As a new capital gains tax advanced in the Legislature this year, a parade of business owners and lobbyists begged lawmakers to drop the plan — or at least give a break to their particular industries.
Washington's new car dealers were absent from that public discussion, not even testifying at key public hearings on the proposal.
They didn't have to worry.
Behind the scenes, the lobbyist for the Washington State Auto Dealers Association (WSADA) was busy securing a special carve-out from the capital gains tax that many other Washington business owners may soon owe if they sell their companies.
By the time the measure passed a key Senate committee, it included a provision exempting the "goodwill" portion of auto dealerships' value — the amount attributed to brand and name recognition and community reputation.
The exemption's wording was virtually identical to language suggested by the auto dealers' lobbyist, Scott Hazlegrove, in emails to the bill's chief sponsor, state Sen. June Robinson, D-Everett.
The tax break — which left some other business lobbyists admiring and a bit envious — highlights how interest groups can quietly bend legislation to their advantage in Olympia.
Over the past decade, auto dealers have generated their own goodwill, donating $1.2 million to candidates for the Legislature, splitting donations fairly evenly between Democrats and Republicans, according to data collected by the nonprofit National Institute on Money in Politics.
The 300-plus dealerships represented by WSADA, which sell new cars through franchise arrangements with manufacturers like Ford, Chrysler, Honda and Subaru, also directly employ more than 21,000 people in Washington, according to a dealer association fact sheet.
Robinson, in an interview, said she backed the exemption out of simple political calculus, to ensure she could get the votes to move the tax bill through the Legislature.
"They did a lot of lobbying," she said. "There are auto dealers in every legislative district ... I just knew it would be one of those things that would be an issue."
One state lawmaker, Rep. Amy Walen, D-Kirkland, co-owns a Seattle auto dealership with her husband, but says she did not ask for the tax break's inclusion in the capital gains bill. "That would be unethical," Walen said.
Walen added that she ran for office in 2018 supporting a capital gains tax aimed at the wealthy. "I really feel like my district wants tax reform," she said.
The break for auto dealers was not the only change in the capital gains bill as it ran the legislative gantlet on its way to Gov. Jay Inslee, who signed the measure into law this month.
Amid public debate and private lobbying, what began as a proposed 9% tax on capital gains above $25,000 a year was whittled down to a 7% tax on gains of more than $250,000 a year. The tax is expected to raise $445 million a year beginning in 2023.
From the start, the capital gains bill included exemptions for home sales, retirement accounts, livestock and timber sales. Lawmakers added breaks for small family businesses and commercial fishing, and widened the home-sale exemption to include all real estate sales.
The push for the auto dealers goodwill exemption began well before the 2021 legislative session, legislative emails show.
On Oct. 20, Hazlegrove emailed Robinson, who was putting together the capital gains tax proposal requested by Inslee. "Thanks for taking the time to talk today," he wrote, attaching suggested specific language for the exemption.
He wasn't immediately successful. When the capital gains legislation, Senate Bill 5096, was introduced in early January, the auto dealer exemption was not included.
But by the time a virtual public hearing rolled around on Jan. 14, Hazlegrove seemed confident he'd be able to secure a win for his clients.
He initially signed up to testify, but said in an email to Robinson and others on the state Senate Ways and Means Committee that he would not raise objections publicly. Instead, he said he'd work behind the scenes with lawmakers and staff and "follow up with the bill sponsor if necessary."
On Feb. 2, Hazlegrove again sent Robinson and key legislative committee staffers suggested language for the "goodwill" exemption. He wrote that it could either be offered for all businesses, or just for the franchise auto dealers.
Two weeks later, the capital gains tax bill was approved by the Ways and Means Committee. The amended version included the goodwill exemption for auto dealers — with the language that mirrored what Hazlegrove had suggested.
The next day, Hazlegrove emailed to thank Robinson. "New car dealers greatly appreciate this inclusion," he wrote, in an email copied to WSADA leaders.
Hazlegrove's emails were voluntarily disclosed by Robinson after an informal request by The Seattle Times, which has also filed a related formal public records request. (Those formal requests often take weeks or even months to process.)
Robinson said lobbyists make suggestions for wording of bills all the time, but stressed such requests are vetted by nonpartisan legislative staff. "I don't just take what a lobbyist sends me and put it in a bill," she said. "It has other eyes on it."
