State wealth tax vote shadows nationwide debate

WASHINGTON (Reuters) - A vote 3,000 miles from the U.S. Capitol over tax rates, pitting the likes of Amazon's Jeff Bezos against Microsoft founder Bill Gates' father, shadows a wider national debate over how much tax the wealthy should pay.

Voters will soon decide whether to approve Washington state's first-ever state income tax, in a ballot proposal as part of the November 2 midterm elections.

The plan levies 5 percent on people earning over $200,000, and 9 percent on couples making $1 million or more.

The debate mirrors one roiling the nation's capital, where lawmakers left town to campaign after failing to agree on renewing lower taxes for wealthier Americans, tax rates that will expire at year end with no action.

After initially running even, a recent poll found income tax opponents gaining ground in Washington state, home to well-known tech companies and their wealthy owners.

In nearby Oregon, voters recently passed a plan to raise taxes on high-earners and business, taking some by surprise.

"There seems to be some willingness among voters to stick it to the rich," said John Matsusaka, a business and law professor who studies voter initiatives at the University of Southern California. "The big idea is that voters could go for a targeted tax increase on the rich."

Washington is one of only seven U.S. states with no income tax. If the ballot initiative passes, it would be one of 10 states that have enacted high-earner taxes since 2003, although one state subsequently repealed the tax, according to the Center for Budget and Policy Priorities.

Five states have taken action in the past two years, according to the group.

"Across the country, there has been a movement to introduce millionaire taxes," said Kim Rueben, economist at the liberal-leaning Urban Institute.

Nationally, the battle over tax rates has been a favorite issue of the conservative Tea Party grassroots movement. In Washington, the wealthy are at the forefront of the fight over taxes.

"It is kind of the battle of the billionaires," said Brett Bader, a Washington state Republican consultant.

Washington state-based executives are lined up on both sides. Microsoft CEO Steve Ballmer and co-founder Paul Allen, and Amazon.com CEO Jeff Bezos each gave at least $100,000 to defeat the measure, according to filings.

Microsoft has issued a statement expressing concern about the proposal, although the pro-tax campaign says company founder Bill Gates backs it.

He has not campaigned publicly on the issue but his father, William Gates Sr., is one of the proposal's main backers.

The elder Gates, a retired attorney who has been active in Washington state politics for years, has put up $500,000 to support the measure, which he helped write.

The most recent survey by independent Elway Research pollsters found 48 percent against the tax, and 41 percent in favor. A month earlier, 42 percent were opposed, with 44 percent in favor.

SOAKING THE RICH?

"Some people say initiative 1098 is about soaking the rich," says the elder Gates in an ad that has the 84-year-old playfully plunging into a vat of water to illustrate his point. "But only the wealthiest 1.2 percent will pay more."

At the other end of the country, congressional Democrats tried in vain to make that point to win renewal of tax cuts for individual income up to $200,000, but end cuts for those above that level or families earning more than $250,000.

Worried that new taxes could forestall the economic recovery, Republicans and some conservative Democrats blocked the move, leaving the tax cuts issue pending for when Congress returns in November -- after the elections.

But unlike in Washington, D.C., the debate in Washington state is not sharpened by partisan disagreements.

Neither Democratic U.S. Senator Patty Murray nor her Republican rival, Dino Rossi, has taken a stance on the state tax issue, instead focusing on broad themes like federal funding of the Wall Street bailout.

Revenue raised under the state's I-1098 proposal, estimated at about $2 billion a year, would go to what backers call "middle class tax relief" -- education and healthcare. State property taxes would drop 20 percent and small business taxes are eliminated under the plan.

Heavy reliance on state sales taxes means those with low incomes pay a much greater share of their income in taxes compared with wealthier people, according to a state tax commission.

After Gates Sr., unions are big backers. Proponents use the fairness argument to make their case.

In Washington state, the unemployment rate is slightly below the national rate at 8.9 percent. Its budget gap is seen growing by an additional $1.4 billion through June 2013, leading the governor to order state agencies to make spending cuts of about 6.3 percent.

Opponents of the measure say mistrust of government helps them make their case, as they warn the state legislature could in two years extend the tax to lower income groups.

"We know that people have that fear of an income tax," said Mark Funk, a spokesman for an anti-tax group. "It doesn't matter whether they are blue or red or independent."

The anti-tax side also say the state's lack of an income tax attracts business and jobs, echoing points made by congressional Republicans that high taxes can stall economic growth.

"As an employer, we're concerned that I-1098 will make it harder to attract talent and create additional jobs in Washington State," Microsoft said in a statement.

Those who follow state initiatives say backers typically need to crack 50 percent support preceding a vote to win.

"I don't think it's going to pass because it is too radical a shift," said Justin Marlowe, assistant professor at the University of Washington's school of public affairs.

"Quite frankly, I think people have a lot of pride in the fact that Washington state doesn't have an income tax."

(Additional reporting by Laura Myers in Washington state and by Jim Christie and Lisa Lambert in Washington; Editing by Jerry Norton)