Capital gains tax in Washington state: Is it about fairness and funding, or will it drive away startups?

The Washington State Capitol building in Olympia. (Flickr photo via Tom Sparks)

Technicians, business owners, public order attorneys and individuals have weighed in favor of and against a proposed capital gains tax in Washington state this week.

A remote hearing by the House Finance Committee was attended by 3,900 people, 2,380 of whom supported SB 5096. Most of Monday’s hearing and ongoing legislative battles revolved around whether the tax is a necessary path to level playing field for Washington state taxpayers or whether the lawsuit represents an unconstitutional state income tax that will ultimately turn out businesses and entrepreneurs the state would expel.

The bill would impose a 7% tax on capital gains from the sale of assets such as stocks and bonds that exceed $ 250,000. Sales less than $ 250,000 are exempt. Many types of assets are also exempted, including real estate, retirement plans, livestock, timber, and the profits from sole proprietorship sales.

It is estimated that the tax will raise approximately $ 550 million annually starting with fiscal 2023. The majority of the funds would be used for early education and childcare, the rest for tax breaks. The Washington Treasury Department estimates 8,000 taxpayers would be taxable by 2023.

The Washington State Senate passed SB 5096 25-24 on March 6th. The bill is now in the house.

Here are some of the comments from some of those who testified:

In favor of

Dylan Grundman O’NeillA senior tax policy analyst for the Institute of Taxes and Economic Policy said research shows that in Washington, more than any other state, “the higher your income, the lower your tax rate.”

“The top 1% pay an effective rate of only about 3%,” said O’Neill. “While middle-income families pay three to four times as much and low-income families almost six times as much. And Washington’s tax system not only drives a wedge between the rich and the rest, it also widens the racial gap. For example, black and indigenous Washingtoners pay an average of 7 and 11 percent higher tax rates than white households.

He cited SB 5096 as an opportunity to “alleviate these inequalities” while raising significant new resources “to invest in people and communities”.

Kevin Litwack, a longtime software engineer currently with Seattle startup Amperity, said many in the tech industry chose careers because they believe in the transformative power of technology to improve people’s lives. And because it pays off.

If we are fortunate enough to be part of a company whose success makes us rich, we would consider it an honor and an obligation to reinvest part of it in our communities.

“We are very fortunate to benefit from it. But we don’t need a lot of wealth, ”said Litwack. “If we are lucky enough to be part of a company whose success makes us rich, we would consider it an honor and an obligation to invest some of it back in our communities.”

Litwack added that opponents of the tax argue that this will cause so-called job makers and top talent to leave the state, and that yes, some of his colleagues will take their money and run away.

“But I firmly believe that there will be more to replace them with the values ​​of community and shared responsibility that our state embodies. And we, not the ones just looking for wealth, are the ones you should have here to build Washington’s future. “

Ruth Lipscomb of Bellevue, Washington, used her testimony to mention the significance of a recent anniversary. She said that 35 years ago, on March 13, 1986, Microsoft shares were first sold to the public. The IPO led Lipscomb to retire eight years later, with more money than she would ever need.

“My family has made a lot of money selling our Microsoft stock over the past 35 years,” said Lipscomb. “And the state did not receive a cent in taxes on these extraordinary profits. Sure, we buy things with some of the money, but most of it goes back into other investments that we later sell for bigger profits. And again the state gets nothing. “

My family has made a lot of money selling our Microsoft stock over the past 35 years. And the state did not receive a cent in taxes on these extraordinary profits.

Lipscomb said her family is one of the few who will pay the tax every year. And although she and her husband have given away large amounts of money over the years to nonprofits working on issues like educational inequality, climate deterioration, and food insecurity, there is one efficient and effective nonprofit that she has never asked for funding – the state government .

“So Washington lawmakers, you are 35 years back asking me to increase my stake,” Lipscomb said. “I’m ready and waiting for you to take this little piece, a lot I’ll never miss, and use it to make life better for everyone.”