A registered lobbyist since 2000, Hazlegrove is paid $10,230 a month by the auto dealer association, according to state Public Disclosure Commission filings. He also lobbied this past legislative session for about a dozen other businesses and organizations, including Weyerhaeuser, eBay, and beer and wine distributors.
Through his firm, Civic Group, he reported $272,000 in compensation so far in 2021, ranking him among the state's highest paid lobbyists. Like many top lobbyists, he co-owns a house adjacent to the Capitol campus, where he once rented a room to a state legislator.
Hazlegrove declined interview requests about the auto dealers' tax break and referred questions to the leaders of WSADA, who also declined to be interviewed.
In an email, Vicki Giles Fabre, the association's executive vice president, defended the exemption. While "goodwill" is also a part of the value for other businesses, "the large percentage of the sales price attributed to goodwill in dealership sales is unique," Fabre wrote.
Fabre added Washington auto dealers already pay a higher share of business taxes than those in neighboring states, citing the state's business and occupation tax on gross receipts. "Washington's current tax system places a unique burden on dealers. The exemption will avoid penalizing dealer families further," she wrote.
The break on goodwill will prove substantial for the auto dealers, according to figures shared by Hazlegrove in his emails to lawmakers.
In 15 Washington auto dealership sales in 2017 and 2018, the "goodwill" value ranged from $1 million to $20 million, with an average of $6 million. (Hazlegrove wrote that those figures excluded one sale that was among the highest in the country.)
Based on those sales, total annual payments for "goodwill" would average about $54 million, he wrote. At a capital gains rate of 7%, the exemption would save car dealers about $3.8 million a year.
Representatives of some other business groups said they were not surprised at the auto dealers' success.
"Lucky them, to not be included. That's wonderful. They were fortunate they have good lobbyist," said Mark Johnson, senior vice president of government affairs for the Washington Retail Association.
In 2020 alone, the auto dealers PAC donated more than $234,000 to the campaigns of dozens of state legislators and statewide elected officials — including $2,000 to Robinson and $4,000 to Inslee, PDC records show. The PAC also wrote two $10,000 checks to campaign committees working to elect Democrats to the Legislature — and two $10,000 checks to committees backing Republicans.
"They really have done a very good job of building close relationships between auto dealers and their legislators. It really paid off at a crucial time," said Patrick Connor, director for the state chapter of the National Federation of Independent Business.
Connor said he is grateful lawmakers also provided relief for small, family-owned businesses, who will get a break from the new tax if they have under $10 million a year in revenue and meet other requirements. But that was "not as explicit and clean as what auto dealers were able to get," he said.
The final legislation shows the "disparate treatment" afforded to various interests, depending on their clout, Connor said. "Individuals get one set of rules. Small businesses get another set of rules. But then there is a small subset of the business community that gets treated another way."
Robinson said the exemptions added by the Legislature did not take away from the main thrust of the capital gains tax — to go after the wealthiest state residents in an effort to turn around the state's regressive tax code.
"We're really targeting the people who are heavily invested in the stock market who make big gains on selling stocks and bonds. It didn't feel like it was getting away from the spirit of the bill or tax to exempt these individual businesses that are not multinational corporations," she said.
After the capital gains bill narrowly passed the state Senate — on a 25-24 vote — House Democrats didn't want to tinker with it too much, said state Rep. Noel Frame, D-Seattle, who chairs the House Finance Committee.
"We never had it in a previous bill," Frame said of the auto dealer exemption. "I don't know what the Senate's justification was." But Frame said auto dealers are "an example of really low margin businesses that really struggle" under the state's B&O tax.
Walen, the Kirkland representative, has worked at auto dealerships for decades, starting out as a cashier and eventually purchasing dealerships with her husband, Jim Walen.
On a recent day at Chrysler Dodge Jeep Ram of Seattle, on north Aurora Avenue, the Walens said their business has unique challenges, including demands from manufacturers, the changing car market, and taxes and regulations imposed by state and local governments.
While again repeating she did not seek out the "goodwill" exemption in capital gains tax, Rep. Walen said goodwill is a particularly important element for car dealers.
"We're a unique kind of family business in my opinion," she said, pointing to the dealership's 100 employees. She said her company pays $70,000 or so a month in B&O taxes, while collecting millions a year in state sales tax.
Johnson, of the retailers association, said he didn't so much begrudge the auto dealers as wish everyone had received a better deal. "I wish they had taken family businesses out of the equation altogether," he said.
