Opinion: The ‘millionaires tax’ is not an existential threat to Washington’s startup economy

Editor’s note: GeekWire publishes guest opinions to foster informed discussion and highlight a diversity of perspectives on issues shaping the tech and startup community. If you’re interested in submitting a guest column, email us at [email protected]. Submissions are reviewed by our editorial team for relevance and editorial standards.

I’m an attorney and advisor to many Pacific Northwest startups, investors, and social entrepreneurs, having spent the past two decades in the Washington innovation ecosystem — including as a higher education policy advocate and former co-chair of the WTIA Policy Committee. I love helping transform great ideas into job-creating companies in my community. 

Which is why I’m unmoved by the panic surrounding the proposed “millionaires tax.” Every time Olympia proposes that our wealthiest contribute more, we’re told that this is the final straw for our brightest risk-takers, an existential threat to our state’s economy. But the real threat to the startup community is losing focus on building up our strengths as this catastrophizing becomes a self-fulfilling prophecy. 

America is at a crossroads. In this defining moment, when our duties as citizens are gravely needed, a growing chorus of local startup luminaries are speaking up. Which issue galvanizes them? Civil liberties, or climate, or gilded age cronyism, or divestment from public interest research, or immigration, or the dignity of work amidst AI disruption, or freedom of speech…? 

Disappointingly, much of the startup community’s advocacy efforts have instead been singularly focused on preventing a few very wealthy folks from changing their primary residence to Las Vegas or Jackson Hole or Palm Beach. 

My oh my, what an uninspired civic imagination in this moment of peril. We can do better. 

So chill with the libertarian fever dream. Read the moment. And read the proposal’s fine print, including important small business tax cuts. And remember what’s made Seattle such a dynamic startup community in the first place. 

The tax proposal is (probably) not going to take your money 

This is a proposed tax on net income over $1 million in a single year. The first $1 million of income would be exempt. This point merits emphasis, as it’s often misunderstood: no one will pay a penny of tax on the first $0 to $999,999 of annual net income. There are additional carve outs and deductions to encourage charitable giving and avoid double taxation. The minimum threshold will be indexed upward with inflation. And the proposed tax would not begin collecting revenue until 2029, allowing plenty of time to work through rulemaking, legal challenges, and fine tuning.

If enacted as proposed, less than 0.5% of households would ever be impacted. Imagine 1,000 random Washingtonians in a room: you could count on one hand the number of people with enough luck, talent, and timing to ever pay this tax. 

What about founders and investors? 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. (An unrelated proposal would apply the state’s capital gains tax on profits that are otherwise exempted from federal taxation; with only a handful of sponsors across both chambers, that proposal appears to have far less traction.) 

Further, the same tax avoidance strategies they already deploy, such as staggered sales, deferred compensation, trust and estate planning, and real estate tax shelter investments, will continue to reduce taxes for founders and investors. The idea that a modest state tax on seven-figure net income is going to make entrepreneurship suddenly “not pencil out” is fuzzy math. 

Fixing Washington’s regressive tax structure is good for business 

Washington consistently ranks among the most regressive tax systems in the country. Relative to other states, lower- and middle-income families pay a disproportionate share of their income in state and local taxes due to our heavy reliance on sales, excise, and business taxes. Addressing this problem is essential to building a resilient state, which matters more than ever in this moment of increasingly reckless and unstable federal governance. 

In announcing his initial support for this proposal, Gov. Bob Ferguson tied the tax explicitly to strengthening the Working Families Tax Credit, removing sales taxes on essential personal hygiene products, investing in K-12 education, and greatly reducing B&O taxes for early-stage businesses. In other words, this is a pro-entrepreneurship policy that argues that we’re all better off when we’re all better off. 

Of particular importance for startups, the proposal to provide B&O tax relief for small businesses would be a boon for early-stage companies in their earliest cash constrained years, i.e., when they need it most. The current draft legislation would provide a credit for B&O taxes on annual gross receipts less than $250,000, which would benefit thousands of local startups and small businesses every year. Meanwhile, Ferguson has called to go further by zeroing out B&O taxes up to $1 million on revenue. 

