Wealthy clash over I-1098

OLYMPIA — The state that produced America’s richest man has never taken a cut of its residents’ income. Microsoft Corp. co-founder Bill Gates and his father would like to change that.

They are among the wealthy Washingtonians who have joined labor unions and other traditional Democratic allies to support a tax-the-rich ballot measure that is dividing the state’s business leaders. Executives at Microsoft, Amazon.com and other technology companies have come out against it.

The initiative will test whether voters are willing to buck economic jitters and drain money from their rich neighbors at a time when national Democrats and Republicans have been waging an intense election-year battle over the merits of taxing the wealthy.

Washington’s measure, known as Initiative 1098, would institute a new state tax on the top 1 percent of incomes to pay for education and health programs while trimming state property and business taxes. The campaign follows January’s overwhelming decision by Oregon voters to increase taxes for corporations and wealthier households.

While his famous son’s public support has so far been quiet, Bill Gates Sr., a prominent Seattle lawyer, helped to draft Washington’s income tax initiative and is the public face of the campaign.

In recent TV ad, the elder Gates is knocked into a dunk tank by softball-tossing children — a playful approach to the idea that the measure will “soak the rich.” Gates counters by highlighting the billions of dollars the income tax would generate for education and health care programs.

“It’s really about doing something for the next generation,” Gates says before taking the plunge.

The initiative sets out two tax brackets. The first rate is 5 percent on the portion of adjusted gross income higher than $400,000 for couples, or $200,000 for individuals.

For joint incomes above $1 million, the tax would be $30,000 plus 9 percent on earnings over the threshold. Single earners above $500,000 would pay $15,000 plus 9 percent of income above the threshold.

State officials say I-1098 would raise more than $2 billion annually from fewer than 40,000 households, or 1.2 percent of Washingtonians filing federal returns. At present, Washington is one of seven states without a personal income tax.

The $4.3 million “yes” campaign is bankrolled largely by labor unions, particularly those representing government employees — more than $1.7 million has come from various arms of the Service Employees International Union. Individual donors include Gates Sr., who has given $500,000, and venture capitalist Nick Hanauer, who has donated $250,000.

But plenty of big-name business leaders are unhappy with the idea.

Amazon.com founder Jeff Bezos and Microsoft CEO Steve Ballmer each have donated $100,000 to the $4 million opposition campaign, which also has drawn contributions from Russell Investments, Paccar Inc., software billionaire Charles Simonyi and members of the Nordstrom family.

Opponents stress that state lawmakers could lower the income thresholds with a simple majority vote two years after the initiative is enacted, and point out that state officials routinely raid “dedicated” spending accounts in lean years.

They also add that, in a time of terribly slow job growth, taking more money from entrepreneurs and businesspeople could seriously crimp the state’s economic rebound.

The privacy of tax returns makes it impossible to say how much the state’s marquee business names might pay under the initiative, but the tax would apply to personal earnings from partnerships, shares in small corporations, capital gains and other non-salary sources of income.

Right now, Washington’s lack of income tax can be a major recruitment point for businesses and talent looking to relocate, said Joe Barer, president of management consulting firm Lake Partners.

“I don’t think people come here just for the weather,” said Barer, who has donated to the opposition campaign. “I’ve personally recruited people, and part of the pitch is, ‘Yes it’s a great place to live — and we have no income tax.”’

Hanauer, one of the earliest Amazon.com investors and founder of the online ad company aQuantive, sees the economics differently. In his judgment, the kind of wealth at stake in the initiative could do far more good for the economy by bankrolling public school teachers and other vital services.

“If you look at the money that somebody like me — or Jeff Bezos or Steve Ballmer — where our cash flow goes, it’s crazy to assert that the highest and best use is in our bank accounts, or in the hedge funds that we’ve parked it in, or as jet fuel in our private planes,” Hanauer said. “It’s just nuts.”

Liberals have been hoping the measure’s populist appeal would help drive friendly turnout in a political year that could be brutal for Democrats. But voters don’t appear wildly enthusiastic.

A recent survey by independent Seattle pollster Stuart Elway pegged support for the income tax initiative essentially tied with the opposition, 44 percent to 42 percent. The poll of 500 likely voters had a margin of sampling error of about 4.5 percent.

High-profile politicians also have been reluctant to participate in the debate, probably because the public appears so uncertain. For instance, the initiative has not been an issue in the state’s top election contest, a heated race between Democratic Sen. Patty Murray and Republican challenger Dino Rossi.

Income tax measures have been attempted over the years in Washington with little success.

Voters have defeated attempts to amend the state constitution for a state income tax, most recently in 1973, and the topic has often been considered a political loser since then.