Washington’s Data Broker Tax Is a Promising but Inadequate Move

Washington State’s new data broker bill is an ambitious but flawed use of tax policy to rein in personal data collection. By taxing companies for extracting or collecting consumer data, the legislation would treat personal information like a natural resource—such as oil or precious metals—in that it would subject data collectors to a severance tax when the data is harvested.

But if lawmakers want to meaningfully curb exploitative data practices, they should levy an ongoing tax on data retention. This would shift the focus from taxing the flow of data collection to taxing the stock of stored information, aligning the interests of privacy-conscious residents and data-collecting firms.

A tax that penalizes long-term storage of consumer data would drive firms to collect only what they need and delete what they don’t, reducing privacy risks. Modeling the levy as an income tax would ensure businesses pay a proportionate cost based on data monetization.

The Washington bill would establish a tiered tax system that scales based on how many residents’ data a company collects. The tiers range from the low end, with companies collecting data on fewer than 500,000 individuals paying five cents per person per month, to the highest tier, where brokers collecting data on more than five million residents face a $1.38 million monthly base tax. Extra-large data collectors then would pay an additional 55 cents per month on each additional resident’s data over five million.

The straightforward policy logic is that the more personal data a company extracts, the greater its financial obligation to the state. But while the bill defines “data brokering” for purposes of registration broadly—it includes buying, selling, and sharing personal data—the severance tax is triggered only by collection.

This promotes consolidation, where one firm specializes in collecting data, pays the tax, and then distributes it to other firms. Instead of limiting data exploitation, the bill may simply shift it to fewer hands. Large platforms would benefit the most, because they collect the bulk of personal data and could function as the tax-absorbing intermediary to many other companies.

In fact, a tax on collection might encourage these firms to retain more data for longer—effectively putting a market value on data of at least the taxes paid to extract it. Secondary firms could then profit from the data without incurring any liability, while the taxable firms could recoup their losses and profit through sale and use.

Data retention and reuse is where the analogy to an extractable natural resource ultimately falls apart. Unlike extracted natural resources, personal data isn’t depleted when used—it can be stored indefinitely, repackaged into innumerable forms, and sold repeatedly.

The Washington proposal puts a price on data collection but does nothing to discourage businesses from holding onto that consumer data and making future use of it. This leaves long-term privacy risks unaddressed and may encourage data hoarding—the indiscriminate collecting and long-term storing of data regardless of its immediate utility.

Severance taxes make sense for activities such as oil extraction because the use in the marketplace for oil is known, and its use is destructive. Policymakers can internalize risks from oil use, such as environmental damage, through a tax on oil extraction.

Data collection is much more speculative. Lawmakers looking to replicate Washington’s model without enabling data exploitation could create a retention tax that would prompt deletion of unnecessary data and apply pressure to brokers throughout the data economy to ensure every company profiting from consumer data pays its fair share.

Absent a tax, the only cost to hoarders is the cost to store the data, which is getting cheaper by the year. A tax on data collection would further encourage this hoarding, if only to avoid having to pay the tax a second time on re-collected data. A retention tax would make it expensive to hoard consumer data without an immediate economic purpose.

Forcing companies to cover the risks of storing massive troves of consumer data and paying for its use should be the policy goal—not making data collection slightly more expensive. Under the current Washington proposal, a company that collects consumer data but never sells it would be taxed the same as one that collects, sells, and resells that same dataset for years. A retention tax would ensure those profiting from long-term data exploitation bear a greater share of the tax burden.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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