Opinion: The ‘millionaires tax’ is a threat to Washington’s startup economy — and here’s the math to prove it

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Ben Golden recently argued in these pages that the proposed “millionaires tax” is not an existential threat to Washington’s startup economy and that critics should “cool it on the millionaires tax hysteria.” I respect Ben and the work he does in our ecosystem. But his piece glosses over critical details that founders, investors, and early startup employees need to understand. And it treats the income tax as if it exists in a vacuum. It doesn’t.

The real story isn’t one bill. It’s the full stack of taxes that Washington is building — layer by layer, session by session — that collectively send a clear message to anyone thinking about starting a company here: don’t.

The full stack

Let me walk through what a Washington startup founder is actually facing right now.

• The capital gains tax is already law. Washington raised the rate to 9.9% on long-term capital gains over $1 million, effective January 1, 2025. That’s not a proposal. It’s already hitting founders on exits.
• The qualified small business stock (QSBS) add-back bills are in committee. SB 6229 and HB 2292 would strip the federal Section 1202 exclusion at the state level. Under current federal law, a founder who held qualified small business stock for five years can exclude up to $10 million in capital gains — 100% tax-free. Congress designed that incentive specifically to encourage people to start small businesses and take the enormous personal risk that entails. These bills would claw that back at the state level, imposing 7–9.9% on gains the federal government explicitly chose to exempt.
• The income tax is moving through the legislature. HB 2724 and SB 6346 would impose a 9.9% tax on adjusted gross income over $1 million, with first payments due in 2029.
• Washington’s estate tax threshold is $3 million — compared to $13.6 million at the federal level — with no spousal portability. A founder who dies holding appreciated startup equity subjects their family to a state-level hit that almost no other state would impose at that threshold.

Take those together. There is no stage of a founder’s journey that Olympia isn’t reaching into. You earn income — taxed. Your startup succeeds and you sell — taxed on gains the feds exempted. You die — taxed at a threshold four times lower than the federal exemption. Three years ago Washington was one of the most founder-friendly states in the country. The legislature is dismantling that in real time.

QSBS is not a reason to relax

Ben’s piece notes that “many will already benefit tremendously from federal tax advantages like QSBS, which can eliminate up to $10 million in federal capital gains taxes on a successful exit.” That’s true — but it cuts against his argument, not for it.

QSBS is a federal exclusion. It does nothing to shield founders from a state income tax or a state capital gains tax. And the bills currently in committee would affirmatively strip the QSBS benefit at the state level. So a founder who did everything right — incorporated as a C corp, held stock for five years, stayed within the qualified trade or business requirements — would still owe Washington 9.9% on gains that are 100% excluded federally. On a $5 million exit, that’s up to $495,000 to the state on gains that Congress specifically said should be tax-free.

This isn’t a talking point. This is what I advise clients on every day. And I can tell you that the founders who understand the math are already asking about changing domicile before their exits.

The 18% problem

Ben’s piece doesn’t address rate stacking. The Tax Foundation calculated that the proposed income tax, layered on top of the existing WA Cares tax, Seattle’s JumpStart payroll tax, and the Seattle Social Housing tax, would yield a combined top marginal rate of over 18% on wage income and RSU vesting in Seattle — the highest in the country. Higher than New York City. Higher than San Francisco.

This matters enormously for the startup ecosystem. Tens of thousands of tech workers in Washington receive restricted stock units as a core part of their compensation. RSU vesting can be lumpy — especially at startups with double-trigger vesting, where years of accumulated stock can vest all at once at an IPO. A startup employee who earned $150,000 a year for five years could suddenly have $2 million in income in a single year when their company goes public, pushing them well over the million-dollar threshold even though their average income was never close to it.

These aren’t theoretical millionaires. They’re engineers and product managers who took below-market salaries in exchange for equity. They are exactly the people Washington should want to attract and retain. An 18% top rate tells them to vest somewhere else.

The B&O offset is not what it seems

Ben points to B&O tax relief as evidence this is a “pro-entrepreneurship” proposal. The current draft provides a credit for B&O taxes on gross receipts under $250,000. Gov. Ferguson has called for zeroing out B&O taxes up to $1 million in revenue.

Let’s be clear about the trade being offered: modest B&O relief for early-stage companies in exchange for a permanent income tax infrastructure that will hit those same founders the moment they succeed. A startup that benefits from B&O relief at $200,000 in revenue will, if it succeeds, eventually generate the kind of income — whether through the founder’s salary, equity compensation, or an exit — that triggers the income tax and capital gains tax at 9.9%.

The B&O credit is a discount on the appetizer. The entrée is a tax regime that punishes success at every turn.

Founders will change behavior

Ben writes that “most people do not move to escape tax increases” and that the “primary cause of capital flight risk is panic.” I wish that were true. But the data and the calls I’m getting say otherwise.

IRS migration data already shows Washington losing a net 222 high-earning millennial households in 2021-2022 — before any of these new taxes were in effect. A 9.9% income tax stacked on top of a 9.9% capital gains tax, with QSBS stripped, gives founders and investors a concrete, calculable reason to establish domicile elsewhere before a liquidity event.

And it’s not just founders. Angel investors evaluate expected returns after tax. If Washington strips the Section 1202 exclusion, the after-tax return on an angel investment in a Washington startup drops meaningfully compared to the same investment in a company in almost any other state. Angels don’t write fewer checks because they’re panicking. They write fewer checks because the math changed.

Early employees will discount equity offers more heavily. Startup recruiters competing for talent against Big Tech will have an even harder time making the equity story work. The downstream effects compound.

This isn’t hysteria — it’s arithmetic

I share Ben’s love for Washington’s startup community. I’ve spent my career helping founders build companies here. I don’t want them to leave. But telling founders to “cool it” while the legislature builds a tax stack that would be the most punitive in the country for startup exits isn’t reassurance — it’s denial.

The people in this ecosystem who understand Section 1202, who understand how RSU vesting works, who understand what an 18% combined rate means for a startup employee’s IPO windfall — they’re not panicking. They’re planning. And increasingly, they’re planning to be somewhere else when the liquidity event happens.

That’s not hysteria. That’s rational economic behavior in response to the incentives Olympia is creating. And it should concern everyone who cares about Washington’s startup future.