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Gov. Jay Inslee speaks to a crowd of tech leaders before the 2018 GeekWire Gala. (GeekWire Photo / Dan DeLong)

Washington Gov. Jay Inslee is proposing two changes to the state’s tax system that would impact entrepreneurs and software-as-a-service companies.

Inslee detailed the new capital gains tax and increased business tax in his proposed biennial budget, which will kick in July 1 and cover the subsequent two years if approved by the legislature.

Here’s what’s on the table:

  • Nine percent tax on capital gains above $25,000 for individuals and $50,000 for households from the sale of stocks, bonds, and other assets. The tax would not apply to homes, retirement accounts, farms or forestry.
  • Increase Washington’s business and occupation tax on service providers, including some software-as-a-service companies, from 1.5 percent to 2.5 percent

The state estimates the increased business and occupation tax would raise an additional $2.6 billion in revenue over the next two years. The capital gains tax would raise about $975 million in fiscal year 2021 and apply to approximately 1.5 percent of households, according to the governor’s proposal.

The new funds and existing revenue would overhaul the state’s behavioral health system, attempt to revive the endangered Southern Resident orcas, support ambitious environmental goals, expand rural broadband internet access, and cover a range of education initiatives.

Michael Schutzler, CEO of the Washington Technology Industry Association. (GeekWire Photo / Todd Bishop)

Michael Schutzler, CEO of the Washington Technology Industry Association, said he’s concerned that the tax changes send the wrong message to entrepreneurs, encouraging them to build their companies elsewhere.

“That’s the signal it sends,” he said. “Please go start your company somewhere else. The State of Washington will simply tax you.”

Washington is one of nine states without a capital gains tax and Schutzler worries that adding one, on top of the federal capital gains tax, will discourage startup activity.

“If you’re an entrepreneur and you have a win, and that win is a million dollars or millions of dollars, you’re at the top end of [the federal] tax rate,” he said. “So if you have a 25 percent federal tax rate already and then you add what the state’s proposing … it comes across as an entrepreneur tax.”

That argument isn’t swaying the governor’s office, which believes the state’s strong tech talent will keep it competitive.

“All evidence from California, Massachusetts and New York – all major tech hubs with capital gains tax – demonstrates that capital gains tax does not stymie entrepreneurs and innovation,” said Tara Lee, Inslee’s deputy communications director, in an email. “Talent and proximity to flagship tech companies like Amazon, Microsoft and so many others – that is the core value entrepreneurs get here.”

The expanded business and occupation tax would apply to Washington tech companies that sell software as a service, according to the governor’s office. Some companies may be subject to different business and occupation tax rates for different services they sell. Retail sales of technology products, for example, would be taxed under the lower rate, while sales of custom software and data processing would be taxed at the higher rate.

Update: Anna Gill, communications manager for the Washington State Department of Revenue, clarified that sales of some software will be taxed as retail at the lower B&O rate.

“Only if the service does not fit into any of the categories of a retail sales would it be considered a service subject to the service and other activities B&O tax, and, therefore, impacted by the governor’s proposal,” she said.

Schutzler questioned the need for additional taxes when Washington’s revenues have grown. He said the tech industry “could almost swallow” the new taxes if they went toward a substantial investment in STEM education to close Washington’s tech talent gap, but he doesn’t feel the budget adequately addresses that issue.

“It’s still hard to understand why you need to increase the taxes given the fact that revenues have grown so substantially,” he said. “No one’s making a compelling argument on that.”

Lee disagreed, calling STEM education and tech talent a “top priority” in the budget planned for the next two years.

“That’s why we’re working to create more STEM education opportunities and career-connected learning opportunities for students and adult workers – to ensure we have the most robust tech workforce that will continue to support the world’s top companies and startups for years to come,” she said.

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