Washington’s income tax on capital gains, which directly affects small business owners who rely on the sale of a business to fund retirement and don’t have 401k plans, encourages relocation to other states
Mark Harmsworth
Washington Policy Center
Chief Executive conducted a survey for Best and Worst states for Business and Washington ranked 46 out of 50 with only New Jersey, Illinois, New York and California being more difficult to run a business.
Tax policy is quoted as one of the main reasons for companies choosing to relocate, with the most friendly tax states, scoring much higher than states like Washington. Washington has implemented an anti-business approach to taxation and is no longer a friendly place to do business, which is reflected in the results of the survey.
Washington is particularly difficult to build and run a business due to its punitive tax structure which includes the Business and Occupation tax (B&O) on gross receipts and the recently implemented capital gains income tax on the sale of a business. Both taxes are baked into in the cost of a producing product or providing a service. This B&O tax represents 19.1% of the taxes a business pays to Washington and is calculated on gross revenue, allowing no deductions for costs. Even a business that loses money has to pay B&O tax on any revenue generated.
Washington’s income tax on capital gains, which directly affects small business owners who rely on the sale of a business to fund retirement and don’t have 401k plans, encourages relocation to other states. With a business owner facing a 7% tax on the value of the business at retirement, the incentive to relocate is obvious. Voters will decide to keep or repeal the tax this fall with Initiative 2109.
High sales taxes in Washington add to the disincentive to locate a business and jobs in other states. Seattle and Tacoma have the highest combined large city sales tax rates in the nation. Lowering this rate will encourage more commerce and increase employment opportunities.
Additionally, the tax environment in Washington will only exacerbate the high unemployment rate in the state, currently at 4.9% and ranked one of the highest in the nation.
A sales tax cut and repeal of the income tax on capital gains should encourage business to locate in Washington. Businesses look for a stable tax environment to start and run a business.
The Washington legislature passed initiative 2111 into law earlier this year to ban passage of new income taxes which will help stabilize the tax environment.
For more Washington Policy Centers recommendations, read the whitepaper that describes the simple changes that would have an immediate impact on the business climate and job growth in Washington.
Mark Harmsworth is the director of the Small Business Center at the Washington Policy Center.
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