Seattle tech leaders shared both praise and concern over a highly anticipated ruling from the Washington state Supreme Court on Friday allowing a new capital gains tax to move forward.
The tax has sparked controversy within the tech industry because it targets stocks, a key part of compensation for many startup founders and their employees.
The 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.
The tax was approved by legislators two years ago but faced legal opposition. It went into effect in January 2022.
It’s unclear exactly how the tax will affect founders and employees that sold their companies since then. The first payments to the state are due in April.
Ted Hawksford is CEO of Seattle startup LiquidPlanner, which was acquired this month by Boston software company Tempo. He couldn’t comment on the details of the transaction and how the new tax will affect LiquidPlanner’s shareholders.
But Hawksford called the ruling “disappointing.”
“The new tax will influence decisions going forward relative to where we choose to invest in building out the team as part of Tempo,” he said.
Hawksford said LiquidPlanner recently shifted to a fully remote company and 40% of its workforce moved out of Washington “to more agreeable destinations such as Texas, Florida, and North Carolina.”
“As part of Tempo, we will maintain this flexible approach for our talent and may at some point opt to establish our business license in more business-friendly locale than Seattle,” he said.
Longtime Seattle entrepreneur Marc Barros said the tax will make founders reconsider whether they should launch a company in Washington state.
“Founders take years or decades to see a return,” said Barros, CEO of camera startup Moment. “Reducing that potential return makes us less competitive than other states.”
Others applauded the court’s ruling.
Xiao Wang, CEO and co-founder of Seattle immigration startup Boundless, said the state “can’t have it both ways.”
“We can’t achieve the community, environment, housing, social support, schools, arts, and more to increasingly make this region a great place to live for founders and employees, and solely rely on a regressive tax structure to fund these services,” he said.
He added: “If [the tax] results in more founders establishing residency in Florida prior to IPOs, hope y’all enjoy hurricanes and mosquitoes.”
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.
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.
Chris DeVore, founding managing partner at Seattle venture capital firm Founders’ Co-op, said “it’s frankly embarrassing that a state as prosperous as Washington has one of the most regressive tax regimes in the country.”
“Our lack of income tax has definitely been a draw for high earners from other states and the imposition of a capital gains tax will slow that inflow somewhat,” he said.
“But in my experience great founders are rarely tax optimizers but rather focus on creating massive new value, so the net impact on our startup economy won’t amount to much, and the benefits to our civil society will far outweigh the cost.”
The legislation two years ago faced legal challenges on whether it should be considered an income tax or sales tax.
In its opinion issued Friday, the court concluded that the capital gains tax “is a valid excise tax under Washington law.” Justices voted 7-2.
The ruling could pave the way for a broader reform that would bring an income tax to the state, said Joseph Wallin, a principal at the law firm Carney Badley Spellman.
Wallin, a longtime legal advisor for startups, said the state’s lack of income tax was a key reason why startups would move from California to Washington. He predicts the ruling will “drive people from the state.”
Kelly Fukai, vice president of community and government affairs with the Washington Technology Industry Association, said the ruling could jeopardize a “meaningful mechanism” in attracting and retaining entrepreneurs.
“The capital gains tax targets startups at an outsized rate,” she said.
Washington fell 13 places to No. 28 in a recent ranking from the think tank Tax Foundation on state business tax climates, “primarily due to giving up its status as a state without an income tax,” after the capital gains tax approval.
“This ruling undermines Washington state’s competitive status making it harder for our state to attract, retain, and grow jobs and economic opportunity,” Washington Policy Center CEO Mike Gallagher said in a statement.
from GeekWire https://www.geekwire.com/2023/seattle-startup-founders-investors-react-to-new-state-capital-gains-tax-that-targets-stocks/
