The prepared testimony below was delivered by ITEP Senior Analyst Sarah Austin to the Washington House Finance Committee on January 27, 2026. For more on the tax break in question, check out our October 2025 brief.
Chair Berg, Vice Chair Street, and members of the House Finance Committee,
My name is Sarah Austin, I’m a senior analyst at the Institute on Taxation and Economic Policy, and I am testifying in support of House Bill 2292.
Few things cut against the grain of American sensibilities quite like regular people paying their tax bill while the wealthiest get away with paying very little. The QSBS program is built to exclude regular people and real small business owners, while allowing millions to flow to the wealthiest households completely untaxed. When states conform to this federal program, the upward transfer of wealth is amplified further. This committee can change that today by passing HB 2292, a bill that would bring QSBS profits under the purview of the state capital gains tax, creating better parity between venture capitalists’ gains and the capital gains of other Washingtonians.
The QSBS program only applies to shares held in C-corporations, which according to IRS data, make up less than 5 percent of all businesses.[1] Companies with assets as high as $75 million can qualify—an increase from the $50 million cap in place before Congress passed H.R. 1 last year. Many industries are barred eligibility for the program entirely, including providers of health and legal services, farmers, and hospitality businesses such as hotels and restaurants.[2] And finally, the benefit isn’t available on stocks that your typical investor might purchase through a stock exchange. Instead, only early-stage investors who have an inside track on original stock issued directly by the company can participate.
These policy choices have resulted in a program that delivers 94 percent of its tax cuts to households with $1 million or more in gross income. These households can cash in their stock and pay zero dollars in federal income tax or Washington capital gains tax on their gains, up to the greater of $15 million or 10 times their initial investment for each eligible business they invest in.[3]
Thanks to a 2025 U.S. Treasury Department report, the full cost of this program has only recently come into focus.[4] The report served as the foundation for my organization’s state-by-state analysis of the cost of this program, which we estimate to be $48.7 million in Washington this year.[5] The Treasury report was also aptly timed, as H.R. 1 substantially expanded the program in ways that will balloon both its federal price tag and the price tag for any state that remains linked to this policy. We estimate that, by 2031, the cost of conforming to the expanded program will be $83.4 million per year.
Only four states—California, Alabama, Mississippi, and Pennsylvania—are decoupled from this provision of federal law, but they were recently joined by the District of Columbia, which decoupled last fall.
California’s experience with this program is instructive. Initially, California tried to selectively couple to the program only for investments in California-based businesses , but this was struck down by the courts as a violation of the U.S. Constitution’s protections for interstate commerce.[6] When lawmakers revisited the policy in light of that ruling, they decided to decouple from the program entirely rather than offer a sweeping tax exclusion that subsidized investment in businesses not just in California, but clear on the other side of the country as well.
That’s part of the trouble with adopting this federal program at the state level; by conforming to QSBS you’re subsidizing investment that is happening not just in Washington, but in California and Texas too. With the budget challenges Washington is staring down right now, and those challenges expected to mount as massive federal funding cuts snap into place, this scattershot subsidy for wealthy investors needs to be revisited.
Skepticism toward QSBS is widespread among tax policy experts. Even conservative groups that favor many kinds of tax cuts, such as the Tax Foundation and the American Enterprise Institute, have cautioned lawmakers that QSBS is not a good idea. Here are some quotes from a handful of tax policy think tanks:
- Scholars at the American Enterprise Institute and Washington Center for Equitable Growth have described QSBS as “particularly troubling… inefficient, complex, and unfair.”[7]
- The Tax Foundation has recommended that “policymakers should consider scaling back or even repealing this QSBS exclusion.”[8]
- My organization, the Institute on Taxation and Economic Policy, notes that “State lawmakers now have the chance to separate themselves from this deeply problematic provision.”[9]
I urge this committee to pass this legislation and protect needed revenues to invest in Washingtonians, not wealthy venture capitalists.
Thank you for your time and consideration.
[1] Internal Revenue Services. SOI tax stats – Integrated business data. Available at: https://www.irs.gov/statistics/soi-tax-stats-integrated-business-data
[2] Internal Revenue Code, Section 1202(e)(3) excludes: (A) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees; (B) any banking, insurance, financing, leasing, investing, or similar business; (C) any farming business (including the business of raising or harvesting trees); (D) any business involving the production or extraction of products of a character with respect to which a deduction is allowable under [IRC] section 613 or 613A [involving oil and gas extraction]; and (E) any business of operating a hotel, motel, restaurant, or similar business.
[3] Before the program was expanded in H.R. 1 of 2025, gains up to the greater of $10 million or 10 times the initial investment could be tax free.
[4] Zahrah Abdulrauf, et al. “Quantifying the 100% Exclusion of Capital Gains on Small Business Stock.” January 2025. US Treasury Office of Tax Analysis Working Paper 127 Available at: https://home.treasury.gov/system/files/131/WP-127.pdf
[5] Sarah Austin and Nick Johnson. “Quite Some BS: Expanded ‘QSBS’ Giveaway in Trump Tax Law Threatens State Revenues and Enriches the Wealthy.” Institute on Taxation and Economic Policy. October 2, 2025. Available at: https://itep.org/qsbs-trump-tax-law-threatens-state-revenues-enriches-wealthy/.
[6] Cutler v. Franchise Tax Board (2012) 208 Cal. App. 4th 1247
[7] David S. Mitchell and Kyle Pomerleau. “Congress Should Have Eliminated, Not Expanded, the QSBS Exclusion.” Tax Notes. October 10, 2025. Available at: https://www.taxnotes.com/tax-notes-today-federal/one-big-beautiful-bill-act-obbba/congress-should-have-eliminated-not-expanded-qsbs-exclusion/2025/10/10/7t2fl
[8] Aleksei Shilov. “Quite the Skewed Business Subsidy: QSBS Exclusion Is a Poor Way to Encourage Investment.” The Tax Foundation. December 11, 2025. Available at: https://taxfoundation.org/blog/qualified-small-business-stock-qsbs-exclusion/
[9] Nick Johnson and Sarah Austin. “States Begin Decoupling from Flawed ‘QSBS’ Tax Break.” Institute on Taxation and Economic Policy. November 6, 2025. Available at: https://itep.org/states-begin-decoupling-from-flawed-qsbs-tax-break/
