Clueless-in-Seattle judges are driving businesses out of state.
Clueless-in-Seattle judges are driving businesses out of state.
W e’ve just had a new reminder of why it’s important to have judges — at both the federal and state levels — who will honor the plain meaning of the law. Washington State’s supreme court has just green-lighted a damaging new 7 percent tax on capital gains, even though the state constitution includes a flashing red light barring such a move.
In Alice in Wonderland, Humpty Dumpty proclaims, “When I use a word, . . . it means just what I choose it to mean.”
The Washington State supreme court clearly followed Humpty Dumpty’s law when, by a vote of 7 to 2, it upheld the capital-gains tax passed by the legislature. The state’s constitution says the state can only tax income up to 1 percent and the rate has to be flat. The court decided that capital gains aren’t income and that taxing them amounted to “an excise tax.” With this twisted logic as precedent, the court could in the future say that a personal income tax is really just a sales tax on your labor services.
The dissenting opinion by Justice Sheryl Gordon McCloud was scathing: “In a contest between a Washington statute and the plain language of the Washington Constitution, the judicial branch has the duty to uphold the Constitution.” In closing arguments before the judges, former state attorney general Rob McKenna, said: “Every taxing authority in our nation, from the IRS on down, treats taxes on capital gains as income taxes, because capital gains are income.”
The justices hustled out their decision because the first payments on the $500 million tax are due on April 15, and bureaucrats needed to know whether they could allocate the loot to their pet projects. I call it “loot” because the state has run huge surpluses for years and just last month announced that revenue collections are up by $1.9 billion.
Even with that, the tax’s supporters aren’t satisfied and blasted the court for not completely opening the door to a statewide income tax. State residents have rejected that idea ten times, so the court was effectively their last resort.
Opponents of the tax promise to launch an initiative to overturn the decision. They point out that in 2010, the father of Microsoft founder Bill Gates led a ballot campaign for an income tax that applied only to couples earning $550,000 or more in today’s money. It was crushed by 64 percent to 36 percent.
“I believe a majority of voters in this state still don’t live in Wonderland and still oppose taxes that reduce investment and job creation,” John Carlson of KVI, Seattle’s leading talk-radio station, told me.
In the meantime, evidence is already showing up that Washington State will pay a price for its tax folly.
Within hours of the supreme court ruling, Fisher Investments, a wealth-management firm based in Camus, Wash., issued a one-sentence press release: “In honor of the Washington State Supreme Court’s wisdom and knowledge of the law, and in recognition of whatever it may do next, Fisher Investments is immediately moving its headquarters from Washington State to Texas.”
Fisher has 4,200 employees. It will keep an office in Washington State, but it is expected to shrink as transfers and hiring bring more employees to its new headquarters Texas.
Others are likely to follow Fisher’s lead. “Many more companies and people will move from WA State,” tweeted Matt McIlwain, of the Seattle-based venture-capital firm Madrona Venture Group.
Higher taxes and excessive regulation driving out business is a nationwide phenomenon. Matt Chancey, a tax specialist at Coastal Investment Advisors, has recently seen clients abandon California and New York in favor of Florida, Texas, Tennessee, and Puerto Rico. “Wealthy clients are portable and can relocate and many of them will. State politicians keep thinking you can tax the rich to no end and that just isn’t the case. Domestic migration for tax reasons is another example of free markets at work,” he told Investment News.
You can expect the state’s large tech sector to be affected. The Seattle area has long been a mecca for technology start-ups — Amazon and Microsoft are just two examples — in no small part because it is one of nine states without an income tax. No-income-tax states create jobs at roughly twice the pace of high-income-tax states.
“It’s bad for tech in Washington State and absolutely makes us less competitive in attracting and retaining both tech companies and employees,” York Baur, CEO of Seattle start-up Moxiworks, told Geek News, regarding the court decision.
Indeed, Washington State has chosen to take the competitive advantage it had over California and Oregon and throw it away. At 7 percent, Washington will now have one of the top taxes on the sale of stocks and other assets in the country.
Washington State’s progressives forget that when the millionaires leave, they take their jobs and their capital with them. And they also forget that after they flee, 7 percent of zero is zero.