Sims pitches four-pronged revamp of tax system

By Ralph Thomas
Seattle Times staff reporter

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He also wants to eliminate the state sales tax and give homeowners a big break on their property taxes.

What's the catch? Sims, the King County executive, is also calling for a personal income tax that would hit the rich harder than in any other state, with the top rate at 10 percent on incomes exceeding $100,000.

After months of behind-the-scenes number crunching and sending up occasional trial balloons, Sims yesterday unveiled his 23-page plan for overhauling the state's much-maligned tax system.

"We just need to blow the whole thing up," Sims told a group of Spokane business leaders during a breakfast meeting before flying to Seattle for a news conference.

Sims said his plan would fix the biggest flaw in the state's tax structure — the fact that poor people pay a much larger share of their income in taxes.

Sims said his plan gives senior citizens sorely needed property-tax relief, and he predicted that eliminating business taxes would create an unprecedented surge in economic growth and new jobs.

Sims' tax plan A breakdown of Democratic gubernatorial candidate Ron Sims' four-pronged tax-reform plan: 1. INCOME TAX: A progressive tax on adjusted gross income, factoring in deductions for items such as mortgage interest and children. State income taxes could be deducted from federal income taxes. Rates: 4 percent for those making less than $25,000 a year; 6 percent for those making $25,000-$50,000; 8 percent for those making $50,000-$100,000; 10 percent for those making more than $100,000. Exemptions: The first $15,000 of adjusted gross income for individual filers. Twice that for joint filers, plus $10,000 per child. What you'd pay: • A family of three making $1 million a year: $95,200. • A family of four making $100,000 a year in adjusted gross income: $4,000. • A family of four making $30,000: nothing. 2. SCRAPPING BUSINESS TAX: If a business reinvests its profits, it pays nothing. If it distributes the profits as paychecks, stock options or other payments, the employees who get the money would pay personal income taxes on it. That system would make Washington the only state in the country with no general tax on businesses. Under the system now, companies pay a business and occupation tax on gross receipts, regardless of whether they turn a profit. 3. PROPERTY-TAX CREDIT: Property taxes would not be collected on the first $100,000 of most homes. For homes worth more than $600,000, the total property-tax bill would go up 4 percent to 5 percent, which would cover the costs of the tax cut on less expensive homes. What you'd pay: • Taxes on a $2 million home would increase by $2,842. • Taxes on a $500,000 home would drop $58. • Taxes on a $200,000 home would fall $232. 4. SALES TAX CUT: Eliminating the state's portion of the sales tax, 6.5 percent, would give the most relief to the poor. A family of four that makes $30,000, for example, would pay roughly $963 less in sales taxes per year than currently. A family of two that makes $300,000 would pay about $2,193 less at the cash register annually. Source: "The Right Thing To Do: A Tax System for Competitiveness, Jobs and Prosperity," Ron Sims

But here's the real kicker: Sims said his plan would do the seemingly impossible — lower the tax burden for a vast majority of residents but bring in more money to the state for schools, roads and health care.

"The numbers work," Sims said in an interview. "That's what's amazing about this."

Attorney General Christine Gregoire, Sims' main opponent in next month's Democratic primary election, said in a prepared statement that his proposal "has no chance of passing" the Legislature and is not the sort of thing candidates should be discussing as the state emerges from a recession. Passing a state income tax would require a two-thirds favorable vote of both the state House and Senate for a constitutional amendment, as well as approval from voters.

Others warned that switching to a system so reliant on an income tax might leave the state with big budget problems during periods of high unemployment.

As business, labor and public-advocacy groups began trying to digest Sims' proposal, supporters praised it as bold leadership.

Former Seattle Mayor Charles Royer chided Sims' foes for feeding voters "the same old 'no-new-taxes' hokum."

"Most politicians, when they run, run from all taxes, let alone the income tax," Royer said during Sims' news conference at Seattle Center. "It takes some serious courage to lead on these tough issues."

Business leaders, who generally find themselves more in line with Republicans on tax matters, were intrigued.

"On the surface, it sounds like we've died and gone to heaven," said Don Brunell, president of the Association of Washington Business.

Still, while Brunell lauded Sims' "nontraditional thinking," he said he wanted to take a closer look before offering a definitive opinion.

Sims said he would be "stunned" if the business community does not support his plan.

William Bradford, a University of Washington professor and former dean of the UW Business School, said Sims' plan would make the state more appealing to new businesses.

"We need to reboot the state tax system for the realities of the 21st century," said Bradford, a Sims supporter who also attended yesterday's news conference.

GOP gubernatorial candidate Dino Rossi applauded Sims for making a bold pitch but said he thinks instituting an income tax would drive the wealthy out of the state and fundamentally change the economy in ways that might drive down revenue.

"A lot of people live here and in Nevada, Tennessee, Florida and Texas because there's no income tax," Rossi said. "If he changes the rules and you're going to tax people in a different manner, they're going to change their behavior."

Gregoire, who leads in the polls and the race for campaign cash, has previously asserted that Sims' real motive is to increase taxes.

But Sims said yesterday she will be proven wrong once people get a closer look at his proposal.

"Increasing taxes and tax burdens is the last thing our citizens need, and it's not what I'm proposing," he said.

Washington, one of seven states that does not have an income tax, gets most of its revenue from three sources: retail sales tax, business and occupation tax, and property tax.

In developing his plan, Sims relied heavily on the findings of a blue-ribbon commission headed by Bill Gates Sr. As previous studies have found, the Gates panel concluded in 2002 that the state's tax structure is outdated, unfair to the poor and bad for business.

In its report to the Legislature, for instance, the panel pointed out that the state's poorest families lose 16 percent of their income to taxes, compared with as little as 4 percent for the wealthiest.

The commission suggested an overhaul, but lawmakers have done nothing with the report.

"There is this sort of accepted wisdom that tax reform is a hopeless cause in our state," Gates said in an interview this week. "But that's something that deserves to be tested."

Sims said a team of volunteers — people with political and economic backgrounds — spent several months helping him craft a plan.

Initially, the group was looking at replacing the state's business and occupation (B&O) tax with some sort of corporate income tax. But Sims said the group eventually realized they could ditch business taxes altogether.

"My initial reaction was, 'We're not going to tax corporations? Yeah, right,' " he said.

Sims' plan also eliminates the state portion of the sales tax, now at 6.5 percent. And homeowners would get an property-tax exemption on the first $100,000 of value.

To make up all that lost revenue, Sims proposes establishing a graduated personal income tax that would go from 4 percent on households with incomes under $25,000 to 10 percent on incomes above $100,000. The top-end rate would be the highest in the nation.

According to Sims' proposal, the state tax burden would increase by about $600 million a year. But that would be more than offset because taxpayers would be able to take an estimated $730 million in federal deductions for state income taxes.

In other words, the state would get more money even as most taxpayers paid less.

"We spent a whole month being paranoid about the numbers, and we've given our numbers to everybody to shoot down and nobody has," he said. "I am incredibly comfortable with the numbers."

Sims said his proposal would amount to a net tax reduction for 78 percent of households.

To sell his plan, Sims is holding a series of public forums around the state.

Ralph Thomas: 360-943-9882 or rthomas@seattletimes.com

Seattle Times reporter Jim Brunner contributed to this report.

Copyright © 2004 The Seattle Times Company

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