As Washington’s proposed “millionaires tax” appears headed toward passage, debate rages on over its potential effects on small businesses and the state’s entrepreneurial culture.
Though the new tax would focus on high-earning individuals, who would pay 9.9% on annual income over $1 million, it would also have significant impacts on some businesses.
Specifically, the tax would impose a 9.9% charge on “pass-through” income — business earnings that flow back to individual business owners — on amounts exceeding $1 million.
The pass-through provision has created a major stir in Washington’s business community and fueled divergent claims over long-term impacts, including predictions of a mass exodus of businesses to lower-tax states.
“See you soon San Francisco,” said Aviel Ginzburg, a Seattle-based founder and critic of the tax, in a Friday post on X shortly after Gov. Bob Ferguson announced his renewed support for the latest version of the measure.
Ginzburg has argued that the tax, which he called “economic suicide,” would chill the state’s tech startup community.
“I’m ecstatic,” was the very different response by Steven Severin, a longtime Seattle nightclub owner and one of the tax’s more outspoken proponents.
State officials expect the tax, which would go into effect in 2028, will generate $4 billion annually for education, health care, higher education and human services. The measure is expected to receive a vote in the House next week.
Severin sees the tax as supporting programs that will ultimately help Washington businesses by “putting more money back in people’s pockets to be able to go spend at all our businesses.”
Early in the debate, Ferguson said he’d back an income tax only if it included major cuts for businesses and working families, including reductions in the state’s business-and-occupation tax, which was one of several business taxes hiked last year.
Ferguson’s demands led to weeks of heated negotiations among lawmakers and a very visible public relations battle over the tax’s potential impacts on Washington’s business community.
Some proponents have downplayed the tax’s burden on business.
They point out the tax’s $1 million threshold means less than 1% of Washington businesses would pay any tax, and that, with deductions and other relief, many smaller businesses will actually see their taxes fall.
State officials estimate roughly 30,000 taxpayers in Washington would end up paying the tax, although the state Department of Revenue was unable to provide an estimate of how many of those taxpayers would be businesses.
The tax also drew support from some high-profile business owners, who see the measure as a step toward fixing the state’s regressive tax structure, which relies heavily on a flat sales tax. Some also pushed back against the critics’ apocalyptic forecasts of a business exodus.
“At the end of day, most of the loudest critics of this proposal — people I respect and work with daily — will almost certainly continue to live and work here in Washington state,” argued Ben Golden, a Seattle-area attorney who advises tech startups, in an op-ed piece in GeekWire.
The tax also has support from several unions and progressive groups.
The Economic Opportunity Institute, a Seattle-based progressive think tank, has argued that the $1 million threshold means the tax’s effective rate, or the actual percentage of income paid, is still lower than in many other states that have income taxes but lower income thresholds for payers.
Critics of the tax have painted a far different picture.
Some of the biggest pushback has come from Washington’s tech sector, which is in the midst of a major shakeout driven by disruptive AI technologies and fears the tax will make it even harder to attract entrepreneurs and compete with other tech hubs.
In a recent letter to Ferguson, several tech leaders warned Democrats’ tax proposals “would materially undermine Washington’s ability to keep growing the tech sector, which is a core driver of our economy, and would slow the AI innovation and investment momentum that we should be accelerating, not discouraging,” according to excerpts published in The Wall Street Journal
Among the signatories were Oren Etzioni, founding CEO of the Allen Institute for Artificial Intelligence, and Luis Vargas, a former vice president for AI at Microsoft, according to The Journal.
But critics say the millionaires tax could also affect more traditional businesses, which often use pass-though income to buy new equipment, retire debt or hire additional employees.
“The majority of my (pass-through) income is not cash I ever see,” said Ryan Likkel, owner of Western Refinery Services, a Ferndale-based construction company with around 200 employees.
“If I’ve got to spend cash on (the millionaires) tax, I’ve got less cash to spend on business growth and new equipment investments,” added Likkel, who is a member of the state chapter of the Association of General Contractors, which opposed the tax.
Critics say the new tax would be simply the latest burden imposed on businesses in Washington. The state has historically resorted to higher business taxes to compensate for its lack of a traditional income tax, which most states have.
Jared Walczak, a senior fellow at the New York-based Tax Foundation, said the 9.9% rate is “anomalously high” relative to other states, and even though it narrowly targets larger businesses, their size means they play a disproportionate role in hiring and investment.
The tax may not “have a lot of payers, but those who are paying are job creators,” Walczak said.
Whether such considerations will be enough to touch off an exodus of business owners and entrepreneurs is difficult to predict, experts say.
Several high-profile business leaders in Washington have said they will move or have already done so to avoid this and other taxes, and warn that many others are considering similar actions.
Seventeen percent of Washington employers say they are considering relocating their businesses to other states, up from 9% last year, largely because of tax changes, according to a new survey by the Association of Washington Business, a trade and lobbying group critical of the tax.
Others, however, say taxes are only one factor entrepreneurs consider when choosing a city or state.
In deciding “where I want to build a company, what is so much more important is a well-educated workforce that you can tap into,” said Justin Beals, a founder and veteran of the Seattle startup scene. He said a fairer tax system is crucial to workforce development.
In the meantime, the tax debate has already led to other kinds of exits.
At a state Senate hearing last month, Jed Fowler, president and chair of HD Fowler, a Bellevue-based construction supply company, endorsed the tax, which he characterized as a “pro-business” investment in Washington’s “shared prosperity.”
“I am willing to pay this tax, I should pay this tax, others like me should pay this tax,” Fowler said, in testimony that drew applause in the crowded hearing room.
But in a sign of just how unhappy the business community is with the tax proposal, Fowler’s pro-tax stance reportedly got him in hot water with some of his customers.
Several days after the hearing, Fowler wrote customers to apologize for his testimony and to say he would be stepping down as company chairman.
“I spoke from a narrow point of view: my own,” said Fowler, according to a report in The Center Square, a new site focused on legislation. “After several humbling and informative conversations with my team and our industry partners, I realized this apology is needed.”
Fowler declined a request for comment from The Seattle Times.
