Washington State I-1077 a State Income Tax Initiative

This initiative is either one of the pinnacles of incompetence and foolishness or the highest degree of deception over a people save the 1889 Constitution of Washington State. But I must note there are some genius portions in the initiative as well. By writing this I will either be hired as an advisor at the sponsors former company or forever band from any business dealers with his company.

Yes, indeed this initiative is purely written for the benefit of the sponsor and the wording is designed to minimize the payment of taxes to the State Department of Revenue by the sponsor.

I have read and written instructions for the main forms of all of the income tax related states. This was done three years ago. Thus I believe I am competent enough to evaluate an initiative which would deal with including an income tax on this state. There are items in this bill which will be unique to this initiative and which are not found even remotely inside of other states.

Besides all of the above. It is unconstitutional. Our state constitution does not allow for a state income tax. Just by saying this is an excise tax instead of an income tax does not change what an income tax is. This initiative is an income tax.

This initiative makes for a stronger need to sign initiative I-1058 which would deal with the education of students in having teachers illustrate with instruction our state and federal constitutions and other supporting documents such as the Declaration of Independence and various documents including the federalist papers.

Now for the guts of the initiative and what are the strong points which do exist, but are few, what really is the interpretation as to the wording will fit in with other states and how other states may operate.

Section 101.

The writer of the initiative 1077 is wanting to institute a state income tax on upper income individuals or taxpayers who have "joint income in excess of $400,000, or in the case of individuals $200,000 dollars."(1) The first item of note is the use of $400,000 and $200,000. The numbers here do note a basic incompetence with the writer. All bills spell out the exact wording of the numbers. No competent bill from the legislature would include numbers of any sort. The inclusion of "dollars" after $200,000 is repetitive at the very least. The writer wants to use the funds for "improving education and health services and providing middle class tax relief by reducing the state property tax by twenty percent and eliminating the business and occupation tax for all small businesses." (1) I would have liked to see truthful statements here to income not only middle income but low income individuals. Not everyone in the low income relies upon free health services. I would consider this to be just a misstep and not an interpretation of arrogance however.

If the writer was trying to reduce government services then a complete reduction of the property tax should be instead included in this section instead of a mere twenty percent reduction in the property tax. The writer does not eliminate jobs in the assessors office but just merely reduces the amount which can be collected. Perhaps just a higher assessment could be used to negate a part of this decrease. I would have liked to see an elimination of the property tax instead. Every businessman or businesswoman knows that the elimination of a tax will also eliminate some of the need for record keeping. One of the biggest pains for small businesses is the accounting of inventory and other assets. Yet, perhaps, if the objective is to create middle class tax relief the property tax at the lower level could be completely eliminating. At above a middle class amount the tax could be phased in but leaving a twenty percent decrease for all businesses. The business and occupation tax is a mere mathematical calculation which most small business calculate themselves or they have their accountant calculate.

My first thought when reading about a trust fund being "to create a new trust fund dedicated to improving education and health services"(1) was the writers membership on education boards and his deceased wife's membership on hospital boards. Education and health care are the writers great concerns. This is philanthropic and noteworthy but why just specifically these groups for taxpayres support. The education fields have support of a large group of highly compensated individuals. As well so does the health industry. But these two groups do get large donors to include their names on buildings, halls, meeting rooms or wings. Would this allow hospitals and education institutions to rename or name construction projects in favor of the writer. This particular possibility I hope was not a consideration on the part of the writer and I would discount it for now if someone would think that is the objective of the writer of the initiative. But why not allow a trust fund for building of windmills or wave energy and dedicate the income from the trust fund to education and health services. Thus this would increase jobs with the cash flow and make the higher income individual proud to spend money. Perhaps even this building project would eliminate the need for a trust fund for improving education and health services in the future.

Section 201(3).

