I-1098 opponent warns, 'You and I are next'

YAKIMA, Wash. -- Back in July, Bill Gates Sr. came to Yakima making the case for an initiative that would impose a state income tax on the rich, and on Thursday the other side got a chance to be heard.

Matt McIlwain, a managing director of Seattle-based Madrona Venture Group and one of the leaders of the defeat Initiative 1098 campaign, warned a packed Rotary luncheon that if the measure passes, it could be expanded to target more than just the rich.

"You and I are next," he told the same Rotary group that heard Gates Sr. speak in support of the measure six weeks ago. And he did it in the same place, the Yakima Convention Center. But it was a starkly different take on the measure.

Where Gates had framed I-1098 as a tax on the rich that will fund education and health care, McIlwain stressed a likelihood that the tax could in time be expanded and said improving public education in Washington is more a matter of innovation than spending. He also focused on the impact a state income tax could have on small business -- noting that the income business owners generate through limited liability corporations and S corporations would be subject to the tax even if the owners reinvested it.

"It penalizes investment, which is what creates jobs," McIlwain said.

If passed, I-1098 would impose a 5 percent income tax on earnings of $200,000 or more per year for an individual or $400,000 per year for a couple. The rate would jump to 9 percent for individuals earning $500,000 or couples earning $1 million. The initiative also would cut state property taxes by 20 percent and increase the business-and-occupation tax credit.

In an interview after the lunch-eon, McIlwain called Gates' focus on taxation fairness a "red herring," despite a study last year by the Washington, D.C.-based Institute on Taxation and Economic Policy that ranked Washington's tax structure the most regressive in the country.

According to the study, the state's sales-tax heavy method forces the poorest 20 percent of residents to
pay 17 percent of its income in taxes. The richest 1 percent, by contrast, pay less than 3 percent of their income in taxes, according to the study.

That study was flawed, McIlwain said, because it ignored the state's business and occupation tax and failed to include seniors or adjust for people who get direct public assistance
from the state.

"You take those three variables and add them in, and we have a progressive system," he said.

Income taxes in Washington have always been a tough sell. Voters have rejected income tax proposals four times already. But Gates, a prominent Seattle attorney and father of Microsoft co-founder Bill Gates, has stirred interest in this one, in part because of the novelty of a rich man pushing for a tax on the rich.

McIlwain doesn't see it as a noble gesture, though, because he believes a tax targeting the rich will discourage entrepreneurship.

"One of the amazing things about the state of Washington is we have a very innovative, entrepreneurial spirit," he said.

* Pat Muir can be reached at 509-577-7693 or pmuir@yakimaherald.com.