Washington lawmakers approved legislation Thursday imposing a 9.9 percent tax on annual income exceeding $1 million, making the state one of the first to adopt a personal income tax after decades of failed attempts. Democratic Governor Bob Ferguson said he plans to sign the measure, which takes effect January 1, 2028, with first payments due in 2029.
The tax affects roughly 20,000 to 21,000 households, less than half of one percent of Washington residents. It applies only to income above the $1 million threshold, meaning someone earning $1.2 million would pay the tax on $200,000.
Ferguson said the measure targets high earners while funding affordability programs for working families. The revenue, projected at $3.5 billion annually starting in 2029, will fund expanded tax rebates ranging from $300 to $1,330 for 460,000 additional households and universal free school meals for all K-12 students.
Senate Majority Leader Jamie Pedersen, the bill’s sponsor, described the legislation as addressing a budget shortfall projected for 2029, not the immediate $2 billion gap facing the state in fiscal year 2027, which begins July 1. He told reporters lawmakers were “planting a seed for the future” rather than pursuing a short-term budget fix.
The bill passed the House 51 to 46, with no Republican support and eight Democrats voting against it. The Senate had approved the measure earlier in the week.
Washington joins eight other states without a broad-based personal income tax, a status the state has maintained since statehood. Voters rejected a similar proposal in 2010 that would have taxed incomes above $200,000 for individuals and $400,000 for couples. Courts struck down an earlier attempt in the 1930s under Article VII, Section 1 of the state constitution, which prohibits taxes on net income.
The new tax is structured as an excise tax on “taxable personal annual income” rather than a direct income tax, an approach designed to withstand constitutional scrutiny. It applies to both residents and non-residents who work in Washington.
Lawmakers paired the income tax with a reduction in the estate tax, lowering the top rate to 20 percent from 35 percent, previously the highest in the nation. Pedersen said the estate tax cut was part of broader negotiations and addressed concerns that the previous rate made Washington an “outlier” encouraging tax avoidance behavior.
Washington relies heavily on sales taxes, which account for roughly 50 percent of state revenue, along with property and business and occupation taxes. This structure creates one of the most regressive tax systems in the country, where low-income households pay a higher effective rate than wealthy residents, according to tax policy analysts.
The Institute on Taxation and Economic Policy found the new tax would significantly improve tax equity in the state. Five percent of the revenue, approximately $175 million annually, is earmarked for childcare funding.
The legislation includes the largest small business tax relief package in state history. Businesses with gross revenue below $300,000 will receive exemptions or credits under the business and occupation tax. Washington has 695,695 small businesses statewide.
Business groups warned the measure could damage the state’s economic competitiveness. Rachel Smith, president of the Washington Roundtable, said voters are concerned about affordability and cautioned against Washington becoming a tax “outlier.” She welcomed the estate tax rollback as positive for family-owned businesses but criticized what she called a pattern of layering major taxes.
Smith said her organization expects a legal challenge and will continue advocating for economic competitiveness and budget sustainability regardless of whether the tax survives court review.
Ferguson said he expects litigation and called legal challenges “appropriate,” adding that the state Supreme Court would ultimately decide the constitutional question. He also predicted a political battle, describing it as a case for “the court of public opinion” as opponents pursue repeal efforts.
Initiative sponsor Brian Heywood, who has financed several conservative ballot campaigns in recent years, called the legislative session “shameful” and accused Democrats of passing measures “against the Constitution.” He said lawmakers lacked the support to pursue a constitutional amendment and send an income tax proposal directly to voters.
Heywood said he is considering multiple strategies, including launching an initiative campaign or targeting lawmakers who supported the tax in November 2026 elections. The bill’s emergency clause makes a referendum difficult, he said.
Analysis from the Tax Foundation shows Seattle’s combined top tax rate on wages and restricted stock units would exceed 18 percent, the highest in the country when combining state and local taxes. The organization warned this could trigger wealth migration similar to outflows seen after Washington adopted a capital gains tax in 2022, when roughly 100 high earners left the state.
Washington’s tech sector employs 360,000 workers, with major employers including Amazon and Microsoft. Companies in the sector face potential retention challenges for executives and investors subject to the new tax.
House Majority Leader Joe Fitzgibbon said public anger over federal budget cuts helped build support for the measure. He told reporters he expects both ballot initiatives and legal challenges in the coming months.
Pedersen acknowledged that if courts block the tax or voters repeal it through an initiative, future lawmakers would face the same budget choices: deeper spending cuts or alternative revenue sources.
The tax applies to all income types, including wages, business income, capital gains, and investment returns. Residents earning above $1 million from any source will owe the 9.9 percent rate on the excess amount. Non-residents who work in Washington and earn above the threshold will also pay the tax on income earned in-state.
The Working Families Tax Credit expansion will provide rebates to an additional 460,000 households. Payments range from $300 to $1,330 depending on family size and income. All K-12 students in Washington public schools will receive free breakfast and lunch under the universal meal program funded by the tax revenue.
Small businesses with annual gross revenue below $300,000 will see immediate relief through business and occupation tax exemptions and credits. This provision takes effect when the income tax does in 2028.
The legislation does not address Washington’s immediate budget gap for fiscal year 2027. The $3.5 billion in annual revenue will begin flowing to state coffers in 2029, after taxpayers file their first returns covering the 2028 tax year.
Smith said the Washington Roundtable will continue pushing for comprehensive tax reform focused on economic competitiveness and budget sustainability. The organization represents major employers across the state.
The effective date of January 1, 2028 gives high earners time to adjust financial planning strategies. Tax advisors are likely to see increased demand for services related to residency changes, income timing, and trust structures before the tax takes effect.
States without income taxes that could attract Washington residents include Florida, Texas, Nevada, and Wyoming. However, relocating to avoid state taxes requires establishing genuine residency, not just purchasing property, according to tax law experts.
Ferguson said in a televised interview Thursday morning that the tax represents a policy choice about who pays for state services. He emphasized the narrow targeting of the tax and the direct benefits flowing to working families through rebates and free school meals.
The governor said he views the political fight over the tax as appropriate democratic debate, with voters ultimately deciding through elections and potential ballot measures whether the policy should stand.
Source: Washington legislative session wraps with Millionaires Tax fight ahead | KOMO News