Here is where the interesting accounting takes place. In section 201(2) "Seventy percent of the net revenues received by the trust must be deposited into the education legacy trust account and used exclusively for the purposes of that account. Thirty percent of the net revenues received by the trust must be used exclusively to supplement amounts available to fund the basic health plan...." (1). This portion is secondary to the middle income tax relief. For section 201(3) "the state treasurer must each year certify the revenue that would have been deposited in the general fund but for the middle class tax relief adopted in Part III of this act, and must make such deposits as are necessary to replace the revenue eliminated by such middle class tax relief." (1)

By the above, no money is taken out of the general fund of the state which is not replaced. So for aspects of the general fund these fund would create a revenue neutral accounting. But the seventy/thirty remainder portion for education and health will put further pressure on the general budget in my opinion. No provision in the bill is given for the priorities which the education legacy trust account will be spending money on. Is this for higher education or perhaps is this for middle income private education relief. Will grants be permitted under this initiative for higher education students. Will middle class relief stop or continue for master and doctoral degree candidates. Will this money be used for pre-school expenses and relief of middle class tax relief accomplishments. No committee is set up for distribution of moneys. Responsibility to a legislative or executive body has not been established for the distribution of funds. Do people just write in and request money for middle income tax relief grants. Please advise.

Another aspect of the initiative in connection with health care is long-term care services. If this is truly middle income tax relief then long-term private pay patients should be the only ones eligible for the long-term nursing home expense subsidies. But this part would be for low income long-term care relief. If this is true then should not the above $200,000 (single) or $400,000 (married) minimum income include a state tax on irrevocable trust income as well. One sheltering technique is to move money from a senior citizens control and into an irrevocable trust fund which directs payments to beneficiaries of the trust. A maximum $ amount can be included for preservation to the next generation so asset protection can be instituted this way. Thus someone with over $200,000 inside of an irrevocable trust could be needing also to receive low income long-tem care state assistance for the needy. This is a question.

Section 302.

"beginning in 2012, the business and occupation tax imposed . . . on small business must be eliminated by increasing the business and occupation tax credit to four thousand eight hundred dollars per year, which will exempt approximately the smallest eighty percent of businesses." (1) Someone would need to analyze whether the elimination of the B & O tax would indeed be a smaller or greater tax on this amount. High paying individuals would not need a comparison unless they are paying the tax. Again, I would eliminate the property tax first at the lower end of the scale. This would increase manufacturing companies movement into our great state. The B & O tax is a pest of a tax but I believe the elimination of the property tax instead of the business and occupation tax would stimulate the economy. The continuation of a reliance upon a property tax and inventory tax would decrease or slow down our economy. Eliminating the property tax would stimulate our economy and help in the recovery out of a recession whenever it comes. Another novel idea would be for business to be allowed a credit of four thousand eight hundred dollars for the reduction of the business and occupation tax or for the reduction or elimination of the property tax. This could be on a yearly or quarterly or monthly basis divided by the portion of the year. Manufacturers probably would choose the property tax and reduce the remaining by the business and occupation tax. The only difficulty here is the point of collection and the communication necessary for both county and state collection agencies between each other.

Section 401

The writer of this initiative does not understand tax law obviously since the writer does not understand the meaning of "domicile". If you are "domiciled" you maintain a permanent place of abode. Is the writer referring to ambassadors which are domiciled in the United States but pay income tax to their home country because their domicile is in their foreign country. A homeless individual can be domiciled in the state as one can sleep under the freeway in the brush but indeed does not maintain any permanent place of abode in the state. Perhaps this is what the writer is talking about. By definition one's domicile can be in the state but one can also live in transient housing and thus maintain no permanent place of abode in this state. Is this what the writer is referring to.

The writer in section 401(4)(c) states "spends in the aggregate more than one hundred eighty-three days of the tax year days of the tax year in this state". The more normal wording should be 180 days or 182 days of time spent in the state. Yes, for a leap year 183 could be a correct number but the writer of the initiative state "more than one hundred eighty-three days"(1). This would be a minimum of six months one day or six months two days for a leap year to be considered as a resident.