In responding to the initial proposal, the governor said his ultimate support for the proposal is contingent on a much more aggressive small business tax break — “we need to have the largest tax break for small business owners in state history,” he said this week.

Rather than fear-monger, startup advocates should redirect their efforts toward supporting that effort for targeted savings for early-stage companies. 

On the pro-millionaire advocates’ counterpoints

There are valid concerns about the proposal’s impact on the business climate and economic growth. 

• Some argue it “punishes success” by not maximizing exit proceeds. Yet this ignores how the proposal invests in conditions that allow startups to thrive in the first place as well as the urgency of addressing a broken tax system. 
• A frequent rebuttal to any tax proposal is that the state should cut spending instead. Absolutely, there must be accountability and responsible stewardship of our public resources. But this is not mutually exclusive; as in business, governments can manage their expenses and restructure revenue at the same time. 
• Critics warn that the income tax minimum threshold will expand in future years. Rep. Jeremie Dufault, R-Selah, calls it “kicking a budget snowball down a hillside. It’s small now, but it will grow as it rolls.” Maybe, but that’s not the proposal under consideration right now. In fact, the current proposal would raise the minimum threshold annually with inflation. 
• There are also legitimate legal hurdles to implementing the proposed policy. Fortunately, we have multiple branches of government. Jurisprudential ambiguity should not deter legislators from passing policies they deem in the best interest of the electorate. 
• Large tech companies are downsizing, particularly amongst software engineering teams. Our fizzling “prosperity bomb” is bad news for a local economy supported by so many coders, and those AI-disrupted jobs are not being replaced elsewhere. In this moment of disruption, creating policies that make it easier to be an entrepreneur and live comfortably in a community are more important than ever, regardless of whether a household brings in millions of dollars a year. 
• Many point to capital flight as the primary concern, though correlation and causation can be muddled on this point. A handful of large tech companies and wealthy individuals have moved operations out of Washington state, and there will likely be a few more (vocal) high net-worth households who will register their primary residence elsewhere to reduce their tax bill — and they may even shift the focus of their investments from local startups to their new neighbors. But the primary cause of capital flight risk is panic; most people do not move to escape tax increases. This tax on outsized annual incomes will not trigger economic ruin, but the outsized investor-class alarm could cause real harm. 

Rather than catastrophize, the startup community ought to celebrate the opportunities that would be unlocked by relieving early-stage businesses of B&O taxes, modestly rebalancing our regressive tax structure, and making targeted investments to keep Washington affordable and thriving. 

The bill is currently open for debate, and critical details remain to be finalized. The startup community should be in these negotiations, rather than adopting an out-of-touch absolutist approach that reduces their influence and credibility. 

Entrepreneurs will build here because we bet on ourselves 

Entrepreneurs want to build something from nothing, test ideas, prove their doubters wrong, and ultimately solve problems. And sure, they want to make loads of money. Their ambition to build, ideate, prove, and solve will not be quashed by a tax that only kicks in after annual net income over $1 million. 

Most creative, ambitious, and educated people are not primarily motivated by marginal tax rate optimization. They want to live in places with access to world-class universities, vibrant cultural and artistic ecosystems, reproductive health care, diverse neighbors, multimodal transportation, LGBTQ+ rights, respect for the natural environment, libraries that don’t ban books, and a basic sense that society has their back. 

The best places in the country to launch a startup include the Bay Area, Boston, New York, and the greater Seattle area. With apologies to the fine folks in Sioux Falls, Houston, and Anchorage (the least taxed large U.S. cities), it turns out startups thrive in communities that invest in themselves and their people. We’ve done that in the Pacific Northwest and are set up for success. Millionaires tax or no tax, the next generation of great companies and scrappy entrepreneurs are primed to emerge from AI House, CoMotion, Foundations, 9Zero, and across our great state. 

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. So let’s cool it on the millionaires tax hysteria, recognize the criticality of the moment, and bet on ourselves. 

Disclaimer: Written in my personal capacity. I’m no startup Lorax — I do not speak for my clients.