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He Fled California Taxes. He’s Fighting Them in Washington

(Bloomberg) -- Money manager Brian Heywood said he left California for the Seattle area more than a decade ago partly to escape taxes. Now, he fears his current income-tax-free home is headed in California’s direction after introducing levies on capital gains.

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“The capital gains tax to me is the camel’s nose under the tent,” said Heywood, the founder of Taiyo Pacific Partners, which oversees $2.4 billion of assets mostly in Japan and India. He worries the levy is “the gateway to get an income tax.”

Heywood has already spent almost $7 million of his own money to get six ballot initiatives in front of Washington State voters this November, half of them tied directly to taxes. One seeks to repeal the two-year-old capital gains levy, another would ban public officials from ever pursuing an income tax and a third would eliminate the state’s carbon tax.

The crucial question for Heywood and his allies is whether Washington will preserve its business-friendly climate, or pursue progressive policies that opponents say could drive wealthy residents to join their peers from New York, Illinois and California heading south for sunnier and more tax-friendly climes. Relocating has become a lot easier since the pandemic era, and Heywood points to Ken Fisher’s decision to move Fisher Investments to Texas last year as a harbinger of what’s to come.

Read more: New York and California Each Lost $1 Trillion When Financial Firms Moved South

Like those other blue states, Washington is dominated by the Democratic Party. It hasn’t elected a Republican governor in more than four decades. Heywood has tried to revive local conservative efforts, donating nearly $500,000 to the state GOP since 2022, according to Federal Election Commission data compiled by Open Secrets.

To be clear, Washington isn’t California when it comes to taxation. Top earners in the Golden State pay roughly 13% in income and capital gains taxes, on top of their federal obligations. Washington has zero state income tax but since 2022 has charged a 7% levy on capital gains over $250,000, raising $900 million its first year.

Before then, Washington had been in rare company as one of a handful of states — including Florida and Texas — that didn’t tax capital gains at all.

Washington lost its richest resident to Florida last year when Amazon.com Inc. founder Jeff Bezos said he was departing. He didn’t mention taxes at the time, saying he wanted to be closer to family.

Supporters of the capital gains tax — including many rich residents of the Seattle area — brush off the idea that increasing levies will bring about a mass exodus of wealth from millionaires and billionaires like Bill Gates, Steve Ballmer and Howard Schultz.

Sonya Campion, a philanthropist whose husband founded the Zumiez apparel brand, pointed to broad support for the capital gains tax from the top 0.2% of Washingtonians who would actually pay it. She said even with this new levy, there just aren’t that many places in the US offering a better tax deal for wealthy families.

“Those are states with different values, and the people that move here want good schools, want public lands and a healthy economy,” Campion said. “I feel really confident about people seeing this is the kind of state that we want to live in.”

Tax advocates are clear that they plan to pursue new initiatives with the goal of shifting the burden of Washington’s tax code toward its richest residents. A recent study from the Institute on Taxation and Economic Policy found that the lowest quintile of Washington earners pay 13.8% of their income in taxes, compared to 4.1% for the top 1% of earners, putting the state second only to Florida for the most regressive tax code in the US.

Misha Werschkul, executive director of the nonprofit Washington State Budget & Policy Center, said measures like the capital gains tax and the Working Families Tax Credit aren’t intended to punish the wealthy, but rather to relieve the burden on low-income Washingtonians. For example, a new bill under consideration would lower the state’s real estate excise tax rate for less expensive property sales and add a surcharge for transactions over about $3 million to fund more affordable housing.

“There are continued efforts to make Washington’s tax code more equitable,” Werschkul said, dismissing allegations that an income tax will be next.

‘Bogeyman’

Asked last year if an income tax was under consideration, outgoing Democratic Governor Jay Inslee said “no.”

“It’s a pretty simple one-word answer,” Inslee said. “The Republicans just delight in this bogeyman.”

One of Heywood’s ballot measures would expressly prohibit any jurisdiction in the state from levying an income tax, though opponents say that it’s so vaguely worded it could threaten other long-standing taxes in the state.

The other three initiatives supported by Heywood’s PAC, called Let’s Go Washington, include removing restrictions on police pursuits, allowing employers to opt out of long-term care insurance and giving parents more rights regarding their children’s health and education. The Secretary of State’s office on Tuesday certified the signatures for the ballot initiative to repeal the capital gains tax. All six measures are likely to go before voters in November.

Heywood, whose Taiyo fund in 2022 partnered with the family office of Nintendo Co.’s founders, said 40 employees moved with him from Monterey, California, to the Seattle area in 2010. Because many of them are Japanese, and the fund invests heavily in Japanese companies, they needed to be close to a major airport, preferably on the West Coast. The first time he flew into Seattle, he said it was “just mind-blowingly beautiful.”

Would he move again and leave all that because of changes to the tax code?

“We’ll see,” Heywood said, referring to his efforts to repeal the tax. “I’m doing it so that I don’t have to.”

--With assistance from Laura Mahoney.

(Adds that Secretary of State certified signatures for the capital gains measure in 18th paragraph.)

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