In section 401(4)(d) I am wondering what "Claim this state as the individual's tax home for federal income tax purposes" means. No one 'claims' any particular state for federal income tax purposes nor do they need to. The only one's who might 'claim' Washington state as their state of residence would be military personnel. How often are military personnel going to have incomes above $200,000 if single or $400,000 if married. Perhaps the pay is better than I thought it was for service to one's country.

Section 501 (2) and (3).

Here the normal wording should be in words and not in a semi-graph format. Yes, it would be cumbersome and have the same meaning but written amounts take precedence over numbers.

Section 502

This is where some of the real interpretation may really be noticed for the true objectives of the writer of the initiative. "The numerator of the fraction is the amount of the taxpayer's adjusted gross income subject to the tax in the other jurisdiction. The denominator of the fraction is the taxpayer's total adjusted gross income as modified by this chapter. The fraction may never be greater than one." This equation is not comparing apple to apple but apple with oranges. The numerator is not being modified as like the denominator is being required to be modified. This could comparatively allow a greater portion of the foreign or other state tax to be used.

The writer is also confusing business income terminology with federal internal revenue terminology. In section 502(1)(b)(a) the writer states: "The amount of tax paid to the other jurisdiction on net income from sources within the other jurisdiction"(1). Here the word 'net income' is used. This is a business income and expense terminology. Obviously this could indicate the writer is not of keen knowledge concerning income tax law. Did the writer actually mean adjusted gross income or gross income from the other jurisdiction. Or is the writer only wanting to include business income. For instance if I have gross business income I would not be including my interest income in this calculation from other sources. This would be true even if the other jurisdiction taxes the income. Another state would not tax interest or dividend income and this would not be part of my gross, adjusted or net income. But a foreign state would tax my interest or dividend income. This however, would be part of my gross income and part of the adjusted gross income from the foreign country and not part of the net income from the country. Would this mean that the "credit" for this gross income would not be a creditable amount because this portion of net income is beyond this stipulation in the initiative.

Since the credit would be the smaller of the two then foreign investments may be extremely costly if domiciled in Washington State. This would give an extreme disadvantage to foreign investor individuals. Since net income also does not include capital gains when finally selling business assets this again would trigger an extreme disadvantage from foreign investments and also investments within other states. Keep your money local or move to another state prior to selling a business of any sort.

Section 502(2) would be punitive in my opinion. "...the director is authorized to enter into a reciprocal agreement with such jurisdiction providing a similar tax exemption on income earned for personal services performed in this state." This reciprocal agreement wording requirement will be punitive for Washington State taxpayers and for residents of other states. The specific wording of "income earned for personal services" would restrict the reciprocal agreement of the other state to attorneys, physicians, accountant, architects, and barber and beauticians. There may be a few more but the personal services income producers very seldom do work in one state and live in another state. Personal services would not include mechanics, plumbers, book writers, editors, traveling salesmen and the like. Personal services are limited to individuals who essentially do not use tools to apply there trade. People who sell a product or buy a product do not have income earned for personal services.

Section 503. Dual Residence.

"...department must reduce the tax on that portion of the taxpayer's income which is subjected to tax in both jurisdictions solely by virtue of dual residence, if the other taxing jurisdiction allows a similar reduction." Does the writer understand what the writer is stating here. Normally if I have a business income from a K-1 from say Kansas, O.K. an oil well, and I receive $10,000 from that income or should I say 'net income'. Then Kansas will take out the withholding at the source for payment of taxes. Since my domicile is not in Kansas I will not be getting a tax credit for the amount of taxes I am paying for the Kansas income. I will only be getting a tax credit on the amount paid to Kansas to pay for that Kansas income. This is further limited by the equivalent taxes I would be paying for the taxes of that income in my domicile state and at the domicile rate as a limitation. So for the $10,000 say I pay taxes of $500 in taxes. For that same income in my domicile state I would be paying $300. So in my state I could not take the $500 as a credit but only rather a $300 tax credit for this income against my domicile state taxes. What Section 503 is saying is if I have a residence in Kansas as well because I like the warm weather during the summer. This is the only time in which I can get a reduction of taxes paid for this income to another state. This is punitive and not common practice. But it is common practice as stated in my example to be allowed to deduct the state taxes paid to another state when I am domiciled in another state.

