Proposed income tax on high earners advances in Washington state

The so-called “millionaires tax” was approved by Washington’s Senate on Monday, advancing a measure that would create a 9.9% tax applied to taxable, personal annual income that exceeds $1 million.

Gov. Bob Ferguson earlier this month criticized Senate Bill 6346 for doing too little for small businesses and lower-income residents in the state. The measure passed Monday included changes that made more small businesses eligible for a business and occupation (B&O) tax exemption.

“The proposal is moving in the right direction,” Ferguson said in a statement. “That said, as the process moves forward in the final weeks of the legislative session, we must direct significantly more revenue directly back to hardworking Washington families and small businesses owners. I look forward to our continued partnership to make our state more affordable.”

The measure passed with 27 Democratic lawmakers voting yes. The 22 no votes included three Democrats.

Lawmakers adopted two amendments, including one to repeal a new sales tax expansion on select services that sparked controversy in the tech industry and a lawsuit from Comcast last year. However, the expansion on advertising services would not be repealed as part of the amendment, which would take effect in 2030.

SB 6346 marks the first time in decades that state lawmakers have pursued a personal income tax aimed at high‑income residents. The legislation would go into effect in two years and includes small business and low‑income tax breaks.

The bill has drawn opposition from some tech leaders and entrepreneurs who worry it could undermine the sector by souring Washington’s relatively favorable tax laws for startup founders, investors and high-wage earners.

Supporters of the proposed law argue those fears are overblown and say the bill helps correct the state’s regressive tax code, which relies heavily on property, sales and business taxes to fund education and other public programs.

The bill is expected to generate an estimated $3.7 billion annually.

The action comes as the state is struggling to plug a more than $2 billion budget hole with spending cuts and a slate of potential tax changes, while at the same time some of Washington’s largest employers are cutting thousands of jobs from their payrolls.

SB 6346 would:

• Create a 9.9% tax on household income over $1 million, which is estimated to apply to fewer than 1% of the state’s households.
• Taxpayers receive an exemption for charitable deductions of up to $100,000, which increased from the original bill’s $50,000 deduction.
• Businesses grossing less than $300,000 would be exempt from the tax starting in 2029, which expanded the pool of eligible businesses from the $250,000 cut-off in the original bill. The break would apply to roughly 65% of all businesses.
• An additional B&O surcharge will also be eliminated beginning in 2029.
• Certain personal hygiene items would be exempt from sales tax starting in 2029.

The income tax would be used in part to expand the Working Families Tax Credit, which provides a sales tax rebate for low- to moderate- income families. It also helps fund the public defense system.

“Today was a momentous step forward. For Washington’s 1.1 million school kids, people struggling to afford health care, and small businesses looking for help, that help is on the way,” said bill sponsor and Senate Majority Leader Jamie Pedersen, D-Seattle, in a statement.

Washington is one of nine states that lack an income tax. If approved by lawmakers, the governor said the proposed tax was certain to go before voters for approval and would face legal challenges as well.

Kirby Winfield, founding general partner at Seattle venture capital firm Ascend, is among those against the legislation.

“This tax is just another brick in the wall of anti-entrepreneurialism from state and local legislators. The average Amazon employee probably won’t mind, but this stuff is devastating to company creation,” Winfield told GeekWire earlier this month.

As state leaders look to impose a levy on wages, they’re also working to repeal a recently passed policy that substantially increased Washington’s estate tax and drew criticism from tech leaders. The new proposal, Senate Bill 6347, also passed on Monday, with 38 lawmakers from both parties voting in favor and 11 Democrats voting against the bill.

Democratic leaders backing SB 6347 feared that wealthy residents would leave the state to avoid the tax — which is significantly higher than any other estate tax, the Seattle Times reported.

Pedersen told the Seattle Times that when it comes to taxes, “it’s not good for us to be an outlier.”

Both bills will now be considered by the House of Representatives. This year’s 60-day legislative session is scheduled to end March 12.

RELATED:

• Opinion: Here’s what’s missing from the tax debate in Washington state
• Opinion: ‘Millionaires tax’ threatens Washington’s startup economy — here’s the math to prove it
• Opinion: The ‘millionaires tax’ is not an existential threat to Washington’s startup economy
• Washington’s ‘millionaires tax’ targets top earners as tech leaders warn of startup fallout