Funding income income tax jeopardizes ‘Silicon Valley 2.0’

Washington State – and especially the central Puget Sound region – is seen by many as “Silicon Valley 2.0” due to the large number of technology companies including Microsoft, Amazon, Facebook and the venture capital startups operating here. With the rise of remote working and a technical exodus from actual Silicon Valley to other states, many industry officials warned during a public hearing on the House Finance Committee on March 15 on a proposed capital gains tax that such a proposal could result in a similar flight from Washington.

ESSB 5096, sponsored by Senator June Robinson (D-38), would impose a seven percent tax on proceeds from the sale of long-term capital gains. The Senate narrowly clarified the bill earlier this month with 25 to 24 votes after the emergency clause of the bill to prevent a referendum was removed. The standard deduction would be the initial capital gains income of $ 250,000.

Although the tax, as it was written, would only affect roughly 8,000 Washington residents, hundreds of CEOs of technology startups have spoken out against the legislation in a letter from the Washington Technology Industry Association (WTIA).

At the public hearing on March 15, WTIA Vice President for Government Affairs Molly Jones said that about a third of its members are considering moving their headquarters, with 30 percent of its members planning to move outside of Washington state. She added that the state’s “startup ecosystem is threatened by the” continued ability to work from anywhere “. Although other states with large tech centers may have an income tax, she found that they have a lower cost of living compared to Washington.

Resonance AI co-founder and president Randa Minkarah told the committee that stock options are an ideal way to attract talented people to startups that cannot offer the same salary as larger tech companies. He added that a capital gains tax “comes at a time when revenues are rising. A new tax is not required to fund these programs. “

NEU co-founder Claudius Mbemba issued a similar warning: “This tax will make Washington State less attractive.” Even if employees don’t leave the state, he said, “top talent will go for more mature companies” that are able to offer better salaries.

The practicality of the tax has proven to be only one aspect of the overall debate. Another component is whether it is even legal under the Washington state constitution. The bill claims to impose an excise tax, but the tax is applied to capital gains, not a sale as is the case with property excise tax.

Even proponents who testified at both the March 15 public hearing and earlier hearings have called this a profit tax. Since the 1930s, the state’s Supreme Court has consistently ruled that income is considered property under the incredibly broad definition of the state constitution and is subject to various restrictions – including a ban on graduated property tax rates.

Critics also point out that any state with a capital gains tax classifies it as an income tax and no jurisdiction has an excise tax on capital gains. At the March 15 public hearing, U.S. Representative Dan Newhouse (R-WA) testified in a 2018 letter from the Internal Revenue Service that a capital gains tax was an income tax. Finance Committee Chairperson Rep. Noel Frame (D-36) said at the meeting that she had never seen the letter.

A separate withholding tax proposal was introduced in the State House via HB 1496 but was never approved by the House Finance Committee.

No further measures are planned for ESSB 5096.