Washington Voters Will Decide Whether to Keep or Reject an Income Tax on High Earners

Washington’s new income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on high earners doesn’t take effect until 2028, but it is already generating a lot of activity. A date has been set for oral arguments in a constitutional challenge to the new law. One state lawmaker recently proposed reducing the threshold to as low as $250,000. And a measure on the ballot this November, Initiative 645, would reverse the legislature’s decision, preventing the new tax from taking effect.

In 2024, the legislature overwhelmingly approved a filed ballot measure stipulating that “Neither the state nor any county, city, or other local jurisdiction in the state of Washington may tax any individual person on any form of personal income,” rather than letting it go to voters. This was largely a procedural move: amending language adopted by ballot measure requires a two-thirds legislative supermajority for the first two years. Had voters approved it in November 2024, lawmakers would not have been able to consider an income tax until the 2027 session. Taking it off the ballot and passing it themselves in early 2024 started the clock sooner, allowing lawmakers to come back during the 2026 session (rather than waiting until the 2027 session) and do what the measure prohibited: adopt an income tax.

In another procedural move, Washington lawmakers added an emergency clause to the high-earner income tax, asserting that the new tax—which doesn’t go into effect until 2028, with a tax filing date in 2029—was “necessary for the support of the state government and its existing public institutions.” This shielded the measure from a provision in Washington law that ordinarily lets voters review tax changes through a referendum. With that avenue blocked, opponents of the income tax instead filed their own initiative to repeal the tax, which was successfully placed on the ballot.

In Washington, which had no income taxation until recently, and where the constitution has previously been interpreted as largely prohibiting income taxation (hence the pending litigation), some high earners in Seattle could face the highest combined state and local top rate in the country—18.037 percent (split across employer and employee)—under the tax, combining the new 9.9 percent tax with the 5 percent Seattle Social Housing Tax, 2.557 percent Seattle JumpStart Tax, and 0.58 percent WA Cares tax.

The tax, imposed on individuals or couples with incomes above $1 million, will largely fall on small business owners and highly compensated tech workers. Very few people earn salaries over $1 million. In most instances, incomes at that level flow through three channels: capital gains and dividend income, pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income, and restricted stock unit (RSU) vesting, where years’ worth of granted shares can vest all at once, particularly when a company goes public. Someone could work at a startup for five years, and then when it goes public, all five years of accumulated stock vests at once, yielding income above $1 million even though their average income over the period is well below that.

The tax also affects pass-through businesses. According to the US Small Business Administration, Washington’s 672,472 small businesses (most of which are pass-throughs) employ 1.4 million people, representing 48.4 percent of all Washington employees. A 9.9 percent tax on small business owners imposes one of the nation’s highest taxes on their income in a state that already imposes a high-rate gross receipts taxGross receipts taxes are applied to a company’s gross sales, without deductions for a firm’s business expenses, like compensation, costs of goods sold, and overhead costs. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to transactions at every stage of the production process, leading to tax pyramiding. (the Business & Occupation Tax) and subjects an unusually high share of their business inputs to the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. .

Washington’s existing tax code is heavily skewed toward business taxes, in part because it forgoes a broad-based individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source, but, unlike other states without one, Washington doesn’t have a low-tax, limited-government ethos. This forces businesses to shoulder a disproportionate share of the tax burden. By imposing a high-rate income tax only on high earners, Washington creates the worst of both worlds for its small business owners, limiting their ability to grow and undercutting job creation.

Those with RSUs vesting aren’t the only ones who could find themselves unexpectedly subject to the tax. Someone selling a business they built up for many years, or generating significant capital gains from selling a home, could also find themselves subject to the tax in a given year.

The tax also features an unusual design. Its charitable deduction is capped at $50,000. Joint filers’ income is taxed above $1 million the same as single filers; two single earners with $600,000 each would not face any tax liability, while those two taxpayers would as joint filers. And it doesn’t include any safe harbor for those who unexpectedly become subject to the tax when their income suddenly exceeds the threshold. Under federal law and in other states, underpayment penalties are not imposed if the taxpayer pays at least 90 percent of their current year’s tax liability or 100 (or 110) percent of the prior year’s tax liability throughout the year through withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests. or quarterly estimated payments. Washington’s new tax has no such safe harbor, meaning someone who did not anticipate becoming a filer or misjudged their liability could be hit with penalties.

Repealing the new tax by ballot measure is an uphill battle, made harder by ballot language warning that repeal would require cuts to education funding, even though the tax is not even in place yet. (A 2022 law allows the attorney general to supply a fiscal impact statement to ballot measures, but critics of the statement attached to this measure point out that it speaks of decreasing funding even though the tax in question does not yet exist and no budget has been adopted incorporating those future revenues.) But especially as lawmakers start discussing ways to expand the tax to more taxpayers before it even takes effect, many voters may be inclined to do what voters in many previous Washington elections have done: reject an income tax.