Washington’s millionaire tax proposal raises new planning questions

A push to tax top earners in Washington state is advancing in Olympia, potentially reshaping the state’s long-standing appeal for high-net-worth clients, tech executives, and small business owners.

Senate Bill 6346, which cleared a key Senate committee this week, would impose a 9.9% tax on annual income above $1 million beginning in 2028.

The first payments would be due in 2029 if the measure becomes law. New revenue would be earmarked for K-12 education, health care and tax relief targeted at lower-income households and small businesses.

The proposal marks the latest – and most serious – attempt to introduce a broad income tax in one of only a handful of states without one. Roughly 30,000 top earners could fall under the new levy, according to reporting by Bloomberg, a notable shift in a state that has leaned heavily on sales and business taxes. Backers frame it as a way to rebalance a system that leans on consumption taxes that hit lower earners disproportionately.

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

Read more: Which US states have gotten more – and less – tax-friendly?

Governor Bob Ferguson has endorsed taxing income above $1 million but has pressed lawmakers to channel more of the projected $3.5 billion in new revenue into cutting sales and business taxes and expanding the Working Families Tax Credit. He has also floated a constitutional amendment to prevent the threshold from ever dropping below $1 million, indexed to inflation, though he has not publicly tied his support for the bill to such an amendment going on the ballot.

During the latest committee action this week, Democrats rejected a Republican amendment that would have voided the bill unless lawmakers passed a constitutional amendment locking in the 9.9% rate and $1 million threshold.

"This has to do with trust," said Senator Chris Gildon of Puyallup, one of the Republicans pushing for tweaks, pointing to thousands of residents who “understand that this is just the first step toward creating a universal income tax that's going to apply to everyone in our state.”

A business coalition that includes the Washington Roundtable has said it is keeping a close eye on the proposal. “This would be a massive economic change in the state of Washington,” said Rachel Smith, the group’s president, told Bloomberg. “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.”

Read more: Will states' tax proposals on high earners go national?

For advisors, one of the most immediate implications lies in the way many Washington millionaires actually earn their income. An analysis by the Tax Foundation notes that relatively few residents draw more than $1 million in straight salary; instead, much of that income comes from capital gains, small business profits, and restricted stock unit vesting for tech employees. Lumpy vesting schedules, especially when multiple years of RSUs vest at once after an IPO or acquisition, could push clients above the threshold in a single year even if their average income is much lower.

Layered on top of Washington’s existing 9.9% capital gains tax on large gains and several state and local payroll levies in Seattle, the new millionaire tax could push the combined state and local marginal rate on some high earners above 18%, according to the Tax Foundation. When federal income and Medicare taxes are included, the top effective rate for those clients could approach 58%.

"A tax this aggressive would do real damage to Washington’s economy, sending jobs and economic opportunity elsewhere," the Tax Foundation analysis said. "In particular, for significant swaths of the state’s tech sector, already the target of anomalously high business taxes, a 9.9 percent income tax could prove the last straw."