By Leo Brine
On Monday morning, the House Finance Committee took up Sen. June Robinson’s (D-38, Everett) historic capital gains tax legislation, which the Democratic-controlled Senate passed two weekends ago on March 6.
During the committee meeting, tech industry lobbyists and conservatives tried to slow the bill’s momentum. Tech lobbyists said the legislation, which calls for a 7 percent tax on capital gains of more than $250,000, would cause small tech startups to flee the state. Republicans chimed in, saying the tax wouldn’t merely drive away business, but it would drive away wealthy people and even the tech industry as a whole.
Specifically, the Washington Technology Industry Association (WTIA) testified that the tax will harm small tech-startups’ ability to recruit employees because stock options (which count as capital gains) would likely be taxed when the employee sells them.
According to the WTIA, stock options are a “primary compensation strategy” for startups. By offering stock options, startups can pay their employees lower salaries while allowing them to buy shares of their employer’s company at a low fixed price. Employees can then sell their shares when the company goes public or is bought out.
Molly Jones, vice president of government affairs for WTIA, implied that tech startups would pack up and head out of Washington if the tax passed. “We are concerned that passage of the capital gains tax will further drive founders, startups, jobs and future drivers of employment and economic growth out of our state,” she said. Her association polled startup members and found, she said somewhat obliquely, that 32 percent were “evaluating whether to relocate their headquarters.” She did say specifically that over 10 percent had already begun looking outside of Washington.
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Republicans piled on, saying the bill will drive the state’s wealthiest to uproot and live elsewhere. They also said the tax will eventually start to affect more than the minuscule 0.23 percent of Washington residents the Democrats estimate would be impacted by the tax.
Republicans also foreshadowed their strategy going forward if the Washington State Supreme Court eventually takes up the bill, by labeling it an unconstitutional “income tax” and comparing it to previously failed income and graduated income tax bills.
House Finance Committee Chair Rep. Noel Frame (D-36, Seattle), who told PubliCola last week that the bill is a priority, kept the discussion moving; 100 people signed up to testify, though only 28 spoke. Nearly 4,000 people signed their names into the legislative record, with more than half, 2,380, signing in support.
One Seattle tech worker, Kevin Litwack, who has received stock options in the past, contradicted the spokespeople for his industry by testifying in support of the bill. “Of course, the tech industry pays well,” he said, “but we don’t need a vast fortune.” Litwack said his peers who view taxes as an obstacle to amassing huge amounts of wealth may “take their money and run,” but “even more will come to replace them, drawn by the values of community and shared responsibility that our state embodies. We, not those purely chasing wealth, are the ones you should want here to build Washington’s future.”
None of the Democratic legislators on the committee spoke to the removal of an emergency clause from the bill that would have put the tax in place immediately and protected the bill from voter referendum. Moderate Sen. Steve Hobbs (D-44, Lake Stevens) sponsored and passed an amendment on the Senate side that removed the clause, irking progressives such as Seattle State Sen. Joe Nguyen (D-34, Seattle).
The bill will head to a finance committee executive session for a vote “soon,” Rep. Frame’s office told PubliCola. The Democrats have an 11-6 majority on the committee. From there it would go to the House floor, where the Democrats are also in control.
Having only a sales tax to fund needed programs also has perverse consequences.
Yea! The Progressives in Washington State have found another way to rip off the productive class and pay off themselves and those on a bad plan. Let me know how I can get on a bad plan and get my free stuff. Steve Willie.
A credible truism is that you tax what you DON’T want — as the tax will discourage it. That’s why taxing cars, excessive consumption, pollution has merit. Taxing capital gains means discouraging successful investments of financial and human capital that generate benefits for society.
In the case mentioned, stock options are deferred income and for most people that has been hard earned, well earned, long earned and the result of producing a product or service of value (often as an “export” to other states and countries.) Why discourage that? (Note: if we had an Income Tax, it would make sense to tax some portion of stock option gains as deferred taxable income.)
In many cases, there are capital gains when a local business is sold. Taxing these transactions discourages valuable assets from transferring to new, more energetic owners and can often hurt family businesses. (Which, again, also reflect deferred income.) Focus on taxing what we don’t want. If we don’t like “excessive gains from margin-enabled speculation in the stock market”, tax that. But taxing value created by successful, growing businesses is counter-productive.
Often we even do the opposite. We give tax breaks that encourage questionable behavior. An important example: we discount property tax (and city services) for poorer, older citizens to remain in their homes. This encourages single residents to stay in their homes — sure, they get some comfort but their house is probably worth $500k to $1m, they can use their equity to stay put if it is so important to them. In the meantime, we have less housing available for families AND everyone (including poorer renters) is subsidizing $5k to $10k per year as their house appreciates $20k to $50k. For what? So that their heirs inherit the house stepped up to market value — no capital gain!
Perverse consequences of tax policy should remind us to think of what we are discouraging (through taxes) and encouraging (through breaks.)