By Jared Walczak
Senior Fellow, Tax Foundation
Main Facts: The Anatomy of Washington’s New Tax Conflict
Washington State is bracing for a profound shift in its fiscal policy landscape. Although a newly enacted high-earner income tax is not scheduled to take effect until 2028—with tax filings due in 2029—it has already triggered intense legislative battles, high-stakes constitutional lawsuits, and an upcoming statewide ballot measure.
At the center of the storm is a 9.9 percent tax levied on individual or joint incomes exceeding $1 million. While proponents market the policy as a targeted measure to ensure that the state’s wealthiest residents pay a "fair share," economic analysts and business groups warn that the structural design of the tax, combined with existing state and local levies, creates a uniquely punitive environment. In Seattle, high earners could face a combined state and local top marginal tax rate of 18.037 percent (factoring in the new state tax alongside local assessments like the Seattle Social Housing Tax, the Seattle JumpStart Tax, and the WA Cares tax).
The measure is poised to impact a specific demographic: primarily high-compensated tech sector employees and small business owners structured as pass-through entities. Furthermore, the legislation features an unusual structural framework, including a strict $50,000 cap on charitable deductions, marriage penalties for joint filers, and a complete absence of safe-harbor provisions for taxpayers who unexpectedly cross the million-dollar threshold due to volatile income streams.
With the legal system, the legislature, and the electorate all clashing over the future of taxation in the Evergreen State, Washington has become a national focal point for the broader debate surrounding wealth taxes, state competitiveness, and fiscal governance.
Chronology: A Timeline of Legislative Maneuvers and Legal Challenges
The path to Washington’s millionaire tax is marked by procedural maneuvering, aggressive legislative timelines, and fierce political resistance.
- Historical Context: Historically, Washington has lacked a broad-based personal income tax. The state constitution has long been interpreted by legal scholars and the courts as largely prohibiting income taxation, establishing a legacy that proponents of the new tax are actively seeking to dismantle through ongoing litigation.
- Early 2024: Anticipating legislative overreach, proponents of low taxes gathered signatures for a ballot initiative (Initiative 2111) explicitly stating that neither the state nor any local jurisdiction could tax personal income in any form. To bypass a direct vote of the people—which would have created a two-thirds legislative supermajority requirement to amend the language for two years—the legislature overwhelmingly approved the measure themselves. By adopting it directly, lawmakers cleared the procedural path to bypass the 2027 legislative session and immediately take up income tax legislation during the 2026 session.
- Late 2024 to Early 2025: Lawmakers advanced the high-earner income tax framework, strategically attaching an emergency clause. This legislative mechanism asserted that the tax—despite not taking effect until 2028—was “necessary for the support of the state government and its existing public institutions.” By utilizing an emergency clause, the legislature effectively shielded the tax from the traditional referendum process, blocking voters from reviewing the change through a standard petition-based veto.
- Current Developments (2026): With the referendum avenue blocked, tax opponents organized and successfully placed Initiative 645 on the November 2026 ballot. Initiative 645 seeks to repeal the legislature’s income tax authorization entirely and prohibit future state and local income taxes. Simultaneously, oral arguments have been scheduled in a major constitutional challenge against the tax law, and state lawmakers have already begun debating proposals to aggressively expand the tax net—with one legislator introducing a bill to lower the income threshold from $1 million down to $250,000.
Supporting Data: Who Pays and How the Numbers Stack Up
To understand the true reach of Washington’s new tax, it is necessary to examine how high-income streams operate in practice and how the policy interacts with the state’s broader economic architecture.
The Myth of the Steady Million-Dollar Salary
Very few individuals earn a straightforward annual salary exceeding $1 million. Instead, income at this level typically flows through three distinct, highly volatile channels:
- Capital Gains and Dividends: Returns on investments and asset sales.
- Pass-Through Business Income: Earnings from sole proprietorships, partnerships, and S corporations.
- Restricted Stock Units (RSUs): Accumulated stock grants that vest all at once—frequently occurring when a tech startup or private company goes public.
