Tax Proposal Splits State's Business Elite

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The Wall Street Journal
By: Nick Wingfield
October 27, 2010

SEATTLE--A proposed income tax on the wealthy in Washington state is spurring a debate over the region's economic future and dividing some of its most prominent figures, including Microsoft Corp. chief executive Steve Ballmer and William Gates Sr., the father of Microsoft chairman Bill Gates.

If Washington voters approve the measure, known as initiative 1098, on Tuesday, it will be the first income tax in the state. No income-tax-free state has passed one since the early 1990s.

The proposal calls for a 5% tax on income over $200,000 for individuals and over $400,000 for couples. That would rise to a 9% tax on income over $500,000 for individuals and over $1 million for couples.

Washington's office of financial management estimates the tax will raise more than $2 billion a year, with 70% of it targeted for education and 30% for healthcare services. The measure would also cut state property taxes and increase credits on a business tax, both designed to help the state's middle class and small businesses.

But the proposal has split Washington's business scene, particularly within Seattle's circle of technology entrepreneurs. The measure's co-author is Mr. Gates Sr., who has donated $600,000 to the campaign to pass 1098, according to state political contribution records. An attorney and elder statesmen in Washington, Mr. Gates Sr. has advocated the tax in numerous public debates, television ads and opinion pieces. Unions have also been big financial backers of the initiative.

The measure's opponents say it will strip Washington of one of its most attractive perks in attracting talent to the area, especially from nearby California, which has one of the nation's highest state income taxes.

"We're one-tenth the size of Silicon Valley," said Matt McIlwain, a managing director at Madrona Venture Group, a venture-capital firm that backed Amazon.com Inc. and others. "We need a competitive advantage to get people moving hundreds of miles to the north."

In a debate late last month, Mr. Gates Sr. said the state's lack of an income tax isn't a "major ingredient" for drawing business talent to the state, including his own son's decision to move Microsoft to Washington in the 1980s. "It had nothing to do with tax structure," he said. "It had to do with an educated workforce, particularly people sophisticated about software."

A spokesman for the Bill & Melinda Gates Foundation declined to make the younger Mr. Gates, who plans to vote for the measure, available for an interview.

The biggest donor to the campaign to defeat the measure is Microsoft CEO Mr. Ballmer, who has contributed $425,000. Paul Allen, another co-founder of Microsoft, has donated $100,000 to the group, according to state records. Amazon CEO Jeff Bezos is another big backer of the effort to defeat the tax, as are a number of companies, including Microsoft and Boeing Corp.

Mr. Ballmer through a spokesman declined to comment, and a spokeswoman for Mr. Bezos didn't respond to a request for comment. A spokesman for Mr. Allen said he believes the tax, if passed, will "make it difficult to recruit highly skilled, highly compensated, employees."

A report this week by the nonpartisan Tax Foundation said Washington scored as the 11th best state in business tax climate as of July, but would have ranked 48th had the current measure been in effect.

In a move to exploit unease about the measure, the Republican governor of Texas, Rick Perry, last week sent a letter to executives at 88 of Washington state's biggest employers--including Microsoft, Starbucks Corp. and Amazon--citing the proposed income tax as a reason to relocate to the Lone Star State, which has no such tax. In addition to Washington and Texas, five other states --Alaska, Florida, South Dakota, Nevada and Wyoming--have no income tax, while New Hampshire and Tennessee tax dividends and interest income.

A big backer of 1098, Nick Hanauer, a Seattle venture capitalist who was also an early investor in Amazon, says Silicon Valley would have long ago lost its edge if state income taxes were that important for attracting talent.

"Rich people have been making excuses for generations about why they shouldn't have to pay their fair share," he said. "I can't peer into their souls, but that's what this is about."

According to a poll conducted during the first two weeks of the month by the Washington Poll, 51% of respondents said they planned to vote against the measure, while 42% planned to vote yes and 7% were undecided.

To shore up support for the measure, its supporters have sought to neutralize one of the main concerns raised by their opponents--that the state legislature in Olympia will eventually expand the tax beyond high earners to include everyone. Last weekend, Mr. Gates Sr., Mr. Hanauer and other backers of the measure pledged in a full-page ad in the Seattle Times to block any such attempt by the state legislature with a new ballot measure.

Write to Nick Wingfield at nick.wingfield@wsj.com

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