Alert
Washington State Governor Announces Support for Millionaire’s Tax
Washington Governor Bob Ferguson announced support for a 9.9% tax on income over $1 million in a single year, signaling potential significant changes to the state’s tax system.
Proposed Millionaire’s Tax
Washington is one of nine states without a personal income tax. However, Ferguson recently announced his support for a millionaires’ tax on those who make more than $1 million in income in a single year, adjusted for inflation.
The governor emphasized the limited impact the tax would have on the majority of Washington taxpayers. The potential tax could be used to reduce taxes on small businesses, increase specific tax credits, increase funding to K–12 education, and reduce sales tax on specific products.
Draft Proposed Legislation
The proposed legislation, SB 6346 and HB 2724, details the mechanics of the potential new tax. Specifically, the new tax would impose a 9.9% rate on the receipt of an individual’s Washington taxable income.
Deductions
Washington taxable income is defined as Washington base income modified by the legislation. Included in the modifications is the standard deduction, which is $1 million per individual, or in the case of spouses or domestic partners, their combined standard deduction is limited to $1 million regardless of filing status.
For nonresidents, the standard deduction is reduced based on a ratio, the numerator being the individual’s Washington base income and the denominator being the individual’s federal adjusted gross income (AGI) from all sources. The standard deduction is subject to change based on inflation.
When computing the Washington base income, modifications in addition to the standard deduction must be made. Long-term capital gains must be deducted and long-term capital losses must be added back to a taxpayer’s federal AGI. Further, a taxpayer must add to the taxpayer’s federal AGI the amount of Washington capital gains subject to the Washington capital gains tax.
Available Credits
Among the credits available, the proposed legislation allows for nonrefundable credit for the amount of tax imposed by the Washington capital gains tax.
It also provides that income tax paid to another state, or political subdivision of the state on the same income in the same tax year may be credits against this tax, subject to modification. Business and occupation (B&O) tax and public utility tax paid to Washington that was imposed on base income included in the measure of this tax may also be a credit against this tax.
The proposed legislation also adds a credit for pass-through entity tax payments. The credit is allowed against taxes due for the amount of tax expense incurred by a pass-through entity. For residents, this amount must be reduced by the amount claimed for a credit for taxes paid to another jurisdiction.
Who Does the Millionaire’s Tax Apply To?
Based on the draft language, the tax would apply to all income of Washington residents, and only to Washington-sourced income for nonresidents.
For pass-through entities, income derived from sources within Washington include an apportioned share of the individual’s distributive share of income, gains, losses and deductions from pass-through entities that operate in Washington. The tax due is computed by including a pro rata share of the Washington base income and the credits allowed.
The modification or credit is calculated by applying a fraction which has as the numerator is the member’s distributive share of the pass-through income, and the denominator is the total income of the pass-through entity.
The draft legislation also details the rules for sourcing and apportioning nonresident income from business activity conducted in Washington.
The tax would take effect on January 1, 2028.
Potential Challenges
Such a significant shift in Washington’s tax system would likely face legal challenges and potentially require an amendment to the state’s constitution as acknowledged by the governor.
Specifically, Washington’s constitution requires uniformity of property tax rates at a rate not exceeding 1%, and pursuant to Culliton v. Chase income is property. Any tax on income that has multiple rates is an unconstitutional property tax.
Consequently, an income tax only imposed on income greater than $1 million and at 9.9% rate as supported by governor is likely to face challenges. Further, a 0% rate for income between $1 and $1 million and a 9.9% for income greater than $1 million is likely to be construed as a two-tax rate regime and therefore, unconstitutional as supported by the Washington Court of Appeals decision in Kunath v. City of Seattle, 79447-7-I, Court of Appeals of Washington (2019).
Notably, similar to the anticipated challenges of the millionaire’s tax, the Washington capital gains tax survived legal challenges and was upheld—as an excise tax, distinguishable from a property tax—in 2023 by the Washington Supreme Court.
Statutory challenges may also lie ahead. Specifically, as enacted in the 2024 legislative session, Revised Code of Washington (RCW) 1.90.100 provides that “neither the state nor any county, city, or other local jurisdiction in the state of Washington may tax any individual on any form of personal income. For purposes of this chapter, ‘income’ has the same meaning as ‘gross income’ in 26 U.S.C. Sec. 61."
However, the draft language of the legislation specifically states that RCW 1.90.100 does not apply to the newly proposed millionaire’s tax.
What’s Next?
The proposed legislation is a starting point for the potential millionaire’s tax, but edits and amendments are expected in the future.
That said, Washington has attempted but failed to implement an income tax numerous times in the past, including in 2010, when voters rejected Initiative 1098. Due to the projected budget deficit and the unique taxing regime, Washington legislators are likely to continue to propose significant tax changes in an effort to continue to bridge the budget gap. We’re Here to Help
For more information or help with the proposed millionaire’s tax, contact your firm professional.