NOTE: An updated version of this blog post and related fact sheet is now available at: http://www.eoionline.org/2010/06/22/initiative-1098-will-business-owners-pay-state-income-tax-updated/
Short Answer: Very few business owners will pay state income tax under the provisions of I-1098. A person claiming business income on their personal tax return would only be taxed if his/her Adjusted Gross Income, net of allowable business expenses/losses under IRS rules, exceeds $200,000 for single filers or $400,000 for joint filers – and then only on the amount exceeding that income threshold.
Background: Of the 452,533 income tax returns reporting business income in 2007, 94% stated an adjusted gross income (AGI) of less than $200,000. All of these business owners would be completely exempt from the income tax proposed by Initiative 1098. Moreover, since 85% of high-income returns are filed jointly, and I-1098’s income tax threshold for households is $400,000, a substantial proportion of those tax filers reporting business income and an AGI above $200,000 will also be exempt from paying the income tax.
Contrary to recent assertion by the Association of Washington Business, only 25% of all returns over $200,000 filed in Washington in 2007 included any business income (not 68%). And only 3.4% of income earned by those over $200,000 came from business income (not 21%). The average business income for filers reporting an adjusted gross income of greater than $200,000 was $78,458 – meaning the majority of their income is derived from sources other than their businesses.
From EOI’s fact sheet: Initiative 1098: Will business owners pay income taxes?
Looking for more information about Initiative 1098? Visit the Economic Opportunity Institute website.