Accounting
Washington State tax hikes target tech giants
New taxes passed in the final days of Washington’s legislative session seek to bridge a record budget deficit by shifting more of the tax burden to technology companies like Amazon.com and Microsoft Corp.
The bills, currently awaiting Democratic Governor Bob Ferguson’s signature, will have a much broader impact, shifting business calculations across nearly every industry, including banks, grocery stores and hospitals.
The new levies — passed less than two weeks after they were introduced — inject additional uncertainty into an economy still recovering from the pandemic and bracing for supply chains disruptions from President Donald Trump’s tariffs. A pending Republican economic package also aims to pair federal tax cuts that could add trillions to the national debt with healthcare and other spending reductions.
Without a state income tax — on individuals or corporations — Washington legislators turned the dials up on several existing taxes. They expanded the kinds of services subject to sales tax, increased rates for the state’s nearly 100-year-old levy on gross receipts and added a new top tier for capital gains to be taxed at 10%.
“This budget forced us to make choices that no one would like to make,” said Senator June Robinson, who led the budget process for state Democrats. She said she’d been flooded with messages warning of “dire circumstances” for both spending cuts and tax increases. State law requires a balanced budget, unlike at the federal level where the government can run large deficits.
Big tech companies that fueled so much of the region’s growth — and inequality — over the past two decades were the primary target of the new tax hikes. The final package would raise more than $9 billion in additional revenue over the next four years.
The existing tax on corporate gross receipts, known as the Business and Occupation tax, was designed to have a low rate that is broadly applied. Now “advanced computing” companies would see that rate more than triple, including a 7.5% surcharge for companies earning more than $25 billion in the previous year. That tax obligation would be capped at $75 million.
The sales tax bill would repeal the exemption for digital automated services, including advertising.
That’s easier for Microsoft and Amazon, the world’s second- and fourth-largest companies, to absorb, but it’s harder for the rest of the local tech ecosystem that has grown out of the talent pool seeded by those behemoths.
These cumulative tax changes would add extra costs for a Seattle startup competing with a company in Austin, Texas, according to Kelly Fukai, head of the Washington Technology Industry Association, who said the tech industry accounts for 22% of Washington’s economy and pays $4.3 billion in taxes.
“While we’re trying to make it be more progressive, we’re just not getting there,” Fukai said of the tax package. “In fact, we’re probably hurting some of the people that we want to hurt the least.”
Even changes to the capital gains tax, aimed at wealthy investors, would also impact founders trying to sell their startups. A bill increases the top rate on long-term investments to 10% from 7% for sales of more than $1 million.
There’s still uncertainty over what Ferguson, who took office earlier this year, will do next. He has less than three weeks to decide if he’ll veto anything, and he could still call lawmakers back to Olympia for a special session. In a statement Sunday night, he said he intends to “carefully review all revenue increases.”
Ferguson dashed earlier Democratic proposals to raise even more taxes, including a first-in-the-nation wealth tax. The Senate on Sunday went ahead with a
Democrats said they consistently heard from constituents advocating for a “balanced approach” that didn’t rely just on cuts. Republicans argued that there was still more room to whittle down a nearly $78 billion biennial budget that spends 8% more than the last one, but Democrats said they cut as much as they could without gutting core services.
Business impact
Lawmakers on Sunday bemoaned the tough choices forced by a record budget deficit. Almost everyone who spoke in Olympia, Washington shortly before legislative business concluded for the year said it was the hardest session they’d ever seen.
Drastic cuts from the federal government are poised to further dent state finances and institutions. Emotions were heightened by the unexpected death of one senator and the wife of another just in the past week. More than one member cried.
In the case of hospitals, higher taxes mean cuts to services, according to Chelene Whiteaker, head of government affairs for the Washington State Hospital Association. She estimates that health care finances will face a $260 million hole by the time this year’s legislation is fully implemented in 2027.
“There are sometimes unintended consequences,” Whiteaker said. “Hospitals are seen as quote ‘the big guys.’ Yes, we employ a lot of people, but we’re operating at no-margin or low-margin.”
Tammie Hetrick, head of the Washington Food Industry Association, which represents independent supermarkets, convenience stores and their suppliers, warned that increasing the business and occupation tax on producers and wholesalers creates a pyramiding effect of higher costs at every step from farmer to shopper.
“We are looking at a significant amount of tax increases that will disproportionately impact independent grocers,” Hetrick said. She said she’s urging Ferguson to use his veto power “to protect the cost of food for consumers.”
The legislature passed other taxes as well, including higher rates on property and fuel. Lawmakers even passed a levy that appears to be
Fukai said businesses will look at the entirety of these new taxes, and even if they don’t pick up and leave, they’re likely to plan their growth for elsewhere.
“People love Washington, right? We all are here for a reason. We all love our communities,” Fukai said. “However, when we start adding these costs on like this, and especially of this magnitude, I think that’s where we’re hitting this sort of tipping point.”
If financial advisors ask clients the rate of return for their rental real estate investment property, they should expect to hear a number at least 5 percentage points higher than the actual one, according to the founder of The Real Estate Whisperer Financial Planning.
