Seattle assesses capital gains tax under new state law, GeekWire

Seattle skyline. (GeekWire file photo/Kurt Schlosser)

The Washington State Supreme Court recently ruled the controversial capital gains tax constitutional. The city of Seattle is now considering a possible capital gains tax to help offset the expected revenue shortfall.

Seattle Councilwoman 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 focus on Seattle’s most pressing needs as a member of the Seattle Revenue Stabilization Task Force,” Mosqueda said in a statement to GeekWire.

The city created the task force in October to help address the revenue gap, which is expected to exceed $200 million by 2025.

Mosqueda, who co-chairs the group, said it will “review multiple revenue options designed to create revenue sustainability and ensure the delivery of critical city services.”

Mosqueda, who is also the city council’s budget chairman, said he is not considering pursuing the capital gains tax ruling on his own. He said the city is not considering a capital gains tax over any other source of revenue at this time.

Capital gains taxes exist at the state and federal level, but Seattle would be unique in passing such a law.

“There are many local jurisdictions that tax capital gains, but that will be part of their overall income tax scheme,” says Maria Keating, a member of Clark Nuber’s state and local tax group. “If you’re looking for a local jurisdiction that doesn’t impose a net income tax but does tax capital gains, I don’t have an example.”

Washington state lawmakers initially passed a new capital gains tax in 2021, but it has 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 raises most of its revenue through sales, property, and business and occupation (B&O) taxes.

In the court’s 7-2 opinion released last month, Justice Debra Stephens wrote that the tax “properly qualifies as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or profits.”

The ruling paves the way for local capital gains taxes, KUOW reports.

State law imposes a 7% tax on capital gains over $250,000 from the sale of stocks and bonds, excluding gains from real estate and retirement accounts, among other exceptions. This is the first floor of its kind in state history.

The tax came into force in January of last year, and the first payments should be made at the end of this month.

Critics of the tax say it will drive business out of the state.

“Without concern for the impact on competitiveness, Washington and Seattle are moving away from our former no-income-tax advantage faster than a Lamborghini can go from 0-60 mph,” wrote Jason Mercier, director of the Washington Policy Center for Government Reform. Center.

Business leaders have voiced similar concerns since Seattle imposed a payroll tax on the city’s largest companies in 2020.

The capital gains tax has sparked controversy in the tech industry because it targets stock, a key part of compensation for many startup founders and their employees.

Kelly Fukai, vice president of community and government affairs at the Washington Technology Industry Association, told GeekWire last month that the decision could jeopardize a “meaningful mechanism” for attracting and retaining entrepreneurs.

“Capital gains tax is aimed at startups at a higher rate,” he said.

Advocates say the tax is one way to change Washington’s regressive tax laws to help low-wage earners and level the playing field for communities of color and rural communities, who are overrepresented in the low-income bracket.

An estimated 7,000 households, the wealthiest in Washington state, are subject to the tax.

The roughly $500 million in annual revenue the tax is expected to generate is expected to go toward early childhood education programs and school construction.



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