Initiative to repeal Washington’s capital gains tax pits education funding against business concerns
Christine Enslein had a financially successful career at Microsoft — so much so that she has been paying Washington state’s capital gains tax since it came into effect in 2022.
But she may be off the hook for future payments if voters approve Initiative 2109, a Nov. 5 ballot measure to axe the tax.
Enslein, however, will be voting against it.
The 7% tax has raised $1.2 billion over two years. The revenue pays for public education, early learning programs and school construction.
When Enslein looks at the state of the schools, including the Western Washington middle school where her daughter has taught for a decade in a 40-year-old, falling apart portable classroom, she is clear on her opposition to the measure.
“I strongly support the way that money is being spent,” Enslein said. She credited public schools for her own accomplishments.
“I wouldn’t have done that without a great education,” she added. “It’s time to belly up and pay it back.”
Results of a new statewide poll show that 55% of voters are opposed to the initiative, 27% support it and 18% are undecided, according to the Seattle Times.
Some voters in the tech and business sectors want the tax eliminated. They argue that it harms small businesses and innovation and is detrimental to the region’s tech economy. They point to budget surpluses at the state level in recent years and accuse lawmakers of squandering tax dollars.
“Washington doesn’t have a revenue problem — it has a spending problem,” wrote Seattle business owner Marcus Charles and software engineer Vijay Boyapati, in a Seattle Times opinion piece backing I-2109.
The Washington Technology Industry Association (WTIA) opposed the creation of the capital gains tax but has not taken an official stand on the initiative. The organization did express concerns about the tax impacts.
“We have heard a few stories from founders who have set up operations in other states, and with remote work capabilities it is becoming increasingly easier to incorporate those financial decisions,” Kelly Fukai, WTIA’s chief operations officer, via email. “It is still early days, but there seems to be volatility in this policy that warrants further consideration.”
The tax applies to profits from the liquidation of stocks and bonds that exceed a certain level. Last year, it was triggered for gains of more than $262,000, up from $250,000 the year before.
The tax has impacted a small fraction of Washington’s 8 million residents. This spring, some 3,850 people filed returns associated with their capital gains, though not all would have owed the tax, according to a spokesperson with the state Department of Revenue.
Washington is criticized for having a tax code that places a disproportionately large burden on low-income residents compared to high earners. It’s one of nine states that does not have a state income tax and it also lacks a corporate income tax. Instead, it relies primarily on sales, property and business and occupation (B&O) taxes for revenue.
There are 42 states with a capital gains tax. Washington’s version does not apply to real estate and home sales, retirement and college savings accounts, farms and family-owned small businesses.
Debate over impacts
The Office of Financial Management estimates that if voters approve I-2109 and repeal the tax, the state will lose $2.2 billion in revenue over the next five years.
The law creating the tax directs the proceeds to help fund public education in the state. The first $500 million collected goes into the Education Legacy Trust Account, which pays for K-12 education, higher ed, and early learning and childcare programs. If the revenue exceeds that amount, as it did the first year of the tax, those additional funds go into an account that pays for school construction projects.
Schools in the state are facing budget shortfalls, with Seattle Public Schools, the state’s largest district, reporting that it’s short $100 million for next year and will be closing some schools.
Lawmakers approved the capital gains tax in 2021, but opponents challenged it in court, arguing that it functioned as an income tax and was therefore banned by state law. The Washington state Supreme Court upheld the tax in a 7-2 decision last year, and the U.S. Supreme Court declined to hear an appeal of the ruling.
That didn’t temper the controversy over the issue.
Let’s Go Washington, the group campaigning in favor of I-2109, blasts the tax.
“Washington has long attracted entrepreneurs due to our lack of a state income tax,” said Hallie Balch, Let’s Go Washington’s spokesperson in an ad supporting the initiative.
“This new tax changes that,” she said, adding that “job creators and investors may relocate, taking their economic contributions with them.”
Tax critics have pointed to Jeff Bezos’ move from Washington to Florida, which does not have a state capital gains tax, as an example of someone fleeing the tax hit. For his part, the Amazon founder said he moved to be closer to family and the southern locations of his Blue Origin space company.
Bezos, who is estimated to be worth more than $200 billion, has since cashed out some of his Amazon stocks as they hit record highs. By residing in Miami, he was able to duck roughly $1 billion in taxes.
Sam McVeety, a distinguished engineer at Google’s Seattle office, receives shares of Google stock as part of his compensation. But he’s not worried about the tax should he ever liquidate enough stock to reach the annual tax threshold.
He moved to Washington 15 years ago and questions the assertion that residents and businesses are driven to come here because of beneficial tax laws.
“I think that’s a pretty dim view of what brings people to Washington state,” McVeety said. “At least for me, it’s the mountains, it’s the investment in infrastructure and people.”
Capital gains and the tech sector
While anyone can invest in stocks, tech and corporate workers like McVeety can receive stock options as part of their compensation package. Cash-poor startups with less money for salaries can attract employees by offering a stake in the business. At bigger companies, stocks are additional incentives and can act as “golden handcuffs” that help retain employees when the options vest slowly over time.
There are different kinds of stock options, but the general concept is an employee can pay for or “exercise” their stock options when they’re granted to them or become vested.
If an employee decides to sell the stock after owning it for more than a year, they would pay a capital gains tax on the amount the stock has increased in value — if that amount exceeds the $262,000 threshold. The sum owed can be reduced through charitable giving.
“The tax kicks in when you actually end up getting cash for the option, [when] they liquidate it,” said Matt Medlin, a CPA at Clark Nuber who leads its tech sector and ESG group.
Medlin declined to comment on whether the new capital gains tax is an issue of concern among clients.
“We talk to folks mostly about sales tax and a lot about B&O tax with our corporate and company business clients,” he said.
There’s also the matter of what happens when a company is acquired. The capital gains tax has exemptions for smaller, family-owned businesses, which could apply to some startups.
For a seller to avoid the tax, their company’s revenue must be below $10 million in the 12 months preceding the sale; the seller and/or their family members must have a 50% stake in the company or meet similar specific ownership requirements; and the seller or family members need to have been active participants in running the business for five of the preceding 10 years.
If an employee of an acquired company owns stock options that are vested but have not been exercised, the entity buying the company will pay the employee for those holdings and that money is taxed as ordinary income, not capital gains.
If the employee has exercised their options, the buyer will purchase those stocks, which if the proceeds exceed $262,000 they would meet the capital gains threshold for the employee.
(For more details, GeekWire previously covered the tax implications in these scenarios.)
Funding for and against
It’s challenging to pinpoint who has contributed in support of I-2109. The group Let’s Go Washington has pooled the contributions for this measure with three others. Those initiatives aim to eliminate a program that chargers polluters for their carbon emissions; prohibit state and local governments from restricting access to natural gas; and allow people to opt out of a tax that provides long-term care.
Funding for the campaign backing all four measures totals about $8.5 million this year, with much of the support coming from Brian Heywood, the Seattle-area hedge fund manager who created the initiatives.
Other large donors include retired tech entrepreneur Lawrence Hughes, Steve Gordon of Gordon Truck Centers, Spokane businessman Larry Stone, and the Bellevue development company Kemper Holdings. Other tech leaders who gave more than $100,000 include telecom’s Bruce McCaw, TerraClear CEO Brent Frei, and Nmap founder Gordon Lyon.
The No on I-2109 committee has raised roughly $4.3 million. Its backers include the National Education Association, the Washington Federation of State Employees, SEIU Initiative Fund and the Washington Education Association. Individual contributors of more than $100,000 include venture capitalist Nick Hanauer and philanthropist Lisa Mennet.