On Wednesday, members of the Seattle City Council’s Select Budget Committee engaged in a debate over a newly proposed 2% capital gains tax. This tax aims to support food and housing programs to benefit the city’s low- and middle-income residents.
The proposal has received a mixed response from Seattle’s elected officials, along with the tech and business community.
Numerous leaders are questioning the necessity for additional revenue, considering the lack of clarity regarding the outcomes from existing funding for such programs.
Concerns have been raised about the potential negative effects on the business sector and the retention of tech talent. Supporters of the tax, however, counter that such policies do not harm a region’s innovation ecosystem. The state recently enacted its own 7% capital gains tax, which stirred controversy within Seattle’s tech sector.
This new proposal is emerging as the City of Seattle works through its 2025-2026 budget. Mayor Bruce Harrell has proposed $8.3 billion in spending, including a $270 million shortfall in the city’s general fund. This fund supports public safety, administration, education, and human services, along with arts, culture, and other programs.
There are concerns that budget shortfalls may increase in the future, particularly as some speculate that the incoming Trump administration may be disinclined to provide federal support for a city often criticized by conservative voices.
City councilmember Cathy Moore is spearheading the capital gains tax proposal.
Moore, who chairs the city’s Housing and Human Services Committee, pointed out increasing unmet needs among Seattle’s financially vulnerable residents. The tax revenue would fund initiatives that help individuals with rent, housing down payments, and food assistance.
While Moore admits more data is needed on the impact of current programs, she stressed that residents are struggling now.
“People’s income is not keeping up with the cost of living,” she remarked. “It’s not keeping up with rents, not keeping up with food, utilities. We live in a very expensive city, and we live in a city in which the income inequality is continuing to grow at a rapid pace.”
Income inequality in Seattle has grown since the pandemic, and median wages for the city’s tech workers reached record highs last year, according to the Seattle Times.
While other councilmembers share Moore’s concerns, not everyone is convinced about the new tax, which is being proposed as a budget amendment.
Councilmember Rob Saka described the proposal as “the right idea at the wrong time,” arguing that the city needs to scrutinize why current initiatives aren’t producing the desired results.
“People don’t mind paying their fair share,” Saka argued. “But people do have a strong problem with doing that if they’re not seeing any return on investment for their existing tax dollars.”
Impacts on innovation and migration
The proposed tax would likely affect a portion of tech employees and entrepreneurs.
While anyone can invest in stocks, employees at larger companies often receive stock options as part of their compensation packages. These “golden handcuffs” help retain employees by vesting options slowly over time.
Startups often compensate employees with company stakes, which could become valuable if the company is acquired.
The Washington Technology Industry Association (WTIA) has raised concerns about the proposed tax, which city data suggests could generate $16 million to $51 million per year.
Kelly Fukai, WTIA’s chief operations officer, stated that the wide range of potential revenue “does not help the city reliably fund programs” and suggested that “a further expansion of the capital gains tax warrants more discussion.”
WTIA opposed the state’s capital gains tax when it passed in 2021.
Seattle Chamber of Commerce President and CEO Rachel Smith is also seeking further information.
“We simply do not believe that the case has been made that the city needs to raise taxes right now,” she told GeekWire in an interview Tuesday. Smith pointed out that city revenue has been consistently increasing, and she echoed Saka’s concerns that the results of existing programs need closer examination.
The chamber is also vigilant about maintaining the city’s economic competitiveness. Smith noted that while most businesses don’t base decisions on a single data point like a tax, the tax environment is among many factors when considering growth and attracting talent.
Chris DeVore, founding managing partner at Seattle venture capital firm Founders’ Co-op, downplayed the connection between taxes and tech innovation.
“California is one of the highest tax burden states in the country, and also happens to be the dominant market for software startups and VC finance,” DeVore said via email. “So no, I think tax policy has very little to do with the quality of innovation in any given location, as much as wealthy anti-tax advocates may wish to conflate the two.”
Cristobal Young, an associate professor of sociology at Cornell University, has investigated whether millionaires move to avoid increased income taxes.
“Top earners are established in their careers, married, have kids in school, own their homes, make good money, and have little reason to move,” he said via email. “They have much lower migration rates than lower-income earners, who are still searching for their economic place in life.”
Young cited tax records showing a “small but non-zero effect on elite migration” when taxes rise for wealthy individuals.
If income taxes increase by 1%, about 0.1% of top taxpayers move away, while others remain, according to his research.
“Would a capital gains tax change this story?” Cristobal said. “It would raise the tax rate a bit more — but add resources for social services that help people get to a better place. The endless question is whether a new program — trying to help people — is worth its cost.”
Young’s book, “The Myth of the Millionaire Tax Flight“, published in 2017.
Research from Young in 2022 noted that “once pandemic restrictions arrived, households began questioning the value of living in expensive, high-tax states.” Tax data shows a clear rise in migration out of high-tax states, especially among higher-income earners, Young wrote, adding that “diminished embeddedness raised the tax-flight cost of taxing the rich.”
Some pointed to Washington’s capital gains tax after Amazon founder Jeff Bezos announced in November 2023 that he was leaving his longtime hometown of Seattle, where Amazon is based, and moving to Miami.
Bezos has sold billions of dollars of Amazon stock since making the move to Florida, which does not have a capital gains tax.
In an Instagram post announcing the move, Bezos said he wanted to be closer to his parents and Blue Origin operations in Florida. He did not mention taxes.
A smaller version of a statewide tax
To address the gap in the general fund, the mayor plans to utilize Seattle’s Payroll Expense Tax, also known as JumpStart. This historically contentious tax targets payrolls at the city’s largest companies, including tech giants like Amazon. The tax was initially intended to address homelessness, foster equitable economic development, and fund environmental programs.
Moore proposed the capital gains tax as a new source of revenue that wouldn’t place a heavy burden on lower-income residents like a regressive sales tax would.
Her pitch comes on the heels of Washington voters showing overwhelming support in the General Election for retaining the 7% statewide capital gains tax funding education.
The proposed city tax would be applied at a lower rate but would otherwise mirror the state tax, limiting its scope and only applying to profits exceeding a certain threshold, which was $262,000 last year. Based on state tax filings from this year, the city tax would have affected 816 taxpayers.
The tax would take effect in 2026, with revenue collection beginning in 2027.
Opponents of the state capital gains tax challenged it in court, arguing that it constituted an income tax, which is not permitted under state law. The Washington state Supreme Court upheld the tax last year, and the U.S. Supreme Court declined to hear an appeal.
Moore emphasized that the tax has withstood the legal process and the ballot. “It’s a solid form of additional revenue, and … has broad public support,” she affirmed.
A spokesperson for Harrell recently indicated that the mayor is currently not in support of the tax but is open to discussion.
Former councilmember Alex Pedersen proposed a similar 2% capital gains tax the previous year.
There are a total of 164 proposed amendments to the city budget, and the committee will commence voting on them starting tomorrow and concluding on Tuesday.
