Washington state tech community spars over proposed capital gains tax

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The Washington State Capitol in Olympia. (GeekWire Photo / John Cook)

Update: The Washington state Senate on Saturday passed SB 5096 by a slim margin, 25-24. The bill now moves to the House.

Washington state’s startup community spent much of this week locked in a tense debate over a plan to tax big-ticket capital gains, one of several proposed taxes targeting the wealthy in a state with a tech industry that’s booming amid the pandemic.

It started with a letter published by the Washington Technology Industry Association, which represents more than 1,000 tech startups and larger companies. In it, WTIA warned the tax will “remove a meaningful attraction and retention mechanism” for startups and “harm our competitiveness.”

“Founders’ shares and stock options are a primary compensation strategy used as a way to encourage those early-stage employees to forgo higher wage jobs at established companies and take the risk for working at a startup … taxing those gains penalizes employees and encourages founders to form their companies in other states,” the letter says.

More than 120 companies co-signed the letter, which ignited fierce backlash from progressives.

Civic Ventures, a progressive think tank formed by early Amazon investor Nick Hanauer, called the WTIA claims “absurdly, obviously false” in a letter to the state legislature.

“The WTIA letter’s central claim is that adopting a tax on extraordinary capital gains will make Washington inhospitable to startups and lead them to locate elsewhere, but this is demonstrably false,” Civic Ventures wrote. “Virtually every state that is a leader in high-tech startups — like California, Massachusetts, New York, and Virginia — also has a state tax on capital gains.”

Invest in WA, an organization lobbying for progressive tax reform, is circulating its own letter highlighting the federal assistance that many WTIA startups received through the emergency Paycheck Protection Program. The group estimates the signatories of the WTIA letter received $34 million in aid.

“To be clear, we’re not objecting to tech startups taking PPP money,” said Heather Weiner, a spokesperson with Invest in WA. “But it’s hypocrisy to take tens of millions in free taxpayer money and then refuse to help others who need childcare or early learning programs.”

The bill up for debate would levy a 7% tax on the capital gains from sales of assets, like stocks and bonds, that exceed $250,000. Sales of anything under $250,000 are exempt. Many forms of assets are also exempt, including real estate, retirement savings, livestock, timber, and the profits from the sale of sole proprietor businesses.

The tax is estimated to raise about $550 million annually starting in fiscal year 2023. The majority of the funds would go toward early education and childcare, with the remainder allocated for taxpayer relief. Meanwhile, Gov. Jay Inslee has introduced separate legislation that would tax capital gains exceeding $50,000 for couples and $25,000 for individuals at a rate of 9%. A new capital gains tax is also under consideration at the federal level, floated by President Joe Biden.

The Washington Department of Revenue estimates that by 2023, 8,000 taxpayers would be subject to the capital gains tax that’s currently working its way through the legislature.

“The excise tax on extraordinary profits … will impact just 1% of households in our state,” said Rep. Tana Senn, a co-sponsor of the legislation, during a press briefing hosted by Invest in WA this week.

“The people of our state know a good investment when they see it,” she added. “Investments in childcare and our working families make sense and we can do it by restoring a bit of equity to our tax code.”

Related: Tech workers sound off on Washington state’s proposed ‘billionaire tax’ at first public hearing

But critics of the legislation claim its supporters have not fully considered the impact of the pandemic and other wealth taxes up for debate in Washington state.

While companies across the tech sector experiment with remote work, state and local lawmakers are seeking a number of new taxes that target the wealthy. One proposal would tax the fortunes of billionaires living in Washington state. And over the summer the Seattle City Council adopted a payroll tax on the city’s highest-paying companies.

Moment CEO Marc Barros and Resonance AI co-founder Randa Minkarah called the timing “perilous” in a separate letter circulated by WTIA. Both companies are members of the trade group.

The founders acknowledged that Washington is currently benefiting from the remote work trend as Bay Area techies migrate north. But Barros and Minkarah worry “our state is at risk of no longer being competitive” if the capital gains tax passes.

“Most founders would support a thoughtful and comprehensive approach to tax reform in our state,” they wrote. “Piecemeal measures like this capital gains tax are not reform, they make our state less competitive and push our innovators to start their business elsewhere.”

Despite WTIA’s strong stance, the Washington tech industry is far from unified in opposition to the capital gains tax. Many tech workers are lobbying the legislature in favor of the bill as part of a coalition called Tech4Recovery.

In an open letter on the Tech4Recovery website, the group notes that the tech industry has been booming during the pandemic while other parts of the economy suffer. Tech stocks soared in 2020, particularly in the Seattle region. GeekWire’s analysis of 28 publicly-traded tech stocks with headquarters or major operations in Washington state showed only one that posted a decline.

“We can’t let ourselves fall into a hole where some people trail badly behind while others of us have rocketed forward,” Wes Mills, a Microsoft employee who signed the Tech4Recovery letter, told GeekWire. “Some people have said that such a tax would make our state unattractive but what kind of state would we be if our public services and people unequally suffer as we come out of this?”

Tech workers delivered a similar message during a February hearing on the proposed billionaire tax.

The capital gains tax bill passed out of the Senate Ways and Means Committee last month and is on its second reading in the Rules Committee. During a press briefing this week, the bill’s sponsors said they’re optimistic about its prospects because it is moving through committees this early in the legislative session.

If adopted, the capital gains tax is almost certain to be challenged in court. Critics say the bill would amount to an income tax.

Washington state doesn’t currently levy an income tax because the constitution requires property to be taxed at the same rate for everyone. State courts have ruled several times that income counts as property. The big outstanding question is whether capital gains count as income in Washington.

Editor’s note: This story has been corrected to reflect Wes Mills’ status as a current Microsoft employee.

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