Candice Horbacz
Washington State’s recently enacted income tax on high earners, slated to take effect in 2028, is already a focal point of intense legal, legislative, and public debate, signaling a turbulent path ahead for the novel fiscal policy. The new law faces a constitutional challenge with oral arguments scheduled, a state lawmaker has proposed significantly lowering the tax threshold from $1 million to as low as $250,000, and a statewide ballot measure, Initiative 645, aims to repeal the tax before it can even be implemented. These concurrent developments underscore the profound controversy surrounding a tax that marks a significant departure from Washington’s long-standing tax structure.
The Legislative Journey and Procedural Maneuvers
The genesis of Washington’s high-earner income tax is rooted in a series of intricate legislative maneuvers that bypassed traditional voter review. In early 2024, the state legislature took the unusual step of overwhelmingly approving a filed ballot measure, Initiative 2111, rather than allowing it to proceed to a public vote. This initiative explicitly 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." On the surface, this legislative action appeared to affirm the state’s historical aversion to income taxation. However, the move was largely procedural, designed to strategically accelerate the timeline for future income tax consideration.
Under Washington law, amending language adopted via ballot measure typically requires a two-thirds legislative supermajority for the first two years following its approval. Had voters approved Initiative 2111 in November 2024, lawmakers would have been barred from even considering an income tax until the 2027 legislative session. By adopting the measure themselves in early 2024, the legislature effectively started this two-year clock sooner. This tactical decision allowed lawmakers to revisit and potentially circumvent the prohibition on income tax as early as the 2026 session, rather than waiting an additional year. It was during this expedited window that the groundwork for the current high-earner income tax was laid, demonstrating a clear intent by a legislative majority to introduce such a tax despite the state’s historical precedents.
Further demonstrating this intent, lawmakers attached an emergency clause to the high-earner income tax legislation itself. This clause asserted that the new tax – which astonishingly does not go into effect until 2028, with its first filing date in 2029 – was "necessary for the support of the state government and its existing public institutions." The inclusion of an emergency clause is a powerful legislative tool, as it typically shields a measure from a provision in Washington law that would otherwise allow voters to review tax changes through a direct referendum. By invoking this clause, the legislature effectively blocked a standard avenue for public scrutiny and potential repeal of the tax through a popular vote, intensifying criticism from opponents who viewed it as an attempt to sidestep democratic processes. This procedural blockade directly led opponents to pursue an alternative strategy: filing their own initiative, Initiative 645, to repeal the tax, which successfully gathered the necessary signatures and secured a place on the upcoming November ballot.
Constitutional Challenge and Washington’s Unique Legal Landscape
The legal battle over the income tax is poised to be a landmark case, given Washington’s unique constitutional history regarding taxation. Unlike most states, Washington has never had a broad-based individual income tax, and its constitution has been interpreted in various court decisions as largely prohibiting such taxation. This legal precedent forms the bedrock of the pending constitutional challenge. Opponents argue that the new high-earner income tax, despite being framed as an excise tax on the "privilege" of receiving income, is fundamentally an income tax and thus violates the state’s constitutional provisions requiring uniformity in taxation and prohibiting property taxes on income. The outcome of these oral arguments and subsequent rulings will have profound implications, potentially setting a new legal standard for what constitutes an allowable tax in Washington State.
For decades, Washington has relied heavily on sales taxes, property taxes, and the Business & Occupation (B&O) tax, a gross receipts tax, to fund state services. This structure has often been criticized for being regressive, placing a disproportionate burden on lower and middle-income households. Proponents of the new income tax argue it is a necessary step towards a more progressive tax system, asking the wealthiest residents to contribute a larger share to public services. However, opponents contend that even with the new tax, the state’s overall tax burden remains heavily skewed towards businesses and consumption, and that this new tax simply adds another layer of complexity and potential economic disincentive without truly reforming the underlying system.
Financial Implications and the High-Earner Burden
Under the new law, individuals or couples with incomes exceeding $1 million will be subject to a 9.9 percent state income tax. This figure, however, does not tell the full story of the potential tax burden on high earners in urban centers like Seattle. When combined with existing local and state taxes, the cumulative rate could place some Seattle residents among the highest-taxed individuals in the nation. Specifically, the new 9.9 percent state income tax could be stacked with the 5 percent Seattle Social Housing Tax, the 2.557 percent Seattle JumpStart Tax, and the 0.58 percent WA Cares tax. This aggregation could result in a staggering combined state and local top rate of 18.037 percent, split across employer and employee contributions. This figure is particularly striking in a state that, until recently, had no income taxation whatsoever.
The impact of this tax is not limited to traditional high-salary earners. The structure of the modern economy, particularly in a tech-heavy state like Washington, means the tax will disproportionately affect small business owners, highly compensated tech workers, and individuals experiencing significant, often one-time, liquidity events. Very few individuals consistently earn salaries above $1 million. Instead, incomes at this level frequently arise from three primary channels: capital gains and dividend income, pass-through business income, and the vesting of Restricted Stock Units (RSUs).
The phenomenon of RSU vesting is particularly relevant in Washington’s vibrant tech sector. An employee at a startup might accumulate shares over several years, and when the company goes public or experiences another liquidity event, all five years’ worth of accumulated stock might vest simultaneously. This single event can push an individual’s income well over the $1 million threshold in a given year, even if their average annual income over the vesting period was significantly lower. Similarly, individuals selling a business they built over many years, or realizing substantial capital gains from the sale of a home or other significant assets, could unexpectedly find themselves subject to this high-earner tax in a single year, despite not being "millionaires" in the conventional sense of consistent high annual income.