For example, an engineer who works at a startup for five years may receive stock that vests simultaneously upon an Initial Public Offering (IPO). This can trigger an income spike above $1 million for a single tax year, even though the worker’s average annual compensation over that half-decade period was well below the threshold. The same risk applies to individuals selling a family-owned business built over a lifetime or generating significant capital gains from the sale of a primary residence.
Small Businesses and the Pass-Through Burden
According to the U.S. Small Business Administration, Washington is home to 672,472 small businesses, which collectively employ 1.4 million people—representing 48.4 percent of the state’s total workforce. The vast majority of these enterprises operate as pass-through entities, meaning their business income flows directly onto the personal income tax returns of their owners.
Imposing a 9.9 percent tax on these small business owners compounds an already heavy tax burden. Washington heavily relies on business-level taxes, maintaining a high-rate gross receipts tax (the Business & Occupation Tax) and subjecting an unusually high volume of business inputs to the retail sales tax, which induces tax pyramiding. By adding a steep personal income tax on top of these existing levies, Washington places small business owners in a uniquely disadvantaged position compared to their peers nationwide.
Flaws in Tax Design
Independent tax policy analysts have highlighted several unusual structural deficiencies within the Washington statute:
- Charitable Contribution Caps: The legislation limits charitable deductions to $50,000, discouraging philanthropic giving among high earners.
- Marriage Penalties: Joint filers are subjected to the tax using the exact same $1 million threshold as single filers. Two single individuals earning $600,000 each face zero tax liability, whereas a married couple with the exact same combined income is penalized.
- Lack of Safe Harbors: Unlike federal tax code and most state systems—which provide safe harbors from penalties if a taxpayer pays a percentage of their current or prior year’s liability through withholding or estimated payments—Washington’s law offers no such protection. Taxpayers who misjudge their liability or unexpectedly cross the threshold face immediate underpayment penalties.
Official Responses and Political Discourse
The debate surrounding the tax has ignited deep divisions among political leaders, legal advocates, and fiscal watchdogs.
Proponents of the tax argue that Washington has long suffered from one of the most regressive tax structures in the United States, where low- and middle-income residents pay a significantly higher share of their income in taxes than the wealthy. Supporters maintain that tapping into million-dollar earners is a moral and economic necessity to adequately fund public education, social services, and infrastructure without placing further burdens on working-class families.
Conversely, opponents and business coalitions characterize the tax as a direct violation of the state constitution and a betrayal of voter intent, pointing to previous electoral victories where Washingtonians repeatedly rejected state income tax proposals.
A fierce battle has also erupted over the wording of the upcoming November ballot measure. Under a 2022 state law, the attorney general is authorized to supply a fiscal impact statement for ballot initiatives. Critics have lambasted the official statement attached to Initiative 645, noting that it warns voters that repealing the tax will necessitate immediate cuts to public education funding. Opponents argue this language is misleading and alarmist, given that the tax is not yet implemented, has not generated a single dollar of revenue, and has not been incorporated into any active state budget.
Implications: Economic Competitiveness and the Future of Washington State
The ultimate resolution of this conflict will carry profound consequences for Washington’s economic trajectory.
For decades, Washington utilized its lack of a personal income tax as a powerful economic development tool to attract top-tier talent, venture capital, and innovative corporations—particularly within the technology, aerospace, and clean energy sectors. Critics argue that introducing a high-rate income tax, especially one coupled with aggressive local surcharges and a low threshold that lawmakers are already attempting to pull down to $250,000, threatens to erode this competitive advantage.
If high earners, entrepreneurs, and mobile tech talent choose to relocate to no-income-tax states like Texas, Florida, or neighboring Nevada and Alaska, the state could experience a contraction in its entrepreneurial ecosystem and a corresponding decline in capital investment.
Furthermore, the outcome of the legal challenges and Initiative 645 will serve as a bellwether for direct democracy in the state. Should the courts uphold the legislature’s use of emergency clauses and override the historic anti-income-tax sentiment of the electorate, it could permanently alter the balance of power between lawmakers and Washington voters regarding fiscal policy.
As the legal briefs are filed, the political campaigns ramp up, and voters prepare to head to the polls this November, Washington stands at a definitive crossroads—one that will shape its economic identity for generations to come.
