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News / Business

I-1098 might slow entrepreneurship

With income tax, wealthy could have less motive, means to invest in state

By Libby Clark
Published: July 14, 2010, 12:00am

Local business leaders and tax advisers say a statewide initiative that would charge income tax on high-wage earners to fund health care and education would likely lower entrepreneurship and business competitiveness in Clark County.

Yet the majority of Washington businesses stand to benefit from the initiative, with lower business and property taxes.

On the ballot this November, Initiative 1098 would introduce a 5 percent income tax on Washington couples earning more than $400,000 per year, or $200,000 for individuals. Individuals making more than $500,000 and couples earning at least $1 million would pay 9 percent.

Small businesses that operate as S-corporations, in which the owners file their state taxes as individuals rather than as a company, will experience I-1098 as an indirect income tax on the business, said Dan Monaghan, a senior tax manager with Perkins & Co. in Portland and a Camas resident.

This new income tax for business owners would be partially offset, however, by I-1098’s proposed increase in the Business and Occupation tax credit, from about $420 to $4,800. Monaghan said.

About 12 percent of Washington businesses would see a reduction in their B&O tax under I-1098, according to the Washington Department of Revenue. Another 81 percent of businesses in the state, without enough gross receipts to qualify for the full $4,800 credit, wouldn’t pay B&O tax at all.

That means the majority of Washington businesses would benefit from the initiative. The state would also benefit from the approximately $1 billion in additional revenue the measure would funnel to education and health care programs, advocates say.

But the small group of high-income executives and business owners that would be affected could have an outsized effect on business creation and growth in Clark County.

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Many local startups are born when high-paid executives at companies such as Hewlett-Packard and Nautilus leave their employers to plow their savings into a new venture, said Lanz Fritz, owner of Corporate Growth Consulting in Camas. An income tax could prevent them from building up that savings, he said.

Start-up founders will also have less reason to stay in or move to Washington before they sell their companies, Fritz said. Liquidation events can range in the millions of dollars, and a 9 percent capital gains tax could represent millions forfeited by business owners to taxes, he said.

The measure would also make Washington a less competitive place to do business, according to some national rankings, making it harder to entice companies to relocate here.

Washington ranked No. 5 among the Small Business & Entrepreneurship Council’s best states to do business in — a fact touted by Identity Clark County’s “Land here, live here” regional branding campaign.

“It (the initiative) would definitely hurt the state’s competitiveness,” said Ray Keating, chief economist at the entrepreneurship council, based in New York. “The huge advantage that states at the top of our index have is the fact that they don’t have income taxes.”

Washington’s lack of an income tax has been a major recruiting tool for economic development officials as well as for companies trying to lure high-paid executives to Clark County, said Bart Phillips, president of the Columbia River Economic Development Council.

An income tax on the wealthiest three percent of Washington taxpayers would be similar to taxes Oregon’s voters imposed by Measure 66 last year. That measure temporarily raises Oregon’s income tax to 11 percent from 9 percent for those earning $250,000 or more.

“Washington’s income tax would still be lower than Oregon’s in all circumstances,” but the difference would be much smaller, probably not enough to make a move to Washington worthwhile for Oregon executives, Monaghan said:

“I had several clients that at least considered and talked about a move to Washington (after the Oregon tax passed). And now they’re putting that decision on hold until after November.”