Millionaire tax tests a state’s 93-year aversion to income levy

After nearly a century of trying, Washington state Democrats could finally pass an income tax — a move that would hit 30,000 or so top earners.

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A proposed 9.9% tax on incomes over $1 million has a good chance of winning approval in the 28 days left in the state legislative session. The measure would fundamentally change the revenue structure in the state, which is known both as the home of glittering tech wealth and as a rare liberal bastion with low taxes. 

Supporters say it’s a long overdue shift away from reliance on the sales tax, which falls disproportionately on low earners who spend more of their income on necessities. Detractors say it would undermine the value proposition that made Washington an attractive place for entrepreneurs who started some of the world’s best — known companies, such as Microsoft, Starbucks, Costco and Amazon. 

“I understand why proponents want to see one,” said Robert Mahon, head of the tax practice at Perkins Coie in Seattle. “My concern is that I think we’ve built up a bit of a competitive advantage that we’re squandering now.”

If the measure passes, it would cap decades of efforts to implement an income tax in Washington, one of only nine states without one. In 1933, the state Supreme Court threw out an income tax approved by voters. Ten subsequent attempts were rejected by courts, lawmakers or voters. 

Pro-tax advocates hope this time will be different, with a measure that would only apply to individuals or couples filing jointly who earn at least $1 million. The pitch echoes proposals from Colorado to Michigan to Rhode Island that would raise taxes on the wealthy. 

Washington Governor Bob Ferguson included a version of the millionaire’s tax in his December budget proposal, although last week he said he won’t sign it unless more of the $3.5 billion in estimated revenue is used to exempt some products from sales taxes, reduce business obligations and expand the Working Families Tax Credit. 

After making some changes in committee, the state Senate could vote as soon as next week.

In a recent committee hearing, speculation abounded over whether there was a deal between business leaders and Democrats to prioritize the income levy over two other measures, a wealth tax and a payroll-expense tax modeled after a Seattle measure blamed for pushing thousands of Amazon jobs to the suburbs. Neither of those other proposals is likely to pass this year. 

The income tax has a better chance. A coalition of business lobbyists including the Washington Roundtable said it was “carefully reviewing” it. Unlike the payroll measure, the individual income tax wouldn’t be paid directly by companies, although it would potentially have an impact on compensation and recruitment. 

“This would be a massive economic change in the state of Washington,” said Rachel Smith, president of the Roundtable. “It is a very serious proposal and it is incumbent upon us, on behalf of our members and the broader business community, to take it seriously.”

There are mixed signals from voters. A poll last month showed 61% in favor of a millionaire’s tax, including 54% of Republicans. But ahead of a hearing last week on the proposal, more than 60,000 registered to testify against it compared with fewer than 20,000 in favor.

Job cuts

It’s a delicate time for the state’s economy. Amazon cut more than 5,000 employees in Washington state during the last 12 months, while Microsoft eliminated 3,200. Meta, Expedia and Salesforce have also pared hundreds of jobs in and around Seattle, even as companies such as OpenAI and Uber Technologies Inc. have signaled plans to expand in the state.

The tax debate follows other moves by state lawmakers to find new revenue sources. The first big victory for advocates of more progressive taxation was a new 7% tax on capital gains passed in 2021, which survived court challenges and a 2024 ballot initiative to repeal it. The legislature then increased the rate to 9.9% for gains over $1 million. 

Lawmakers also raised business and sales taxes last year, looking for an additional $9 billion to help close a budget deficit after years of higher spending. Smith warned that an excessive burden would be “a recipe for being less competitive.”

Even as state Democrats draw inspiration from populist measures gaining ground around the country, some members of the caucus are wary. Amy Walen, a Democrat who represents the wealthy Seattle suburb of Bellevue, said the accumulation of taxes is stifling investment and prompting some of her constituents to consider leaving the state. 

“If every time we go to Olympia, we change the rules or we change the landscape, we have already created enough instability that it makes it risky to leave your assets here or plan long-term investments,” Walen said. She said she would support an income tax on high earners at a lower rate, coupled with even more relief on sales and property tax.

Despite the proliferation of taxes, tens of thousands of people have been moving to Washington every year, and last year it ranked sixth among the states in gaining total residents. Supporters of higher duties on the wealthy say people value public services like education and health care, especially at a time when the Trump administration is rebalancing federal policy to benefit the rich. 

Even if lawmakers pass the millionaire’s levy, it will almost certainly face legal challenges all the way to the state Supreme Court. As the bench of nine justices has gotten more liberal, Democrats have grown increasingly eager for the court to review the 1933 precedent. 

Lawmakers have also said an income tax would all but certainly go before voters in the form of a ballot initiative to repeal it. Brian Heywood, a wealthy money manager who has bankrolled several initiatives including the failed attempt to repeal the state capital gains duty, said he’s weighing his options.

The legislature adopted a Heywood initiative in 2024 pledging not to pursue an income tax. But that was a “pie crust promise, easily made, easily broken,” state Senate Majority Leader Jamie Pedersen said in December, referencing a line from Mary Poppins. 

The governor has insisted that the threshold for the millionaire’s tax should rise with inflation and never be lowered. But Pedersen was noncommittal when asked if Democrats would eventually ask more modest earners to pay it as well. 

“The bill that is in front of us is only about people who have at least a million dollars of income,” Pedersen said. “We don’t have the ability to bind future legislatures.”