Section 701.

"For nonresident individuals, income derived from sources within this state must be apportioned and allocated to this state."(1) United States Supreme Court cases have indicated this to be unconstitutional. With the wording 'income derived' is where the problem is. Unearned Passive income such as dividend and interest income are never supposed to be taxed in the state where the income is 'derived' but rather in the state where the income tax payer is domiciled. Just this reason alone will nullify this section until the legislature could correctly add back in this information or calculations to reflect what the Supreme Court has previously ruled in this particular matter. California in the early '90s was claiming income earned from retirement income within California if the trustee is location was within California. California said the pension income was taxable income to California even if the domicile of the income tax payee never lived in California. This is an old settled case and does not need to be tested or brought up in any fashion again.

Section 701(3)(a) "...nonresident derived from sources within this state is the net amount of items of income, gain, loss, and deductions fo the nonresident's adjusted gross income that are derived from or connected with sources in this state ..." The problem with this section is the word 'deduction'. To arrive at adjusted gross income you begin with gross income and subtract adjustments and then you arrive at the adjusted gross income. Actually, deduction are for the itemized deduction section on page two of the Form 1040 or 1040NR. The deduction would be calculated after the adjusted gross income so deductions would never be part of the adjusted gross income but adjustments to gross income always would be part of the final adjusted gross income calculation.

Section 701(3)(b) "...connected with sources within this state are those items attributable to the ownership or disposition of any interest in real or tangible personal property in this state, and a business, trade, profession, or occupation carried on within this state." So what this is meaning to me is someone who only has income from passive residential real estate is not subject to this state income tax. All other states would tax this type of income. Does this mean that the writer has residential real estate holdings in Washington State and would like to retire in another state or does not reside in this state for a long enough period of time so as to establish Washington State residence and also does not want to pay the Washington State income tax as proposed.

Section 801.

"...and who is required by the internal revenue code to withhold taxes, must deduct and withhold a tax..." Technically is anyone required to withhold taxes. If earned income from wages then some would say yes, but perhaps someone could send in estimated taxes instead. Only by filing a Form w-4 would an employer be required to withhold federal income tax amounts. Thus only is when Form w-4 is filed would withholding for the state be required.

Again, with section 801(2) the writer is asking for "personal service" and a reciprocal agreement. What is really needed to be asked here is if 'earned income" is received by a recipient and withholding is required. With further clarification on this is if w-2 wages are received. This requirement is too specific for a reciprocal agreement with other states for the other state to restrict withholding requirements. More specifically, Oregon, one of two bordering states is the most extreme in its protection of reciprocal agreement legislation. Oregon should demand compliance to their laws and not compliance of Oregon to our laws for any type or style of a reciprocal agreement to be arranged in the future.

Section 803. "state of Washington" "If the liability of any individual for taxes, interest, penalties, or other amounts due the state of Washington is less than the total amount of the credit which the individual is entitled to claim under this section, the individual is entitled to a refund from the department in the amount of the excess of the credit over the tax otherwise due. This insert could be very innocently included or put in 'on purpose'. The lower case 's' in state would be referring to the organic Washington and not the defacto Washington. With the defacto Washington 'State" is caped for the "S". Or the phrase "State of Washington" would be noting rather than "state of Washington". Is the writer stating that he believes the State of Washington will soon collapse and to guard against this he will be having the ability to withdraw funds or credits against the state of Washington if the State of Washington ever collapses. This is one of the ingenious segments of this initiative. Anticipation of the collapse but providing for the future funding of education and health care so they will not collapse or have any type of systemic problems which could occur if a collapse happened. Genius move I must say.

