requires new taxes or tax increases be approved by a two-thirds vote.  California voters recently repealed the requirement to approve a budget by a two-thirds vote.)  They also contended that requiring a two thirds vote was unconstitutional.  The proponents claimed that the people want the two-thirds requirement, having approved initiatives that required the legislature to pass tax increases only after a two-thirds vote approving such tax increase on three different occasions.  They also argued that balancing the budget without new revenue was a reasonable mandate as this is what citizens have to do everyday with their own budgets.  The proponents also argued that the constitution only requires that the legislature pass laws by a majority … it does not specifically call for a simple majority.  Initiative 1053 is pass, restoring the two-thirds vote for the fourth time: 65% to 35%.

These measures will make the next legislative session very difficult.  There is no new revenue from an income tax.  The food tax has been repealed and cannot be restored without approval by two-thirds of the legislature or a vote to the people, further reducing the amount of revenue.  The economy is not predicted to make any great improvements in the next two years.  The proposed budget deficit is predicted to be $2.4 billion.  What is not clear from Initiative 1053 is whether the Department of Revenue is free to change its prior administrative interpretations, resulting in tax increases.  For example, if there is a rule that favors a taxpayer but the Department of Revenue revises the rule to impose a tax, would such action be deemed a legislative action because the legislature delegated rule writing authority to that agency?  Because administrative rules are treated as having the “same force and effect as if specifically included therein [the Revenue Act]” (RCW 82.32.300), would rule amendments that increase taxes require that the legislature approve such rule by a two-thirds majority?  This creates interesting issues regarding separation of powers.  But with the desperate need for additional resources, the next few years maybe a pressing time for the Department of Revenue and taxpayers.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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