Impact on Small Businesses: A "Worst of Both Worlds" Scenario
The new income tax’s potential impact on small businesses has become a major point of contention. According to the U.S. Small Business Administration, Washington is home to 672,472 small businesses, most of which are structured as pass-through entities. These businesses collectively employ 1.4 million people, representing a substantial 48.4 percent of all employees in the state. For these small business owners whose income is taxed at the individual level, a 9.9 percent state income tax adds a significant new burden.
Critics argue that this new tax exacerbates an already challenging tax environment for businesses in Washington. The state’s existing tax code is heavily skewed toward business taxes, partly due to its historical lack of a broad-based individual income tax. Washington imposes a high-rate gross receipts tax, the Business & Occupation (B&O) Tax, which taxes a company’s gross sales without deductions for business expenses like compensation or cost of goods sold. This "tax pyramiding" effect means the tax is applied at multiple stages of production, increasing costs throughout the supply chain. Furthermore, an unusually high share of business inputs are subject to the state’s sales tax, adding another layer of expense for companies.
By introducing a high-rate income tax specifically on high earners, many of whom are small business owners, Washington is creating what some analysts describe as the "worst of both worlds." The state retains its heavy reliance on business taxes, which are generally seen as less efficient and more burdensome than broad-based income or sales taxes. Simultaneously, it now imposes one of the nation’s highest income tax rates on a segment of its business owners. This dual burden could limit their ability to invest, expand, and create jobs, potentially dampening economic growth and competitiveness. The argument is that instead of fostering a low-tax, limited-government ethos often found in other states without individual income taxes, Washington’s approach places a disproportionate and potentially stifling burden on its entrepreneurial class.
Unusual Design and Potential Pitfalls
Beyond its broad economic implications, the design of Washington’s new income tax features several unusual aspects that have drawn scrutiny. One notable feature is its charitable deduction, which is capped at $50,000. While many tax systems encourage charitable giving through deductions, this cap could limit the incentive for very high earners to make larger philanthropic contributions, potentially impacting non-profit organizations that rely on significant donations.
Another point of contention is how the tax treats joint filers versus single filers. The $1 million income threshold applies equally to individuals and married couples filing jointly. This means two single earners, each with an income of $600,000 (totaling $1.2 million), would not face any tax liability under the new law. However, if those same two individuals were married and filed jointly, their combined $1.2 million income would exceed the $1 million threshold, making them subject to the tax. This lack of a "marriage penalty" adjustment, common in many federal and state income tax codes, could create an unintended disincentive for marriage or inequitable treatment based on filing status.
Perhaps one of the most significant design flaws highlighted by critics is the absence of a safe harbor provision for those who unexpectedly become subject to the tax. Under federal law and in most other states with income taxes, taxpayers are typically protected from underpayment penalties if they pay at least 90 percent of their current year’s tax liability or 100 percent (or 110 percent for high earners) of their prior year’s tax liability throughout the year through withholding or quarterly estimated payments. Washington’s new tax, however, lacks such a safe harbor. This omission means that an individual who did not anticipate reaching the $1 million threshold, or who misjudged their liability due to a sudden income event (like an RSU vesting or a business sale), could be hit with significant penalties, adding an element of financial risk and uncertainty for those navigating complex income scenarios.
The Ballot Box Battle: Initiative 645
The ultimate fate of Washington’s high-earner income tax may well be decided by voters this November through Initiative 645. This citizen-led initiative seeks to repeal the legislative decision and prevent the tax from ever taking effect. However, the campaign for repeal faces an uphill battle, complicated by the official ballot language presented to voters.
Critics have pointed out that the ballot language warning that repeal would necessitate cuts to education funding is misleading, given that the tax is not yet in place and no state budget has been adopted incorporating these future, projected revenues. A 2022 law allows the attorney general to supply a fiscal impact statement to ballot measures, but the statement attached to Initiative 645 has been controversial, speaking of "decreasing funding" even though the tax in question does not yet exist. Opponents argue this framing is designed to sway voters against repeal by implying an immediate and tangible loss of services, despite the theoretical nature of the "lost" revenue.
Despite these challenges, the history of Washington State elections suggests that voters have a strong inclination to reject income taxes. Historical data shows multiple instances where similar proposals have been put before the electorate and decisively defeated. As state lawmakers have already begun discussing ways to expand the tax to include more taxpayers even before its initial implementation, many voters may feel an increased urgency to act. The specter of a lower threshold, as proposed by one lawmaker, could galvanize a broader segment of the population against the tax, viewing it as a potential stepping stone to a broader income tax affecting a larger portion of the populace.
Broader Economic and Political Ramifications
The ongoing saga of Washington’s high-earner income tax represents more than just a fiscal policy debate; it embodies a fundamental struggle over the state’s economic identity and the future direction of its tax system. For decades, Washington has been an outlier, thriving as one of the few states without an individual income tax, a feature often touted to attract businesses and high-income residents. The introduction of this new tax, even if narrowly targeted, signals a potential shift in this long-standing economic strategy.
The outcome of the constitutional challenge will not only determine the legality of this specific tax but could also redefine the legal parameters for future taxation in Washington. A ruling upholding the tax might open the door for more progressive tax policies, while a reversal could reinforce the state’s unique anti-income tax stance. Similarly, the ballot measure in November will serve as a crucial referendum on public sentiment. If voters repeal the tax, it will send a clear message to lawmakers about the enduring popular opposition to income taxation. Conversely, if it survives, it could embolden proponents to pursue further tax reforms.
The political ramifications are equally significant. The procedural maneuvering employed by the legislature has created deep divisions, with accusations of democratic sidestepping from opponents. The debate also highlights the tension between the desire for a more progressive tax system and concerns about economic competitiveness, especially for a state heavily reliant on the tech sector and small businesses. As Washington navigates these complex challenges, the decisions made in the coming months will profoundly shape its fiscal landscape and economic future for years to come.
