http://www.effwa.org/files/pdf/PHI-1098

Policy Highlighter ______________________________ August 26, 2010

2010 No. 4

The Economic Impact of Initiative 1098 in Washington State

In Washington state, the November election will include a ballot initiative that would reshape the state’s tax structure.

Initiative Measure No. 1098 would reduce the state portion of

the property tax by 20 percent, increase the Business and Occupation tax credit from its current level to $4,800 and create an income tax on those making over $200,000 per year as an individual ($400,000 for those filing jointly).1 The income tax rate would be 5 percent for those earning between $200,000 and $500,000 and increase to 9 percent on income earned above $500,000.

The state's Office of Financial Management (OFM) estimates that the measure will increase state tax collections by $2.213 billion in Fiscal Year (FY) 2012 and $2.937 billion in FY 2013.2 This represents 14 percent of FY 2012 project general fund revenues and almost 18 percent of FY 2013 revenues.3 A tax increase of this magnitude will have implications for the future of the Washington state economy.

By 2013, Initiative 1098’s tax changes would lead to: • A loss of more than 61,000 private sector jobs; • An increase in the state’s long‐term projected unemployment rate from 6.7% to 7.9%; • A reduction in real disposable income of more than $2.5 billion, or $149 per capita; • A reduction in certain state and local tax collections (such as the sales tax) due to the economic damage inflicted by an income tax.

The Beacon Hill Institute at Suffolk University used its Washington State Tax Analysis Modeling Program (WASTAMP) to analyze the effects Initiative Measure No. 1098 would have on the state economy as well as the changes to state and local tax revenue collections.4 Table 1 displays the results for FY 2013, the first year this tax change could take effect. These effects are measured against a “baseline economy” with the current tax policies in place and Table 2

Quick Summary

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Paul Bachman is the Director of Research at the

Beacon Hill Institute. www.beaconhill.org

For more information, visit www.effwa.org or call 360-956-3482. The Evergreen Freedom Foundation is a private, non-profit, public policy research organization in Washington State. Our mission is to advance individual liberty, free enterprise, and limited and accountable government. We do not accept government funds.

This publication should not be construed as an attempt to support or oppose specific legislation.

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The Economic Impact of Initiative 1098 in Washington State Policy Highlighter ______________________________

measure dynamic economic effects of the tax

The imposition of the income tax leads to a drop in

changes proposed.

household real disposable income of $2.538 billion in FY 2013. On a per capita basis, real disposable

Table 1

income falls by $149 per person in FY 2013.

Economic Effects of Initiative Measure 1098

FY 2013

Private Jobs

‐61,372

The analysis of state and local revenue shows that reducing taxes on businesses and property, while replacing the revenue with a tax on high income households, would result in a net total revenue

Government Jobs

12,184

Net Change in Jobs

‐49,188

personal income tax brings much more revenue

197

than the reduction to the state property tax and the

Investment, ($ million) Real Disposable Income ($ billion)

‐2.538

Real Disposable Income per Capita ($)

‐149

increase.

At the state level, the creation of the

increase to the B&O tax credit. Further revenue changes would come from the sales tax, the unemployment insurance tax and other taxes and fees assessed at the state level. Table 2 displays the results.

The model shows that these tax changes would

The establishment of a personal income tax on

have a negative effect on Washington’s economy.

those earning more than $200,000 annually would

By 2013, the initiative would destroy 49,188 jobs,

create $2.522 billion in new revenue in FY 2013.

consisting of 61,372 private sector jobs lost and

The increase to the B&O tax credit would reduce

12,184 public sector jobs created.

the tax burden on businesses by $281.79 million in

The

job

losses

would

also

unemployment rate for 2013.

increase

the

The Washington

FY 2013, while property tax collections would drop by $383.64 by FY 2013.

State Economic and Revenue Forecast Council

The economic damage resulting from the tax

forecasts the state unemployment rate will stand at

increase would harm sales tax collections by $64.16

5

6.7 percent in 2013. Using the WA-STAMP model

million and other taxes and fees by $66.55 million

estimates, the unemployment rate would surge to

in FY 2013.

7.9 percent under Initiative Measure No. 1098.

revenue gains to $1.726 billion in FY 2013. These

The cuts to the B&O tax, as well as the property tax, lead to a decrease in the cost of capital, which will boost investment by $197 million in FY 2013.

These figures bring the state total

figures are less than the state’s OFM because the STAMP model considers the revenue losses due to the economic damage inflicted by the tax increase.

The imposition of the income tax leads to a drop in

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household real disposable income of $2.538 billion

in FY 2013. On a per capita basis, real disposable income falls by $149 per person in FY 2013.

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The Economic Impact of Initiative 1098 in Washington State Policy Highlighter ______________________________

Revenue Effects of Initiative Measure 1098 ($ millions)

loss of $77.52 million in FY 2013. In total, state and local

FY 2013

State Taxes

governments

will

boost

tax

revenue

collections by $1,648 million in FY 2013.

Personal income tax

2,521.69

Sales and use tax

‐64.16

Business and occupation tax

‐281.79

Property tax

‐383.64

Other fees and revenues

‐66.55

State Total

1,725.55

Local Taxes

Tax on residential property Tax on business property

1

‐24.20 18.45

Other taxes and fees

‐71.77

Local Total

‐77.52

Total Revenue Change

1,648.03

At the local level, the economic damage would also hurt revenue collections for cities and towns in Washington.

The reduction in the state

Initiative Measure, No. 1098, http://www.sos.wa.gov/elections/initiatives/text/i10 98.pdf.

2 Washington State Office of Financial Management, Budget Division, Fiscal Impact for Initiative 1098, Internet, available at http://ofm.wa.gov/initiatives/2010/1098.pdf (August 2010).

3 Washington State Office of Financial Management, Budget Division, Year Outlook for the State’s General Fund, Internet, available at http://www.ofm.wa.gov/budget/info/June2010SixYearOutlook.pdf (June 2010).

4 For a description about the model see http://www.beaconhill.org/STAMP_Web_Brochure/S TAMP_IntroductionMS.html.

5 Revenue Review Meeting. June, 2010. Washington State Economic and Revenue Forecast Council.

Internet, available at http://www.erfc.wa.gov/publications/documents/jun 10pub.pdf., 87.

property tax would raise property values and help local property tax collections, but the job losses would cause overall revenues to drop by $5.75 million in FY 2013.

Other local taxes and fees

would fall by $71.77 million, for total local revenue

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