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Do taxes that target wealthy residents drive away entrepreneurs and businesses?
That’s the question being debated again in Washington state after Gov. Jay Inslee this week proposed a new wealth tax to help generate revenue for government programs and address a multi-billion dollar budget shortfall.
Washington recently passed a 7% capital gains tax that sparked controversy within the tech and business sectors.
Critics of such taxes say they hurt the ability to attract business and retain tech talent.
Seattle-based venture capitalist Aviel Ginzburg said the wealth tax could be a “disaster.”
“We’re still waiting for how it’s written, but if indeed it is based on unrealized capital gains it could completely destroy our entire innovation ecosystem,” he said.
Ginzburg, who recently helped launch a new startup community for entrepreneurs and investors in Seattle, said he’s concerned about an exodus of startup founders, who can have lucrative equity stakes in their companies.
He also believes that high net worth individuals — the people who make angel investments in startups and invest in venture capital funds — will depart.
Pouring all my energy into making Seattle a better place to be an entrepreneur and the gut punches feel endless.— aviel 🚜 (@aviel) December 18, 2024
Todd Myers, vice president for research at the Washington Policy Center, called the proposed wealth tax a “direct attack on innovators in the tech sector who are such an important part of our state.”
“Washington should be welcoming the next Jeff Bezos and Bill Gates, not chasing them away,” he said, referring to the founders of Seattle-area tech giants Amazon and Microsoft.
However, some say tax policy has little to do with the quality of innovation in a given location, pointing to high tax burden states such as California — home to Silicon Valley, the epicenter of tech and the AI boom.
And research shows that raising taxes on the rich doesn’t lead to migration to other states or countries.
But even without migration, a wealth tax would “erode the investments of those who remained, undercutting Washington’s economy, particularly in the tech sector,” said Jared Walczak, vice president of state projects at the think tank Tax Foundation.
Some pointed to Washington’s capital gains tax after Bezos announced in November 2023 that he was leaving his longtime hometown of Seattle, where Amazon is based, and moving to Miami.
Bezos has since sold billions in Amazon stock. But he never mentioned taxes in his Instagram post about the move to Miami — he wanted to be closer to his parents and Blue Origin operations in Florida.
In the wake of the capital gains tax, one company — Fisher Investments — announced it was moving to Texas.
But there hasn’t been a widely reported migration of tech companies out of Washington state due to that tax, which passed in 2021 and taxes profits over $262,000 made from the sales of stocks and bonds.
An initiative to repeal the capital gains tax — which funds public education — was overwhelmly voted down by Washington residents in last month’s election.
Seattle is still the No. 2 tech talent market, according to a recent report from CBRE.
A novel tax
Helion CEO David Kirtley, left, with Gov. Jay Inslee at Helion’s facility near Seattle. The fusion company is backed by OpenAI CEO Sam Altman and has a deal with Microsoft. (GeekWire Photo / Lisa Stiffler)
Inslee, who is departing the governor’s office next month after a 12-year run, wants to tax personal wealth above $100 million at 1%. That means anyone with less than $100 million in wealth would not be subject to the tax.
Here’s how it would play out, according to the state’s Department of Revenue:
If a Washington resident had $101 million, they would be taxed 1% on $1 million — or $10,000.
If someone had $1 billion, they would be taxed 1% on $900 million — or $9 million.
The state says the wealth tax would impact 3,400 residents and generate $10.3 billion over four years.
Washington has no personal or corporate income tax and generates most of its revenue through sales, property, and business and occupation (B&O) taxes. Critics say this regressive approach to taxation hits low-income individuals and households hardest.
“Washington’s strong economy has created extraordinary wealth for a few, while rapid growth and rising costs have made it harder for working families to piece together child care, housing and health care,” Inslee wrote in his budget report.
Several states have tried passing wealth taxes in recent years, including Washington, but none have been enacted. A federal proposal from lawmakers targets fortunes over $50 million and was re-introduced earlier this year.
Many countries have repealed wealth taxes due to high administrative costs, tax evasion, and low revenue generation, according to a recent report from the Washington state Department of Revenue.
The report highlighted several potential administrative challenges with a wealth tax, including valuation of intangible assets, enforcement, and compliance.
It also noted that revenue estimates for a wealth tax are difficult due to limited data, valuation challenges, and the risk of wealthy residents leaving the state.
“Despite the challenges faced in administering and estimating the revenue from a wealth tax in Washington, the department believes we could administer the tax if it were to be signed into law,” the report said.
Rachel Smith, CEO of the Seattle Metropolitan Chamber of Commerce, said the state should address broader budget choices before implementing something like a wealth tax.
“What we want to see are reasonable and responsible budget practices — and only after these exercises should a conversation about new revenues actually occur,” she said.
Editor’s note: Story updated to reflect accurate calculations.
