Washington state’s controversial capital gains tax went into effect earlier this year. Now a similar tax could come to Seattle if one lawmaker gets his way.
Seattle councilmember Alex Pedersen introduced a plan this week to replace the city’s water tax with a 2% capital gains tax that he says could generate $50-to-60 million annually. The tax would offset what the city currently collects from water bills and would save the typical household at least $100 per year, according to Pedersen.
“The top 1% can afford to pay this 2%,” he said in a press release. “Adopting a more fair and progressive capital gains tax would ensure no one has to pay taxes for their drinking water in Seattle, making this the first time City Hall has proactively eliminated a regressive tax.”
Similar to the state capital gains tax, the proposed Seattle version would apply to gains of more than $250,000 on the sale of stocks or bonds and would exempt retirement funds and real estate transactions. It would apply to a “very small number” of people, according to the press release.
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 Supreme Court ruled that the tax was constitutional in March.
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.
Some business leaders also said the new law would drive business out of Washington state, particularly with the adoption of remote work during the pandemic.
Economists Cristobal Young and Ithai Lurie wrote in a study last year that “once pandemic restrictions arrived, households began questioning the value of living in expensive, high-tax states.”
In a separate study from 2016, Young found that most wealthy people don’t move to avoid paying high taxes.
Opponents of the new Washington state tax say they expect lawsuits to be filed that will challenge the state Supreme Court’s ruling.
The tax ended up generating $849 million this year, more than three times what was expected. The revenue will go toward school construction and other education programs.
Seattle councilmember Teresa Mosqueda, the city council’s budget chair, and Mayor Bruce Harrell told KUOW in April that they were evaluating a potential local capital gains tax.
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.
Advocates say the new state capital gains 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.
Washington state has no personal or corporate income tax and generates most of its revenue through sales, property, and business and occupation (B&O) taxes.
Pedersen called the city’s utility tax on water “one of our most regressive forms of taxation.”
Pedersen wants the city to approve the proposed capital gains tax this year so it can impose the new law Jan. 1 of next year and eliminate the water tax by the end of 2024. The first year of tax collections would be 2025.
“A revenue-neutral tax reform that, for the first time, proactively eliminates a regressive tax can help to rebuild trust with the majority of residents who are skeptical of financial proposals from City Hall,” said Pedersen.
The councilmember also wants to implement a new fee on real estate developers to help fund transportation projects.
Pedersen previously opposed a payroll tax on the city’s largest companies that passed in 2020.
Pedersen represents District 4, the Northeast area of Seattle which includes the University of Washington. He was elected in 2019 and will step down at the end of this year.
