Tax Notes: Washington Legislature Approves Millionaire’s Tax

Washington lawmakers have approved a new income tax on millionaires, securing a key legislative victory for progressive tax reformers.

S.B. 6346 is set to be signed by Gov. Bob Ferguson (D), likely setting the stage for a legal fight before the state supreme court and a potential ballot repeal effort by conservative opponents. The tax won’t take effect for a couple of years in anticipation of that fight.

Until then, Washington has no income tax, as long-standing supreme court precedent has effectively prohibited progressive income taxation since the 1930s. But Democratic lawmakers, with the support of Ferguson, introduced S.B. 6346 early this year to establish a 9.9 percent tax on personal income over $1 million beginning in 2028. They are confident that the tax will ultimately be upheld.

The legislation would impose the 9.9 percent tax as of January 1, 2028, and allow a deduction of $1 million that applies to an individual filer’s income, as well as to the combined income of couples, “regardless of whether they file joint or separate returns,” according to the bill’s text. The threshold would be adjusted for inflation…

The legislation would allow a credit against taxes paid to other states on the same income, a deduction for up to $100,000 of charitable contributions, an 80 percent deduction for carryovers, and a credit for the state’s long-term capital gains tax (which applies marginal rates of 7 percent on gains over $250,000 and 9.9 percent on gains over $1 million, with adjustments for inflation).

The measure would also repeal, as of January 1, 2029, most of the provisions of a 2025 bill, S.B. 5814, which applied sales and use tax to a range of services that had previously been exempt, including IT training, website development, security services, custom software, live presentations, and more. However, the repeal wouldn’t apply to S.B. 5814’s taxation of advertising services, including digital advertising.

Mercier said the millionaire’s tax will next face a bid by opponents to litigate it on the grounds that it violates the state’s precedent in Culliton v. Chase (1933). He noted that in 2021, lawmakers had passed the state’s CGT by framing it as an excise tax, in order to get around the precedent — a gambit that succeeded when the state supreme court upheld the CGT on those grounds in 2023. But the millionaire’s tax is a frontal challenge to the precedent, he said.

…

Mercier said that opponents of the millionaire’s tax would likely file a challenge at the superior court level to get a decision against the tax that would cite previous Washington supreme court precedent, to bolster their argument. “The supporters will want to go to direct review” before the state supreme court, he said.

Notably, Senate Majority Leader Jamie Pedersen (D) said earlier in the session that he’s confident the court will overturn the 1930s precedent.

Bloomberg Law: Millionaire Tax Rattles Washington Rich as Schultz Quits Seattle

Washington state lawmakers had been debating a proposed “millionaire’s tax” for 23 hours straight when Starbucks Corp.
 founder Howard Schultz said he was leaving the state to move to Miami.

“It seems to be a historic legislative session — from a tax perspective — every year now,” said Aaron Johnson, an attorney at Ballard Spahr. “We are undermining the approach that any prudent business would take in determining whether or not to remain in our state or to invest in our state.”