David Goldstein spoke out in favor of Civic Ventures, the policy shop founded by venture capitalist Nick Hanauer. He criticized the Washington Technology Industry Association’s “insincere arguments” that a capital gains tax would damage Washington’s startup ecosystem.

“The WTIA either doesn’t understand how the capital markets work or they hope you don’t,” Goldstein said. “They claim the tax will reduce available capital and move it out of the state. However, most of the equity funding for startups in Washington comes from state investors, who would not be subject to tax, while local investors would be regardless of where they put their money.

“They claim the tax will force companies to move into a friendlier business climate,” added Goldstein. “However, one study after another shows no correlation between tax rates and investment or growth. In fact, California, New York, and Massachusetts, with high taxes, attract by far the largest venture capital. “

Hanauer repeated these claims on his own Twitter thread during the hearing:

I find it obscene that @WTIA is fighting a wealth tax on capital gains from lucrative stock options in the WA state capital. To imply that someone other than a small handful of me and my super rich friends would pay for this is a disingenuous fear tactic. #waleg

– Nick Hanauer (@NickHanauer), March 15, 2021

Do you know what attracts companies? A state with well-funded public services, amenities, first-class institutions and infrastructure. The things that buy taxes attract talented, smart people who in turn attract wealthy VCs like me who want to make money from tech startups.

– Nick Hanauer (@NickHanauer), March 15, 2021

But when you see the @WTIA / CEOs / my VC peers oppose that, keep in mind they are whining about a single digit wealth tax on extraordinary stock and asset gains> $ 250,000 a year. If you made $ 251,000, you would pay $ 70. REPEAT: These people are against paying $ 70 for $ 251,000 in profit!

– Nick Hanauer (@NickHanauer), March 15, 2021


Molly Jones, The vice president of government affairs for the Washington Technology Industry Association spoke for the group of more than 1,000 technology companies in the state. Jones said she argued “on behalf of the Washington startup ecosystem as 80% of our members have 20 fewer employees.”

This tax comes at a time when start-up employees can be found and work permanently from anywhere. And we are concerned that our startup ecosystem is at risk.

According to Jones, stocks of stock options are used as the primary compensation strategy and as an incentive for early-stage employees to take the risk of working for a startup. Taxing these profits penalizes these employees, according to the WTIA, and encourages founders to set up their businesses in other states or move to other states.

“This tax comes at a time when start-up workers have newly discovered and persistent skills to work from anywhere,” said Jones. “And we are concerned that our startup ecosystem is at risk. We surveyed startups in our membership to better understand this dynamic. 19% of respondents have left their headquarters since the pandemic began. 32% are considering moving their headquarters; and over 10% are already looking outside of Washington. “

Claudio Mbemba; CTO and co-founder of Seattle startup Neu said the tax penalizes startups with an oversized tax rate.

“As you may know, startup founders and employees take stocks and shares as compensation during a startup’s inception years,” Mbemba said. “As new entrepreneurs evaluate the tax landscape for their companies, that tax will make Washington State less attractive. This tax will cause both startups to leave the state and reduce the talent pipeline as top talent moves to more mature companies. “

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Randa Minkarah, The co-founder and president of Resonance AI said her startup employed 13 people in Washington and the tax would harm those employees and the wider startup ecosystem.

“Many of our employees are considering moving to countries with lower cost of living or more competitive tax systems,” Minkarah said. “I strongly support continued investment in government programs to strengthen childcare and education. However, this newly proposed tax comes at a time when revenues are rising. And a new tax is not required to fund these programs. “

Then Mead Smith, The President of the Washington Policy Center said that if the tax were waived, it would be the first separate capital gains tax in the country and would “add new bureaucracy to the Washington state government and cost all taxpayers millions of dollars to manage it”.

“As an income tax, it would take advantage of Washington without income tax in attracting new businesses and inevitably pave the way for broader income taxes,” argued Smith. We know from experience that the income tax will be extended to more people once it has been introduced. And here in Washington, where tax revenues are increasing significantly and the billions in federal aid will soon arrive, this is also an unnecessary tax. “

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