A landmark capital-gains tax ruling by Washington state’s Supreme Court has ignited a debate over the future of business in the state. (GeekWire Illustration)

Now that Washington state’s new capital gains tax has the legal green light, many business leaders are sounding the alarm.

The state Supreme Court ruling Friday prompted a one-sentence press release from Camas, Wash.-based Fisher Investments: “In honor of the Washington State Supreme Court’s wisdom and knowledge of the law, and in recognition of whatever it may do next, Fisher Investments is immediately moving its headquarters from Washington State to Texas.”

The company isn’t closing the Camas office but will shift its hiring focus to Texas, where Fisher’s CEO is based.

The move from Fisher “shouldn’t surprise anyone,” said Matt McIlwain, a longtime managing director at Seattle venture capital firm Madrona Venture Group. He tweeted: “Many more companies and people will move from WA state.”

But whether the 7% tax on capital gains of more than $250,000 causes an exodus of entrepreneurs and CEOs from Washington state remains to be seen.

A 2016 study examining 45 million tax records found that most wealthy people don’t move to avoid paying high taxes.

“We find that millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance,” the study reported.

GeekWire interviewed Cristobal Young, one of the authors of that study and an associate professor of sociology at Cornell University who has extensively researched migration of top income earners.

  • Young studied migration effects in New Jersey when the state passed a tax on incomes over $500,000. It had no impact on the number of millionaires moving into or out of the state.
  • He did another study evaluating three major tax reforms in California, including a tax cut for high-income earnings. There was little-to-no migration of wealthy people following those changes.
  • Young also did a border-county analysis that used the Portland, Ore., metro area as a leading example. Portland and Vancouver, Wash., are separated by the Columbia River and have very different tax systems. Oregon has one of the highest tax rates on top earners in the country. “If you are a rich person living in this metro area, you’d pay a lot less taxes if you lived on the Washington side of the city,” Young said. But he found that the vast majority of top earners in the Portland area are still living and paying taxes on the Oregon side.

“At best, taxes are a minor factor in the migration of the rich,” said Young, who wrote a book called The Myth of the Millionaire Tax Flight.

Cristobal Young. (Photo via cristobalyoung.com)

But Seattle-area business leaders are concerned about the capital gains tax, which will begin collecting payments next month following legal controversy.

“It’s bad for tech in Washington state and absolutely makes us less competitive in attracting and retaining both tech companies and employees,” said York Baur, CEO of Seattle startup Moxiworks.

Critics point to the pandemic-driven adoption of work-from home. Seattle ranks No. 2 in the country with nearly 47% of it workforce working remotely, according to the Washington Technology Industry Association.

“I’d argue that in the age of remote work there are other states that don’t have this tax and people will relocate because they can,” said Anthony Bontrager, a venture capitalist at Seattle-based WestRiver Group.

Some fear that the capital gains tax is one step toward a state income tax. Washington is one of nine states with no personal income tax; it generates most of its revenue through sales, property, and business and occupation (B&O) taxes.

“It’s concerning to see something that has been one of our key competitive advantages going away,” said Jason Hagey, vice president of communications at Association of Washington Business. “We also know that once a new tax is introduced, it tends to expand over time.”

An estimated 7,000 households — the wealthiest in the state — are estimated to be affected by the capital gains tax law, which excludes revenue from real estate and retirement accounts, among other exceptions. 

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.

Advocates said it’s 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.

“For years Washington has had the most upside-down tax code in the nation, where the lowest-income families in our state pay up to 18% of their income in taxes and the wealthiest tenth of a percent like me pay next-to-nothing,” said Nick Hanauer, a Seattle venture capitalist and self-described civic activist.

Hanauer said public investments make the state a good place to live and work, which can attract company leaders.

“If some rapacious jerk doesn’t think he should have to pay a mere 7% tax on his six-figure Wall Street profits to fund those things, he can shove off to a ‘low-cost’ state like Idaho or Mississippi — oh wait, both those places tax capital gains profits, with fewer exemptions than Washington,” he said.

Margaret O’Mara, a University of Washington professor and tech historian, pointed to Silicon Valley as an example of a potential bellwether.

“The history of Silicon Valley suggests that other regional advantages outweigh tax laws for most people and firms,” she said. “Entrepreneurs and investors have been complaining about California’s high taxes for decades, but that hasn’t stopped Silicon Valley from growing and growing.”

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