Washington’s Initiative 1098 has sparked debate about the impact of income taxes on small business. (See opinion pieces here, here, and here, for example.) There seems to be some confusion—as well as some claims on the outer edge of truthfulness—so I’ve put together a triplet of charts that may help clarify things.
First up, here’s a look at how business owners would fare under 1098:
The data used in this chart come from research by the Economic Opportunity Institute.
What the numbers show is that only one-tenth of all “Washington tax filers claiming net business income from a sole proprietorship, S-corporation and/or partnership” report more than $200,000 in income, the threshold for I-1098′s tax on single filers.
In fact, these numbers actually overstate the reach of the tax in at least two ways. First, there are actually more business owners than shown (those with losses) who are exempt from the tax, thereby shrinking the real percentage of total business owners who are subject to it. Second, and more importantly, a significant share of the business owners are actually joint filers, which means that they would be exempt from the tax provided that their annual household incomes are below $400,000. As a result, it’s fair to say that fewer—probably much fewer—than one-tenth of all business owners would pay any state income tax at all under 1098.
Next, let’s look at how many businesses would get tax cuts. This one’s a two-parter.
Here’s the picture for the state’s Business and Occupation tax:
All told, the B&O tax reductions will mean that businesses in Washington will pocket an extra $250 million a year starting in 2012. And because of the way they are structured, the B&O tax cuts will be most beneficial to smaller businesses. The roughly seven percent of businesses that won’t get a reduction are the state’s biggest businesses.
Finally, here’s a (partial) picture of state property taxes:
This chart is a little obvious I suppose, but the point tends to get overlooked: 1098 will provide an across-the-board 20 percent cut in state property taxes for all property owners, including individuals, businesses, and anyone else who pays property taxes. It’s true, as some folks like to nitpick, that local property taxes are higher than state property taxes. But that oft-repeated claim doesn’t change the underlying math: 1098 reduces state property taxes by 20 percent. (More detailed property tax savings are available from Economic Opportunity Institute.)
There’s a clear benefit to property owners, but also a benefit to renters and lessors because landlords tend to pass along the cost of property taxes to their tenants. So it is reasonable to expect that even businesses (and individuals) who lease or rent property will benefit indirectly from a lower state property tax burden.
Needless to say, these charts can’t illuminate how any particular business would fare under 1098. But I think they strongly suggest that small businesses—and small business owners—will actually benefit from 1098. Now it’s perfectly possible, I suppose, that some small fraction of business owners will find themselves at a net tax disadvantage under 1098, but I think for the moment, the burden of proof is on the opposition.