What the Seahawks can teach us about Washington's capital gains tax

Washington has a lot of wealthy residents. But much of their wealth isn't taxed by the state.

At least, it wasn’t, until the capital gains tax came along a couple years ago.

Now, there's an initiative on the ballot to repeal it.

In Washington state, it's hard to tax wealthy people. Many other states, including Washington's neighbors — Oregon, Idaho, and Montana — have state income taxes that tax wealthy households at higher rates.

But legal rulings in Washington say the state can't have a progressive income tax like that.

Still, according to University of Washington economics professor Jacob Vigdor, there are other ways to tax the rich.

"One example would be a tax on caviar," he said. "Another example would be a tax on yachts, a tax on any kind of consumer good where the people who consume that good are wealthy people."

Vigdor's specialty is public finance, which covers taxation and government spending. He says you can think of Washington state's capital gains tax as something like a caviar tax.

But this tax applies to things that are even more rare than caviar. Like, football teams.

Seahawks tax

In the short time since Jody Allen inherited the Seattle Seahawks from her brother (she is executor of his estate), the team's value has increased by $3 billion, according to some estimates. If the team were sold today, the state could potentially rake in $200 million in taxes.

Those taxes help pay for public education. The state is required by law to prioritize education funding. If voters repeal Washington state's capital gains tax, the state will have to raise taxes somewhere else, or take the money out of another program.

Listen to the full discussion of this topic on KUOW's economics podcast, Booming, by tapping below.

Loopholes big enough to drive a herd of cattle through

There are a lot of loopholes in this tax. Some things are exempt. The first $262,000 in profits, for example.

Many people who would owe capital gains use this exemption to get around the the tax. The sale of stock can be spaced out over multiple years, keeping the profits every year below the threshold.

For example, a stock sale of $4 million that earned $500,000 in profits could be spaced out over two years, keeping the profits below the $262,000 threshold.

Vigdor says this strategy could partially explain why the state's income from the tax declined in its second year.

RELATED: Are Washington’s wealthiest waiting out the state’s capital gains tax?

But when profits get really big, it's harder to spread them out like that. If Jody Allen wanted to sell the Seahawks off in small chunks over many years to remain below the threshold, it would take her 18,000 years.

Long-term profits from the sale of a small business are protected from the tax, since they can be deducted. But the Seahawks would not qualify as a small business.

Real estate is exempt from the state tax, even though the federal government considers real estate profits as capital gains. Elected leaders didn't want to anger the many homeowners who see the value of their homes as their retirement fund.

Other exemptions include retirement plans, car dealerships, timber, fishing rights, and herds of cattle.

Groups representing people who sell those things sent lobbyists to Olympia when the bill was being written.

"The Washington Cattle Feeders Association is opposed to Senate Bill 5096 as it would impact cattle feeders due to the nature of our business," said one lobbyist during a public hearing.

Generally, their arguments boiled down to: You didn't really mean for this tax to apply to us, did you?

RELATED: Ditch Washington's Capital Gains Tax? The case for No on I-2109

Vigdor says some of these exemptions make sense. After all, a cow takes a lot of money to maintain, which makes it different from many other assets.

"If I buy a Van Gogh and I hang it on the wall and I sell it a few years later for millions more than I paid for it, I didn't have to feed the painting," he said. "I didn't have to hire someone to muck out the stall where I keep my Van Gogh, right? So it's a very different idea than a cow because in order to make the cow more valuable, it requires work."

After you account for all those exemptions and deductions, that only leaves about 4,000 of the state's wealthiest residents to pay the tax.

Capital gains tax opponents

Brian Heywood is among those likeliest to pay.

Heywood built his wealth by investing in Japanese companies, then streamlining their operations to make the companies more efficient.

His profits have allowed him to own a gentleman farm in Redmond, Washington, and to restore a collection of 300-year old Japanese farmhouses and a historic Buddhist temple near Kamakura, Japan. The complex serves as his part-time residence when he's in that country.

But his permanent residence is in Washington. A large sale of his stock portfolio could trigger the state's capital gains tax, which would tax some of his profits at 7%.

Heywood spent just under $7 million to get several initiatives on the ballot this fall, including one that would overturn the capital gains tax.

Heywood says it's not money that motivates him to fight the tax; it's his libertarian principles. He says the government is not a responsible spender of peoples' money, in the way that private companies are, or can become when a private investor like him shows them how.

He says the tax scapegoats wealthy people and hurts the economy.

"It's an easy thing, right? 'Oh, those rich bastards, they deserve it. Let's stick it to them,'" Heywood said. "The problem is, they take their money with them and they take their job creation with them."

Heywood points to Jeff Bezos, as a cautionary example. After Washington state's capital gains tax went into effect, Bezos moved to Florida, where he sold a lot of stock and avoided some serious taxes.

RELATED: The other reason Bezos may be moving to Miami

Heywood asks, will Bezos continue to invest in companies in Washington state, now that he's gone?

The answer appears to be, yes. Washington state ranks high on the list of Bezos' recent investments, which include Seattle-based companies like Arrived Homes and Cloud Paper.

Learn about the initiatives on this year’s ballot on our economics podcast, Booming, below. You can also find it on the KUOW app, or in your favorite podcast app.