Washington Gov. Bob Ferguson headed into this year’s legislative session endorsing the idea of an income tax on higher earners. But he’s not on board with the framework for that tax that Democratic legislators are unveiling on Tuesday.
“I appreciate the hard work that went into drafting this initial proposal. It’s a good start, but I cannot support it in this form,” the first-term Democrat said in a statement.
The legislation calls for a 9.9% tax on individual adjusted gross income over $1 million. The tax would take effect Jan. 1, 2028, with the first payments due in April 2029.
Democrats want to direct the revenue toward tax relief, both for individuals and businesses. This includes expanding a tax credit for low- and moderate-income households and the early sunsetting of a tax surcharge on some of the state’s biggest companies.
It’s on this front that Ferguson believes the bill falls short.
“I have repeatedly insisted that a significant percentage of the revenue generated by the Millionaire’s Tax must go back into the pockets of Washingtonians to make life more affordable,” he said. “This proposal does not come close to doing that.”
The legislation has been expected for weeks, with draft language circulating among lawmakers, business groups, accountants and attorneys.
If it is enacted, Washington would shed its status as one of nine states without an income tax on personal wages and salaries.
Supporters see the bill as a step toward reengineering a state tax code that favors the rich and forces lower-income residents to pay an outsized share of their income in taxes and fees.
But the bill is sparking bitter pushback from Republican legislators and others, who see it as opening the door to a type of taxation that the state Supreme Court ruled against in 1933 and that voters have rejected multiple times since, most recently in 2010.
Critics believe the tax will eventually creep down the income ladder and that, even now, it will deal a blow to small businesses that pass through earnings to their owners.
Challenges against the tax at the ballot box and in court are all but guaranteed.
With majorities in both chambers of the Legislature and Ferguson in the governor’s office, Democrats have the power to pass the tax over GOP opposition. They also believe public opinion is in their favor, pointing to signals like voters in 2024 upholding a tax on capital gains.
Spending side of the ledger
Democratic leaders want to direct revenue from the tax toward expanding the Working Families Tax Credit for lower-income households and removing the state’s retail sales tax on grooming and hygiene products, like soap and toothpaste.
The bill also doubles an exemption from the state’s main business tax for smaller companies, raising the threshold to $250,000 a year in gross receipts.
And it would bring an early end to a 0.5% tax surcharge on several hundred large companies with more than $250 million in annual revenue, phasing it out after 2028 instead of Dec. 31, 2029.
Some money from the tax would also flow to counties to cover the costs of public defenders for people who can’t afford lawyers, a part of the justice system that’s been under strain.
Where the tax would not help is in solving the state’s immediate budget difficulties. Lawmakers this year are trying to solve a budget shortfall that’s around $2 billion.
On the Democratic Party’s left flank, progressives have pushed for a new statewide payroll tax on large companies. They’ve argued it could raise money quickly to help avoid budget cuts and cover new costs the state is confronting due to Republican-backed federal policies.
Pedersen said late last week that the timing issue is moot and that the income tax would come online around the same time as the payroll tax.
A so-called “necessity clause,” tacked onto the income tax bill, would shield it from a referendum.
An initiative campaign to reverse it would still be possible. But an initiative requires thousands more signatures to send to legislators or voters than a referendum, making it a more time-consuming and expensive undertaking.
Taxing athletes and other fine print
The bill would not cover income from the sales of homes or certain small businesses. Taxpayers would get a credit for any capital gains taxes they pay to the state.
Professional athletes who aren’t Washington residents would be taxed on the portion of their income tied to performances in the state. College athletes with “name, image, likeness” earnings could also have to pay depending on their connections to Washington.
Opponents of the bill have seized on what they describe as a “marriage penalty,” because the $1 million threshold for paying the tax does not go higher for married couples. That floor would rise in future years to account for inflation, beginning in 2029.
Ferguson has said he does not support taxing income under $1 million.
This story was originally published by the Washington State Standard.
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