The Seattle Times Swallows Bartell Drug's Claims About I-1098

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Bartell Drug's CEO George Bartell (pictured at right) says I-1098 -- the initiative that would impose an income tax on high earners in Washington -- "may be the most serious threat" his locally owned pharmacy chain has ever faced. The Seattle Times was more than willing to swallow Bartell's claims of possible poverty. Unfortunately, because it failed to make any phone calls, the paper ended up spitting out an editorial full of misinformation and disingenuous truth-bending.

The crux of Bartell's argument rests on an obscure tax distinction. So hang with me for a second while we parse the complicated stuff.

Bartell and the Times claim that I-1098 is a backdoor business tax on something called an S corporation. Most companies are C corporations. A select few -- those that, like Bartell, have less than 35 shareholders and aren't publicly traded -- are S corporations.

Why would a company want to be an S corporation? Simple: the potential to save a lot of money.

S corporations like Bartell avoid paying the combined state and Federal corporate tax of 40 percent. Meaning S corporations like Bartell have a huge advantage over C corporation competitors like Walgreens and Rite Aid, who have to fork over nearly half of their pre-tax income.

"Rite Aid is headquartered in Pennsylvania, which like most states has a personal income tax," says State House Rep. Brendan Williams, a lawyer and I-1098 supporter. "Rite Aid is paying twice as much in taxes as Bartell. So the idea that Washington having a high-earner's income tax is going to disadvantage Bartell relative to Rite Aid is nonsense."

According to Bartell and the Times, however, their current advantage would be wiped away by I-1098. "Its extra 9 percent individual rate nails S corporations, LLCs and partnerships -- but not C corporations," writes the paper.

The Times is at its condescending best when it explains how I-1098 supporters could have possibly overlooked this hometown-boy-hampering provision.

"Probably it wasn't the sponsors' intention to favor one group of companies over another," writes the paper, with all the gravity of a boarding school headmaster. "But they are activists. They are not sympathetic to business and don't understand it very well. I-1098 is the result."

Funny, because Marilyn Watkins, policy director for the Economic Opportunity Institute, is a former businesswoman and an I-1098 "activist." And she understands very well that Bartell and the Times are full of crap.

"It's a sham issue," she says. "We're not picking on any one kind of company. We're doing exactly what the other states with an income tax are doing."

Bartell claims that he and his other shareholders put their money back into their stores. "It's what a good retailer does," says the Times.

But if that's the case, then Watkins has some good news for him: so long as Bartell has halfway competent accountants, I-1098 won't affect him in the least.

"The fact of the matter is that if the Bartell company or any other S corporation invests their profits back into equipment or staff or patents or whatever, then they don't pay income tax on that money," says Watkins. "I-1098 doesn't discourage reinvestment, it encourages it."

In order to understand how the Times could have possibly run an editorial so one-sided and simplistic, I called up Bruce Ramsey, the writer who penned it. He explained that he didn't need to talk to I-1098 proponents like Watkins because she'd already come in to the Times' offices to make her case. It was a case Ramsey didn't seem to get.

After a frustrating 15-minute phone call in which both he and I -- neither of us MBAs -- tried to explain to the other the relevant points on both sides, Ramsey offered an explanation that made him sound much like the I-1098 activists that he derisively said don't understand business very well.

"I'm not quite following this thing about not paying a tax on money you reinvest," he said.

Finally he begged off the phone and out of the conversation with the equivalent of a shrug: "Listen, I'm not a tax accountant, OK?"

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