Candice Horbacz
Washington State’s newly enacted income tax targeting high earners, though not scheduled to take effect until 2028, has already ignited a fervent debate across legal, economic, and political spheres. This contentious legislation is facing an immediate constitutional challenge, with oral arguments now scheduled, and is the subject of a forthcoming ballot measure, Initiative 645, which seeks its outright repeal this November. Further stoking the controversy, a state lawmaker recently proposed significantly lowering the tax threshold from $1 million to as little as $250,000, signaling potential future expansions even before the initial measure is implemented. The confluence of these events underscores the profound shift in Washington’s long-standing tax policy and the deep divisions it has created.
A Decades-Old Constitutional Hurdle: Washington’s Unique Tax History
For well over a century, Washington State has stood out as one of a handful of states without a broad-based individual income tax. This absence is deeply rooted in a series of state Supreme Court rulings, most notably Culliton v. Chase (1933), which effectively classified income as "property" under the state’s constitution. Article VII, Section 1 and 2 of the Washington State Constitution mandates that all property must be taxed uniformly and according to its value, effectively prohibiting a progressive income tax where different rates apply to different income levels. Any attempt to implement a graduated income tax has historically been struck down by the courts as an unconstitutional property tax.
This legal precedent has shaped Washington’s fiscal landscape, leading to a heavy reliance on sales, property, and business and occupation (B&O) taxes. The state’s tax system is frequently criticized by some for its regressive nature, disproportionately burdening lower and middle-income households who spend a larger percentage of their earnings on taxable goods and services. Proponents of income taxation have long argued that a progressive income tax would create a more equitable system and provide a stable revenue source for public services. However, voter sentiment has historically leaned against income taxes, with numerous ballot measures attempting to introduce such taxes failing decisively over the decades, the most recent being in 2010.
The recent shift began with the passage of a 7% capital gains tax on high-value stock and bond transactions exceeding $250,000, which took effect in 2022. This tax was challenged but ultimately upheld by the state Supreme Court in 2023, which ruled it an excise tax on the sale or exchange of capital assets, not an income tax on property. This decision opened the door for new interpretations of income taxation in the state and set the stage for the current high-earner income tax.
The Legislative Chess Match: Navigating the Path to a New Tax
The journey to the new 9.9% income tax on high earners involved a series of intricate legislative maneuvers that highlighted the political complexities of altering Washington’s tax code. In 2024, the state legislature took the unusual step of overwhelmingly approving a ballot measure, Initiative 2111, which stipulated that "Neither the state nor any county, city, or other local jurisdiction in the state of Washington may tax any individual person on any form of personal income." Instead of allowing this measure to go before voters in November 2024, lawmakers opted to pass it themselves.
This move, while seemingly counterintuitive, was a calculated procedural play. Under Washington law, amending language adopted by a ballot measure requires a two-thirds legislative supermajority for the first two years. Had voters approved Initiative 2111, lawmakers would have been barred from even considering an income tax until the 2027 legislative session. By passing it themselves in early 2024, the clock on this two-year restriction started sooner, allowing legislators to return during the 2026 session—rather than waiting until 2027—and, paradoxically, adopt the very income tax that Initiative 2111 was designed to prohibit. This strategy effectively shortened the waiting period for introducing new income tax legislation, demonstrating a determined effort by some lawmakers to establish an income tax framework.
Adding another layer of procedural complexity, Washington lawmakers included an "emergency clause" in the high-earner income tax bill. This clause asserted that the new tax, despite its 2028 effective date and 2029 filing date, was "necessary for the support of the state government and its existing public institutions." The inclusion of an emergency clause is typically reserved for urgent matters that require immediate implementation. Its use in this context was highly controversial because it shielded the measure from a provision in Washington law that ordinarily allows voters to review tax changes through a referendum process. By invoking the emergency clause, proponents of the tax effectively blocked a direct voter referendum, forcing opponents to pursue a more arduous path to repeal through their own citizen-led initiative, which ultimately became Initiative 645.
Anatomy of the New Tax: Scope, Rates, and Unique Design Flaws
The new 9.9% income tax is levied on individuals or couples with incomes exceeding $1 million annually. This threshold, while seemingly targeting an elite segment of the population, has prompted concern among various economic sectors. When combined with existing local taxes in high-cost urban centers like Seattle, the cumulative tax burden on top earners could become one of the highest in the nation. For instance, high earners in Seattle could face a staggering combined state and local top rate of 18.037 percent. This figure amalgamates the new 9.9 percent state income tax with Seattle’s 5 percent Social Housing Tax, the 2.557 percent Seattle JumpStart Tax, and the 0.58 percent WA Cares tax. Such a high combined rate raises questions about Washington’s economic competitiveness and its ability to retain high-income residents and businesses.
Analysis suggests that the tax will primarily impact small business owners and highly compensated tech workers, particularly those in the state’s thriving technology sector. While very few individuals earn straight salaries exceeding $1 million, income at this level often flows through several channels: capital gains and dividend income, pass-through business income, and restricted stock unit (RSU) vesting. The latter is particularly relevant in the tech industry, where employees often receive stock options that can vest all at once, especially when a company undergoes an initial public offering (IPO). An individual working at a startup for several years might see five years’ worth of accumulated stock vest simultaneously, leading to a sudden income spike above $1 million for that specific year, even if their average annual income over the period was significantly lower. This "lumpy income" characteristic presents a unique challenge for taxpayers and the tax’s design.
