Matt McIlwain: 7 reasons why the capital gains tax is bad for Washington state

Editor’s note: We asked two Seattle venture capitalists — Civic Ventures’ Nick Hanauer and Madrona’s Matt McIlwain — to defend their opposing viewpoints on the new capital gains tax in Washington state that was ruled constitutional by the state Supreme Court last week. Tech leaders shared both praise and concern for the law, which imposes a 7% tax on capital gains of more than $250,000 from the sale of stocks and bonds. Below is McIlwain’s post — you can read Hanauer’s post at this link.

Since Washingtonian’s rejected a state income tax by 64% to 36% in 2010, the state has prospered economically and substantially grown tax revenues. Now the state Supreme Court has reversed a lower court ruling and invented an excise tax on capital gains income that exists nowhere else in the world. If the ruling stands, it will be detrimental to job creation, innovation, investments, and tax revenues for our state in the years ahead. Here are the details:

1. Washington state had $40 billion of tax revenue growth in the past 12 years (since the 2010 income tax was defeated) — from $26 billion to $66 billion (over 150% tax revenue growth vs. 15% population growth).
2. The existing state tax system encourages investment, job creation, and economic growth and our state’s success creating work opportunities, innovative products and increased tax revenues were the envy of most other states.
3. The state already has the only revenue tax (B&O tax) in the country and high excise taxes and fees including the second-highest cell phone taxes (over 20%), third-highest gas taxes (52 cents/gallon) and a progressive, real estate excise tax.
4. There is a myth about regressivity in the Washington state tax system perpetuated by attributing property taxes to renters, not incorporating the B&O tax (a progressive tax) into the analysis, and not factoring transfer payments and exemptions. Moreover, when the state had an over $10 billion tax revenue surplus last year, the legislature and governor did nothing to lower excise taxes (state sales tax, gas tax) that are viewed as regressive.
5. We are in an era of hybrid work that is likely to sustainably reduce in-office work requirements which gives people and companies unprecedented mobility to work where they believe the community and government best serve their needs.
6. The unprecedented “excise tax” on capital gains income will both encourage people and companies to leave Washington state (see the Fisher Investments announcement) and discourage others from coming to live and build their companies here. This new tax is bad news for the state, opens the door to countless other state and local “excise taxes” as evidenced by a bill already introduced to raise the capital gains excise level to 8.5% and lower the threshold to $15,000. This will hurt the overall economy and innovation ecosystem for many years to come.
7. This new “excise tax” also violates the U.S. Constitution (Commerce Clause) primarily because it levies an excise tax on activity outside the state. Income taxes can reach across state lines, excise taxes cannot. Options are being explored for federal court and Congressional challenges along with efforts to evaluate a state-wide initiative to overturn the law.