Washington’s new high-earners income tax — if it survives lawsuits and an expected ballot challenge — is projected to raise billions of dollars a year.
How to divvy up that new cash influx was a big subject of debate as majority Democrats negotiated which tax cuts to pair with what supporters call the “millionaires tax.”
Gov. Bob Ferguson tried to draw a line in the sand, arguing during a Feb. 17 news conference that “more than half” of the money should be sent back to Washingtonians through tax breaks for businesses and people.
Lawmakers budged some on the governor’s suggestions. But the final tax bill passed by the Legislature devotes less than a third of its proceeds to tax cuts and rebates. The rest will grow the state’s operating budget.
Ferguson is expected to sign Senate Bill 6346 into law Monday, enacting the 9.9% tax on earnings of more than $1 million for individuals and couples. It would start on 2028 income with the first payments due in 2029, affecting an estimated 21,000 filers.
In the 2030 fiscal year, once the tax is fully up and running, it’s projected to bring in roughly $3.7 billion. Of that, about $1 billion, or 28%, would go toward tax relief, with the rest dedicated to state spending. In 2031, roughly 30% of the estimated $3.2 billion in tax proceeds would go to tax cuts.
And the biggest tax reduction in the bill — worth nearly $500,000 annually — merely rolls back a tax increase lawmakers imposed last year when they added the sales tax to an array of previously exempt services, such as temporary staffing, IT help and software development.
State Senate Majority Leader Jamie Pedersen, D-Seattle, defended the final tax-versus-spending mix in an interview, saying lawmakers needed to correct long-standing flaws in the tax code that have left the state unable to keep up with rising demand for services.
The levy on Washington’s wealthiest residents will mostly bolster the state general fund operating budget, which pays for K-12 schools, universities, social services, prisons and health care. A 5% share of the new tax is devoted to the Fair Start for Kids fund, which pays for early education and child care subsidies.
Pedersen said the tax cuts included in the bill are nothing to scoff at and will lower costs for millions of state residents every time they go shopping.
Starting in 2029, the sales tax will be eliminated on purchases of over-the-counter drugs, diapers and hygiene products like toothpaste and shampoo. “Anything that you buy in a grocery store pretty much is going to be tax-free whether it’s Advil or Crest toothpaste, or Pampers or whatever,” Pedersen said.
The bill also doubles the exemption threshold for when businesses have to pay the state’s business and occupation tax, to $300,000 in annual gross revenue. Businesses grossing up to $600,000 will also get some relief.
And it vastly expands eligibility for the Working Families Tax Credit, which sends annual rebates of between $335 and $1,330 to eligible state residents.
Under current law, for example, a married couple with three kids can get a $1,335 annual check if they earn about $69,000 or less. The expansion would make them eligible for a rebate if they make up to $138,000.
Ferguson praised the expanded rebates as key to his support for the final “millionaires tax” bill, noting it would make another 460,000 households eligible for the annual rebates, totaling an additional $230 million annually.
“That’s money straight back into the pockets of working families,” he said in a statement earlier this month.
Ferguson and other Democrats have also touted the tax as paying for free school breakfast and lunches for all public schoolkids, though that is only included in a nonbinding intent section of the bill.
Majority Democrats rebuffed some of Ferguson’s other major tax-relief proposals, including a larger tax break for small businesses and two “sales tax holidays” per year on purchases of less than $1,000.
Republicans unanimously opposed the new high-earners income tax, which they argue will eventually be extended to many more households earning below $1 million.
Sen. Chris Gildon, R-Puyallup, said in an interview he likes some of the tax cuts included in the bill, such as ending the sales tax on diapers and shampoo.
But Gildon said that falls short of more substantive tax relief, like just lowering the state’s 6.5% sales tax. Several amendments proposing to lower taxes were rejected by majority Democrats.
“It’s not going to add up to a whole lot of dollars in people’s pockets,” he said.
Gildon also criticized the expansion of the Working Families Tax Credit, questioning whether families with six-figure incomes should be getting rebates from the state.
Despite his earlier demands for additional tax relief, Ferguson signaled support for the final compromise bill as it passed the Legislature a couple weeks ago. He joined cheering House Democrats in the wings of the House chamber when they passed the measure after a marathon, 24-hour-long debate.
Speaking briefly with reporters at the end of the legislative session, Ferguson dismissed concerns that the new tax will drive away businesses and wealthy people in any significant numbers.
He predicted voters will bless the final tax plan if it heads to the ballot.
“I feel confident when the people see where those dollars go — small business tax breaks, dollars back to individuals, free breakfast, free lunch, I think the people are going to like it,” he said.