Beyond its high rate, the tax features several unusual design elements that critics argue make it problematic. For example, its charitable deduction is capped at $50,000, which is significantly lower than federal deductions and could disincentivize substantial philanthropic contributions from high earners. Furthermore, the tax imposes a "marriage penalty" by treating joint filers’ income above $1 million the same as single filers. This means two single earners each making $600,000 would not incur any tax liability, whereas if they married and filed jointly, their combined $1.2 million income would subject them to the tax, effectively penalizing marriage.
Perhaps most critically, the tax does not include any "safe harbor" provisions for those who unexpectedly find themselves subject to the tax due to a sudden surge in income. Under federal law and in most other states, taxpayers are protected from underpayment penalties if they pay at least 90 percent of their current year’s tax liability or 100 (or 110) percent of their prior year’s tax liability throughout the year through withholding or quarterly estimated payments. Washington’s new tax offers no such protection, meaning individuals with volatile or unexpectedly high incomes—such as those from RSU vesting, selling a long-held business, or generating significant capital gains from a home sale—could face substantial penalties if they misjudge their liability or fail to anticipate becoming a filer. This lack of flexibility is a significant concern for small business owners and those with non-traditional income streams.
Economic Ramifications: Impact on Small Businesses and Job Creation
Washington’s existing tax code is already heavily skewed toward business taxes, partly because it historically forgoes a broad-based individual income tax. Unlike some other states without an income tax that adopt a low-tax, limited-government ethos, Washington’s high spending priorities force businesses to shoulder a disproportionate share of the tax burden. The state imposes a high-rate gross receipts tax, the Business & Occupation (B&O) Tax, which is levied on a company’s gross sales without deductions for expenses, often leading to "tax pyramiding" as it applies at multiple stages of production. Additionally, an unusually high share of business inputs is subject to the state’s sales tax.
According to the U.S. Small Business Administration, Washington’s 672,472 small businesses, most of which are pass-through entities, employ 1.4 million people, representing 48.4 percent of all Washington employees. Imposing a 9.9 percent income tax on small business owners, on top of the existing B&O and sales taxes on inputs, creates what critics describe as the "worst of both worlds." This cumulative tax burden can severely limit small businesses’ ability to grow, invest in expansion, and create new jobs. It could also diminish their competitiveness compared to businesses in states with more favorable tax environments. The increased cost of doing business may deter entrepreneurs from starting or expanding operations in Washington, potentially leading to a slower economic growth trajectory.
The Battle for Repeal: Initiative 645 and Public Sentiment
The constitutional challenge represents one front in the battle against the new tax; the other is a direct appeal to voters through Initiative 645. This measure, placed on the November 2026 ballot, aims to reverse the legislature’s decision and prevent the high-earner income tax from taking effect. However, the campaign for repeal faces an uphill battle, made more complex by the official ballot language.
Critics have vociferously challenged the fiscal impact statement provided for Initiative 645. A 2022 state law allows the attorney general to supply a fiscal impact statement for ballot measures. For Initiative 645, this statement warns that repeal would necessitate cuts to education funding, even though the tax is not yet in place and no state budget has been adopted that incorporates these future revenues. Opponents argue that this language is misleading and prejudicial, as it frames the repeal as a reduction in existing funding rather than the prevention of future, hypothetical revenue. They contend that it unfairly biases voters against the initiative by suggesting immediate negative consequences that are not yet realized.
Despite these challenges, there is a strong historical precedent in Washington for voters rejecting income tax proposals. Time and again, citizens have voted down various forms of income taxation, reflecting a deeply ingrained skepticism toward this type of levy. The current debate is highly charged, with proponents emphasizing the need for progressive taxation to fund essential public services like education, healthcare, and infrastructure, arguing it’s a matter of fairness. They point to the state’s regressive tax system and the increasing wealth disparity as justification for taxing high earners.
Conversely, opponents, including various business associations and taxpayer advocacy groups, argue that the tax is unconstitutional, economically damaging, and prone to expansion. They raise concerns that the current $1 million threshold is merely a starting point and that lawmakers, as evidenced by the recent proposal to lower the threshold to $250,000, will inevitably seek to expand the tax to a broader segment of the population. They warn of potential capital flight, where high-net-worth individuals and businesses might relocate to states with more favorable tax climates, ultimately harming Washington’s economy.
Broader Implications and the Future of Washington’s Fiscal Landscape
The fate of Washington’s high-earner income tax—whether it survives legal scrutiny and voter repeal—will have profound implications for the state’s fiscal landscape and economic future. If the tax withstands these challenges, it could signal a fundamental shift in how Washington funds its public services, potentially paving the way for further expansions of income-based taxation. The proposal to lower the tax threshold to $250,000, even before the initial tax takes effect, reinforces these concerns among critics.
The ongoing legal battle will also test the boundaries of the state Supreme Court’s interpretation of "property" versus "excise" taxes, further defining the constitutional limits of taxation in Washington. The outcome could set a significant precedent for other states grappling with similar constitutional constraints or seeking to diversify their revenue streams.
Ultimately, the controversy surrounding Washington’s new income tax is more than just a debate about revenue; it reflects a deeper ideological struggle over the state’s economic identity, its approach to wealth distribution, and the very nature of its social contract. As 2028 approaches, the state remains at a critical juncture, with its long-held tax traditions facing their most significant challenge in modern history. The decisions made by courts, voters, and lawmakers in the coming years will undoubtedly shape Washington’s economic trajectory for decades to come.
