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Seattle officials worry that implementing a local capital gains tax would coax wealthy residents to change their home addresses.
Seattle City Councilmember Cathy Moore is proposing a local 2% capital gains excise tax that would be applicable to non-retirement financial gains over $250,000.
However, the tax is based on where a taxpayer's permanent residence is located, which means residents with multiple Washington addresses can potentially avoid the tax altogether.
A memorandum from the Seattle Office of Economic and Revenue Forecasts explicitly states that some taxpayers may be motivated to move to other local jurisdictions. In turn, the long-term effect of the tax on economic activity in the city would likely be negative, according to the office.
Washington’s own 7% capital gains tax on the sale or exchange of long-term capital assets targets some of the state’s wealthiest residents. The Center Square has previously reported on the loss of tax revenue from Amazon Founder Jeff Bezos when he moved to Florida.
According to Ben Noble, head of the city council's central staff, a relatively large share of statewide capital gains revenues were paid by a relatively few number of individuals. In 2023, 816 taxpayers in Seattle paid the state capital gains tax. Out of the 816, the top 20% paid 85.7% of the state capital gains tax.
“Those individuals’ decisions could drive literally tens of millions of dollars of revenue in terms of its impact,” Noble said during the Select Budget Committee meeting on Wednesday.
If the tax is approved, Seattle residents subject to the tax would see a 6.5% to 9% increase in tax burden depending on the capital gains amount and the federal tax rate.
If a resident sells $1 million in stocks and the original basis for that stock was $700,000, now they realize a long-term gain of $300,000. A $262,000 standard reduction from that results in a net gain of $48,000. Apply the 2% tax rate and that results in a $960 tax for the resident.
Retirement accounts, condemnations, livestock in the conduct of a farming and ranching business, timber, commercial fishing privileges, and goodwill from the sale of auto dealerships are exempt.
Real estate sales are also exempt. This means any person who may have bought a house and is selling it in 2026 would not be subject to the capital gains tax.
The Seattle Office of Economic and Revenue Forecasts anticipates the tax to generate a wide range of revenue: from $16 million to $51 million per year with potential moderate growth thereafter.
However, the city would not be able to fully utilize all of the generated revenue. The Seattle Department of Finance and Administrative Services projects onetime system implementation costs of $1 million and ongoing costs of $1.2 million.
Out of the $1.2 million, $500,000 would go toward maintaining a taxpayer registration and payment system, and the other $700,000 would support staffing, including three new customer service representatives and two new tax auditors.
Moore said the tax proposal is a result of voters failing to approve Initiative 2109 to repeal the state's capital gains tax, and the tax being tested by the legal process.
“I think the fact that this revenue source has been tested both in terms of going through the legal process in the courts and upheld at the state level and then it was challenged in [Initiative 2109] – indicates to me that this is a solid form of additional revenue and that it has broad public support,” Moore said.
Seattle's capital gains excise tax would be imposed beginning Jan. 1, 2026, if approved by the full city council.