That’s because of calculations based on “optimistic assumptions, untracked costs and the absence of formal benchmarking” among many owners, said
“It’s where ownership bias meets the reality of returns,” Arzaga added. “Whatever they say, knock out at least 5%.”
Despite the substantial role of
READ MORE:
A void in the profession?
Instead, more planners should maximize their value to clients by taking them through a realistic cash-flow estimate incorporating every expense that they can then apply to a long-term forecast of their assets in retirement, Arzaga said. Even for high net worth clients in particular who generate tens of thousands of dollars in rental income each year, the risks and costs of a property that isn’t meeting their investment expectations can eat up their holdings over time.
“I want to propose that this is an idea that you can use that will expand your thinking about the way we approach this business,” Arzaga said. “I think the way we approach it now is great, but I still don’t see it in any of the curriculum — whether it be the licensing certifications, none of the designations — none of them focus directly on real estate investments.”
Arzaga shared the case study of two 58-year-old clients from San Francisco he called Kevin and Lynn who had a net worth of $3.6 million and rental income of $75,000 per year through a property that was separate from their residence. Through debt service payments and other expenses, however, their costs on the property amounted to $76,000. If the couple followed through on their plan to retire when they turned 65 while keeping the same quality of life that cost them $312,000 a year, they would run out of their assets by age 84, Arzaga estimated.
“Somebody with a $3.6 million net worth, this is kind of not what they expect, right?” he said. “So that’s why they come to us. And luckily, they came to us.”
READ MORE:
A better course of action
If the couple were to sell the property in a tax-advantaged 1031 exchange for a better-performing asset or simply spin off their rental holding, absorb the taxes and reinvest the holdings into their long-term portfolio strategy, their assets could amass value hundreds of thousands of dollars or even millions higher than their current scenario.
One of the main misunderstandings stems from the cost of maintaining rental properties, according to Arzaga. In his example, the clients mentioned their amount of income and told him that the number included their expenses. He saw that they had miscalculated when he examined their itemized deductions on Schedule A of their tax returns.
Operating expenses include taxes and the preparation of them, insurance premiums, legal fees related to entity filings and other matters and two major areas — maintenance reserves and property management. In terms of maintenance, the owners should build in costs of about $30,000 to $40,000 every decade for concrete, foundation work, a roof replacement or similar upkeep, Arzaga said. Property management poses difficulty as well.
“Most people like to do that on their own. Most people aren’t capable of that,” he said. “It’s important, and it’s a big asset. And some decisions they’re making are because they’re not professionals in this area.”
READ MORE:
Providing value outside investment portfolios
These realities may be tough for the clients to hear, but they usually come around after planners lay out the cold calculation of the costs and risks involved with a lot of small-scale rental properties. Assisting clients in making smarter choices about their real estate is “more significant than beating the S&P 500” and a “much more noble cause,” Arzaga said.
“Understanding how real estate can impact a family’s finances, I think, is essential to being a comprehensive advisor,” he said. “You’ve got to be comfortable talking about these things. You don’t have to be an expert, but addressing them, to do a service for your clients.
Joel Cooperman, cofounder and former CEO of Citrin Cooperman, left the firm on March 31 after over 40 years.
Cooperman founded the firm, alongside Niles Citrin, in 1979 when two English rock bands provided the seed money needed to open shop in a small New York apartment. Now, the Top 25 Firm reports over $870 million in revenue, with 27 offices, 455 partners and 3,190 employees.
“I can assure you that Niles Citrin and I never had any plans to build a firm larger than the two of us and maybe a couple of others,” Cooperman said in a statement. “In the early years, accounting was still viewed primarily as a profession and not as a full business – this never really made sense to me. We felt that for long-term success it was critical to create a culture and environment that our partners and employees would enjoy as we all worked to build a thriving sustainable business.”
Citrin Cooperman
Citrin Cooperman was one of the first instances of a major accounting firm
Cooperman offered advice to those early in their career: “I have always been surprised that so many people do not really understand how much they have to offer, how much potential they have. If I could offer any advice, it would be to figure out what you are good at and what you love to do, make a plan, write it down, and then go after it every day.”
In the blogs: Nothing’s perfect
Trump tariffs 100 days market promise and problems: Fast Money list
Stocks making the biggest moves after hours: SMCI, SNAP, BKNG
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Economics1 week agoDonald Trump wants a certain kind of immigrant: the uber-rich
-
Economics1 week agoTrump tariffs could cause summer economic slump: Chicago Fed president
-
Personal Finance1 week agoConsumers are making different financial choices in response to tariffs
-
Economics4 days agoECB members say inflation job nearly done but tariff risks loom
-
Accounting4 days agoAt Schellman, AI reshapes a firm’s staffing needs
-
Economics6 days agoBusiness already are trying to pass tariff cost onto customers, Fed report says
-
Economics3 days agoAmericans are getting flashbacks to 2008 as tariffs stoke recession fears
-
Economics5 days agoTrump insists bond market tumult didn’t influence tariff pause: ‘I wasn’t worried’