Washington’s ‘millionaire tax’ targets high earners as tech leaders warn of early fallout

Washington’s Democratic leaders on Tuesday finally unveiled the so-called “million tax” – a proposed 9.9% tax applied to annual taxable income exceeding $1 million.

For the first time in decades, lawmakers are improving a personal income tax targeting high-income residents that will take effect in two years, and include small business and low-income tax breaks.

The move comes as the state struggles to close a more than $2 billion budget hole through spending cuts and the announcement of potential tax reforms, while some of Washington’s largest employers cut thousands of jobs on their payrolls.

The combined pressures — set against a backdrop of continued uncertainty about government policies and funding — have leaders in the business community worried about additional financial burdens in an increasingly faltering economy.

“Raising the personal income tax is a major economic move for our state — one that will have consequences — and it’s not something we, or anyone in Washington, take lightly,” Rachel Smith, president of the Washington Roundtable, which represents business executives, said in a statement.

Others were dull.

“This tax is just another brick in the anti-business wall from state and local law enforcement. The average Amazon employee probably won’t pay attention, but these things are very damaging to the company’s creation,” Kirby Winfield, a founding general manager at Seattle venture capital firm Ascend, said in an email.

The message, Winfield said, is that “Washington does not favor job creation or wealth creation for risk-taking founders and startup workers.”

In a state that has relied heavily on property, sales and business taxes to balance its books, Gov. Bob Ferguson has repeatedly voiced support in recent months for an income tax on the state’s highest earners.

In December, he said a tax like the one proposed would apply to less than 0.5% of Washington residents and would raise more than $3 billion each year. An official fiscal note for the bill has not yet been released.

But the governor on Tuesday said the draft law falls short of supporting small businesses and low-income residents in the state. The bill is “a good start, but we still have a long way to go,” he said at a press conference.

“We listened and heard the voices of many people in Washington who are struggling right now and cannot afford our country,” Ferguson said. “And we need to deal with this.”

Tax increases and new deductions

The proposed tax, introduced as Senate Bill 6346 and House Bill 2724, includes several provisions:

• 9.9% tax on Washington taxable income in addition to the standard deduction of $1 million per individual, which is based on the corporation’s adjusted gross income.
• It allows up to $50,000 per year in charitable deductions per filer (or per couple), as well as non-refundable credits to avoid double-taxed income by Washington’s B&O, capital gains tax, or certain other exemptions.
• There are many definitions of residents who are subject to the tax, including someone who lives here more than 183 days a year.
• It will apply to income received from 1 Jan. 2028, with the first payments due in April 2029.

Proponents of the tax say it brings more fairness to the federal tax system. Washington is one of the nine states with no income tax, and has prohibited the imposition of personal income tax.

“Washington’s archaic tax code is the second-lowest in the nation, meaning working people pay more, while the gap between rich and poor continues to widen,” Invest in Washington Now, a Seattle nonprofit that supports progressive tax policy, said in a statement.

The estimate includes targeted tax breaks:

• The B&O small business tax credit is doubled, so businesses with gross annual receipts of less than $250,000 will no longer pay that tax.
• B&O’s interim payout to high-yielding companies will end a year early, in 2028.
• The Working Families Tax Credit removes the age limit for participation.
• Exemption from the new sales tax on personal care and hygiene products will take effect on Jan. 1, 2029.

In his press conference on Tuesday, Ferguson called for the biggest benefits for small businesses and families. The governor has said he wants to provide $1 billion in tax relief to small businesses, and the proposed bill provides just over $100 million. Ferguson also called for expanding eligibility for the family tax credit and providing larger amounts to recipients, as well as a broader sales tax exemption.

Now comes the negotiations with a firm timeline. This year’s 60-day legislative session is scheduled to end on March 12.

“So it’s a challenge for something this big and this complex” to find a solution, Ferguson said, but added that he sees “a lot of cooperation.”

If approved by legislators, the governor said the proposed tax will definitely go before the voters for approval and will face legal challenges.

Nixing Washington’s ‘tax advantage’

Although the new tax rate has worried some businesses, it is not the only controversial tax being considered in Olympia this year.

Tech industry leaders have been debating a separate proposal that would extend the state’s capital gains tax to claim profits from the sale of qualified small business shares (QSBS) even if the gains are exempt under federal law. The change, included in SB 6229 and HB 2292, will impact startup founders, early adopters and investors.

Aviel Ginzburg, a Seattle-based venture capitalist at Founders’ Co-op and leader of the Foundations Community Foundations, recently posted a funny video to highlight his opposition to the QSBS tax and the millionaires.

“People are happy to pay more taxes. I’m happy too, especially if … the money is well spent,” said Ginzburg, asserting that this is not the case here. “We are about to kill the golden goose.”

Other legislation like the Seattle tax, aimed at Amazon and other large companies, was floated without success last year and is not beneficial this time around.

Other states are also struggling with unaffordability and want to raise taxes on high earners, with Colorado heading to a ballot measure and Michigan considering a similar move. California, on the other hand, is assessing a one-time, 5% tax on residents making more than $1 billion — which has caused at least six billionaires to flee the state.

Ascend’s Winfield dismisses comparisons between Washington and California’s tax burdens given by other major powers in the southern state.

“Given the choice between paying ridiculous taxes here or in California, founders will just move to the Bay Area,” he said. Billions of dollars in venture capital, great technical talent and an unmatched tolerance for risk.

“Stuttle is good but not close,” Winfield said. “And if you take away the tax benefit you lose your big draw.”