(The Center Square) – Washington state residents who have sold long-term capital assets, such as stocks and bonds, exceeding $1 million will have to pay an increased capital gains tax.
That’s due to Senate Bill 5813, passed by the Legislature and signed into law by Gov. Bob Ferguson earlier this year. SB 5813 increased the capital gains tax rate to 9.9% on gains exceeding $1 million and went into effect retroactively to Jan. 1 of this year.
Before this change, Washington had a 7% tax on long-term capital gains over a certain exemption amount of $270,000 in 2024. The Washington State Department of Revenue has not yet released the inflation-updated amount for 2025.
One critic of the increased tax rate contends it could backfire and ultimately mean less, not more, revenue for the state.
“The new higher rate is going to give businesses and investors pause for thought about where they declare residency, so as not to pay the 10% tax,” Mark Harmsworth, director of the Small Business Center at the free-market Washington Policy Center think tank, wrote in a Wednesday blog.
Harmsworth told The Center Square lawmakers should have learned a lesson when Amazon founder Jeff Bezos left the state to avoid the tax.
“That’s when it was at 7%, and he moved his residency to Florida,” he said. “The tax that he would have owed was about $610 million that the state was unable to collect because he moved his residency.”
Harmsworth said large companies, including big tech companies, have already started diversifying beyond the Evergreen State.
“Microsoft has started opening data centers outside the state and research centers, too, so they’re starting to move some of the employees out,” he explained.
Harmsworth pointed out that Amazon has relocated some 25,000 employees to Bellevue to avoid Seattle’s wealth tax and could be motivated to expand outside of Washington due to the increased capital gains tax.
“If they moved a significant number of employees out of state, the impact isn’t just the taxes they lose from cap gains from those employees that are doing well and have stock maybe over a million, but they also lose the wages that were being spent in the state no longer going into grocery stores, into remodels, or into landscaping companies, and that sort of thing,” he explained. “It’s the loss of revenue being spent in the state, which hurts just regular folks who are out there trying to make ends meet.”
Proponents of the capital gains tax see it as a policy that addresses tax inequity, invests in vital public services, and benefits the broader Washington community.
Capital gains excise tax collections so far have topped $560.6 million for tax year 2024, according to the Washington State Department of Revenue.
The revenue generated from the capital gains tax is primarily dedicated to funding education and school construction.
During an April 16 Senate Ways & Means Committee hearing on SB 5813, supporters said the higher tax rate is needed to fund education.
“Our current tax structure places an unfair burden on working families but allows immense wealth to the largely untaxed. I see firsthand how underfunded some of our basic public services are, especially education,” Kyrian MacMichael, a teacher in the Olympia School District, told the committee. “This simply asks those who are doing extremely well to chip in a little more.”
Capital gains tax supporters claim the tax primarily impacts the wealthiest individuals in Washington, with a very small percentage of taxpayers – less than 1% – subject to the tax.
Harmsworth disagrees, arguing that small- and medium-sized businesses are also impacted.
“So, if you’re a mail-order sports supplier, for example, and you’re in Washington, and you don’t need to be in Washington, you could be someplace else,” he argued. “So, you take your $3 or $4 million business, and you move it to a much more tax-friendly state, and Washington not only loses the potential capital gains tax on that, it also loses B&O, and it loses sales tax.
Harmsworth said that for many small business owners, their business is their retirement, and if the state takes an even bigger chunk of that, it may be the last straw for some.
“So, when the state comes in and says we’d like 10%, they may say ‘No, we’re going to go to Arizona’,” he said.
In November, 64% of Washington voters rejected Initiative 2109 to repeal the capital gains tax.
