Washington’s income tax on millionaires clears Legislature; business groups worry about tax affecting competitiveness

OLYMPIA – A new tax on personal income above $1 million a year has officially cleared all legislative hurdles in the state Capitol, marking the most significant shift in state tax policy in nearly 100 years.

The state Senate voted 27-21 on Wednesday evening to concur with the tax changes the state House adopted late last week. Three Democrats voted with the 18 Republicans present in the chamber in opposition to the tax, while 27 Democrats voted in support.

While Washington is currently one of only nine states without an income tax, the bill would impose a 9.9% tax on income for joint filers or individuals with incomes above $1 million starting in 2029, with the money used to cut other kinds of taxes, as well as boost spending. Gov. Bob Ferguson is expected to sign the bill into law in the coming weeks.

State Sen. Marcus Riccelli, D-Spokane, said the expansion of free school meals to all students in the state is among the most important tax relief in the bill.

“We don’t means-test kids, whether they’re going to be able to use football helmets, school libraries or get on a bus,” Riccelli said. “This is going to have a huge impact.”

State Sen. Shelly Short, R-Addy, said Wednesday the removal of a proposal to use some of the money for counties to fund their public defense systems comes at a time when local jurisdictions are “struggling” to pay the increasing cost.

“I’ve never been wild about this bill. I think it’s the wrong direction,” Short said. “But at least, at least, there was funding, potential funding for that. And there’s not anymore.”

Final approval in the Senate came a day after a 24-hour marathon debate in the House of Representatives, where lawmakers proposed roughly 80 amendments to the wide-ranging tax policy.

Gov. Bob Ferguson is expected to sign the tax into law in the coming weeks, though it would not take effect until 2029.

Following its passage in the House on Tuesday, the governor cited many of the provisions – including an expansion to the Working Families Tax Credit, universal free school meals for K-12 students, sales tax exemptions on diapers and over-the-counter medicine, and an increased tax cut for small businesses – as pieces of tax relief that “got me to the place of supporting it.”

“It’s less than one half of one percent of Washingtonians who are paying the tax,” Ferguson told lawmakers Tuesday evening. “And I think that’s the right balance for this.”

The credit is a rebate for low-income families of $50 to $1,330 a year meant to reimburse them for sales taxes.

The bill received pushback from business groups in the state, who argued the adoption of an income tax could hurt Washington’s business climate. After the legislation cleared the House, several business-focused groups, including The Washington Roundtable, Seattle Metropolitan Chamber of Commerce and Greater Spokane Inc., said in a joint statement that “the business community continues to urge state leaders to work towards a sustainably managed budget and a tax code that will ensure Washington’s competitiveness.”

Alisha Benson, CEO of Greater Spokane Inc., said in a separate statement that “new taxes only add more pressure.”

“When businesses decide where to grow or invest, they look for stability, predictability, and a competitive overall tax environment,” Benson said. “Policies that layer on additional taxes make Washington less competitive to neighboring states, at a time when employers have many choices about where to invest and create jobs.”

While the tax would not take effect until 2029, there will likely will be years of fights in the court system and at the ballot box before it can take effect.

Critics have argued the tax goes against state Supreme Court precedent that income is considered property, and therefore must be taxed at a uniform rate. A legal challenge to stop the tax is all but certain to be filed in state court, and potentially in federal court as well.

Voters will also have the chance to decide whether the state should keep the fact, though it’s not clear which election that will take place.

“An issue this significant should be heard in the Supreme Court, and should be decided by the justices. And then ultimately, in the court of public opinion,” Ferguson said Tuesday. “So I also appreciate that part of it. The people here, the representatives here have spoken, the representatives on the Supreme Court will speak, and then if it passes there, all of the people will have an opportunity. So it’s going to get a thorough vetting before this is all done.”