Section 805

The minimum required amounts due for estimated taxes of $500 is standard within the state income tax withholding requirements of other states. Most are still at $100 without someone incurring an interest penalty but most states have or are moving to $500 as there requirement. What the real question is is why only $500. Is this initiative being geared to have the standard exemption or deduction amount lowered in the near future. If in conformity with other states minimum threshold and the standard deduction amount being large should not the standard deduction amount be perhaps $10,000. But at the present time a $500 minimum requirement would be the tax on the first $10,000 above the threshold. A slight bonus at the end of the year could move the income by more than this amount to move higher income tax payers. Also, with partnerships being required to distribute funds at least once per year and this usually being December the higher threshold could be justified.

Section 902.

No wording is specifying whether interest from the state will be paid for overpayments from an audit to the taxpayer. Does imputed interest dictate in this particular situation or is this the creation of a possible ponsi scheme by the state. If no requirement is made for the state and timely payments when would an interest payment be due from the state to the individual taxpayer.

This initiative requires a payment after the IRS makes its determination. No allowances are given for disputes with the IRS. If I disagree and bring the dispute to the Tax Court or the District Court then I still would be owing the tax according to the determination of the IRS. Of course I could get a refund later but would I collect 12% interest on this amount or would I collect a lower amount. This is probably included in one of the RCWs which are addressed so I will not continue with this point.

Section 904.

No provision is given here for the filing of a separate married filing separately state return if a federal return filing married filing jointly was filed except if one is a nonresident. Could I not be a part-year resident and then would I be required to file a Joint return. Or since the initiative is silent as to this matter would I not have to file a tax return at all. This is not indicated and adjudication would be the method of valor against the state in this situation. Or perhaps it would not matter since taxes paid to other states would far outweigh the taxes owed from the part-year status of the one spouse.

But something is obviously missing in this initiative. Perhaps on purpose and perhaps not. Section 904(5) states: "In any case in which a joint return is filed under this section, the liability of the husband and wife is joint and several, unless the spouse is relieved of liabilty under section 6013 of the internal revenue code." This topic without looking would be concerned with innocent or injured spouse status of couples. But in this state there are laws addressing "domestic partners". In not providing for relief or joint income tax return status for domestic partners is not the writer saying that if one is in a joint domestic partnership relationship then state income taxes will not be owed. If the topic is not addressed and the state law does perhaps the initiative is lacking in its proposed function of relieving middle income tax relief and providing for education and health care services.

Section 905(2)

"All books and records and other papers and documents required to be kept under this chapter are subject to inspection by the department at all times during business hours of the day." You have got to be kidding. What about reasonable search and seizure. Where is the respect for the U.S. Constitution in this matter. Do I not have an unalienable right to privacy via my papers being "secure". This provision of the initiative would be grounds to not sign let alone not vote for the initiative if it arrives at the ballot box.

Section 1001.

Interesting. Very interesting. This section refers to "United States supreme court". The Washington, D.C. Supreme Court has caps for 'S' and 'C' and on purpose. There are many 'supreme courts' in the united states of America. A lot of counties have supreme courts. Perhaps the writer is referring to Philadelphia Supreme Court as well or alternatively. "...as they have evolved during the past eight decades." Maybe just a typo of some sort but I would think not. Is the writer of the initiative acknowledging we have two Constitutions and thus two forms of government.

Sources:
1) Initiative Measure No. 1077, Filed march 25, 2010 Secretary of State, State of Washington
http://www.sos.wa.gov/elections/initiatives/text/i1077.pdf

2) I-1058 Education of our students in comparing foundational documents in our state and federal.
www.wethepeopleofwa.org http://www.sos.wa.gov/elections/initiatives/text/i1058.pdf