Washington State Lawmakers Propose Millionaire Income Tax (1)

Top-earning households in Washington could be the first in the state to pay income tax under a new bill that takes aim at earnings over $1 million.

The bills, S.B. 6346 and its companion H.B. 2724, were introduced Tuesday and would apply a 9.9% levy on income over $1 million. Washington is one of nine states that have no personal income tax. Legislators have framed the issue as one of affordability and necessity as the state faces budget shortfalls partly caused by the federal government’s budget cutting.

But Gov. Bob Ferguson (D) has already signaled his opposition to the bill. The governor previously has been skeptical of relying on a wealth tax to balance the budget, particularly one that may not survive legal challenge, but said in December he would support a 9.9% tax rate on millionaire households under certain conditions.

“I appreciate the ongoing dialogue with House and Senate Democratic leaders,” Ferguson said at a press conference Tuesday afternoon. But he noted that when he announced his support for a millionaires tax, he said a “significant percentage of the revenue must go directly back into the pockets of Washingtonians.” He said the bill “is not close to achieving that important objective.”

The tax is estimated to raise $3.7 billion annually, and would impact less than 1% of the wealthiest households in the state, beginning in 2028, according to a release from the bill’s supporters. The revenue would go toward covering state program shortfalls and a handful of tax breaks for lower-income residents and businesses.

Legislators acknowledged that the bill was a starting point, but said they believe they can work through amendments with the governor and the business community..

“Washington families are concerned about affordability and keeping our economy strong, and businesses are too,” said Washington House Majority Leader Rep. Joe Fitzgibbon in a statement. “By reforming our outdated tax code, we’re helping make life more affordable for working families and promoting our state’s economic competitiveness.”

Looking at the Options

Among the initiatives listed by the bill’s supporters are an expansion of the working families tax credit, eliminating sales tax for hygiene products, and the elimination of the business and occupation tax for companies grossing less than $250,000 annually.

The bill mentions several exemptions to the income tax, including income earned from the sale of certain family-owned small businesses and the sale of some property. It also provides a credit for income tax paid in other states, tax paid as part of the state’s capital gains levy, and for pass-through entities. Under the bill, charitable contributions would be deductible up to $50,000 for both partners and individuals. It sets a $1 million standard deduction for both individuals and joint filers.

Ferguson said Tuesday that the current proposal would return $230 million annually back to Washington taxpayers, which he said is not sufficient. He said he would like to expand the working families tax credit further than what the income tax proposal offers.. He also said he would also like to see more tax relief for small businesses and tax exemptions for a wider variety of products.

“The 7% we see here is not close,” Ferguson said of the percentage of revenue from the millionaire’s tax that would fund other tax reductions. “We have a long way to go.”

Taxes on the wealthy and high-earners have become popular as states—including Washington—grapple with funding shortfalls. Voters there in 2024 defeated a ballot measure that sought to overturn a capital gains excise tax.

Several business groups in the state have responded that they’ll evaluate the millionaire tax proposal.

“We appreciate legislator sensitivity to the significant impacts an income tax would have on Washington,” Joe Fain, president and CEO of the Bellevue Chamber of Commerce, said in a release. “However, several structural issues in this proposal need closer review, including the treatment of pass-through entities, charitable deductions, a potential marriage penalty, and interactions with other state tax policies.

The tax will still meet with some resistance. Brian Heywood, the wealthy money manager whose Let’s Go Washington group has backed several ballot initiatives, including the 2024 effort to repeal the capital gains tax, said he expects the legislature to pass the income tax in this year’s short session.

“Clearly this is an unconstitutional power grab, and Let’s Go Washington is going to look at what it needs to do to protect the people against an income tax, up to and including a ballot initiative,” Heywood said Tuesday.

Lawmakers said they weren’t worried about the potential impact the tax would have on pushing out wealthy individuals and large companies. They referred to the tax offsets in the bill, and emphasized that the legislation was modeled after the existing capital gains tax.

“I don’t think we’re going to create a major disincentive for people to live in Washington state,” said Sen. Jamie Pedersen.

The bill will go before the state Senate Ways & Means Committee on Friday for public comment.

--With assistance from Anna Edgerton