A controversial capital gains tax was recently ruled constitutional by the Washington state Supreme Court. Now the City of Seattle is looking at a possible implementation of its own capital gains tax to help ease an anticipated revenue shortfall.
Seattle councilmember Teresa Mosqueda and Mayor Bruce Harrell told KUOW this week that they are evaluating a potential capital gains tax.
“I remain committed to reviewing all progressive revenue options to center Seattle’s most urgent needs as a member of the Seattle Revenue Stabilization Workgroup,” Mosqueda told GeekWire in a statement.
The city formed the workgroup in October to help shore up a revenue gap expected to surpass $200 million in 2025.
Mosqueda, who co-chairs the group, said it “will review a myriad of revenue options intended to create revenue stability and ensure delivery of critical city services.”
Mosqueda, also the city council’s budget chair, said she is not considering pursuing a capital gains tax ordinance independently. She said the city is not considering a capital gains tax more than any other revenue source, at this point.
Capital gains taxes are in place at the state and federal level but tax experts say Seattle would be unique if it passed such a law.
“There are many local jurisdictions outside of Washington that tax capital gains, but it will be part of their overall income tax scheme,” said Maria Keating, a member of the state and local tax group at Clark Nuber. “If you are looking for a local jurisdiction that does not impose a net income tax, but does tax capital gains, I don’t have an example.”
Washington state lawmakers originally passed the new capital gains tax in 2021 but it faced legal challenges over whether the tax is an income tax or a sales tax.
The state has no personal or corporate income tax and generates most of its revenue through sales, property, and business and occupation (B&O) taxes.
In the court’s 7-2 opinion issued last month, Justice Debra Stephens wrote that the tax is “appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.”
The ruling paves the way for local capital gains taxes, KUOW reported.
Update: Alex Hudson, a candidate for Seattle City Council, announced Thursday that she supports a municipal capital gains tax. “It will make our Seattle tax code fairer and more equitable, and raise much needed revenues to fund important public priorities,” she said in a statement.
The state law imposes a 7% tax on capital gains of more than $250,000 from the sale of stocks and bonds, excluding revenue from real estate and retirement accounts, among other exceptions. It’s the first tax of its type in state history.
The tax went into effect in January of last year and the first payments are due later this month.
Critics of the tax say it will drive businesses out of the state.
“Unconcerned about the impact on competitiveness, Washington and Seattle are speeding away from our prior no-income tax advantage faster than a Lamborghini can go from 0-60 mph,” wrote Jason Mercier, director at the Center for Government Reform at the Washington Policy Center.
Business leaders voiced similar concerns after Seattle passed a payroll tax on the city’s largest companies in 2020.
The capital gains tax sparked controversy within the tech industry because it targets stocks, a key part of compensation for many startup founders and their employees.
Kelly Fukai, vice president of community and government affairs with the Washington Technology Industry Association, told GeekWire last month that the ruling could jeopardize a “meaningful mechanism” in attracting and retaining entrepreneurs.
“The capital gains tax targets startups at an outsized rate,” she said.
Advocates say the tax is one way that Washington’s regressive tax laws can be altered to help low-wage earners and level the playing field for people of color and rural communities who are overrepresented in low income brackets.
An estimated 7,000 households — the wealthiest in Washington state — are estimated to be affected by the tax.
The estimated $500 million in yearly revenue the tax is expected to generate is earmarked to be funneled into early-childhood education programs and school construction.
