A New State Payroll Tax Could Drive Jobs out of Washington

Washington state lawmakers are considering a raft of new 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. proposals, including a new 5 percent tax on employee payroll above the Social Security wage threshold, under which about 5,300 businesses (those with more than $7 million in payroll) would be liable at an estimated $2.3 billion a year in higher taxes.

Proponents are selling the bill, SB 5796, as “removing the cap” on federal Social Security taxes, which currently apply to the first $176,100 of income, though this framing obscures more than it reveals. From the outset, Social Security was designed as a social insurance program, and since benefits are capped, the amount of compensation subject to tax is also capped. Some federal policymakers have called for raising or even eliminating the cap to further fund Social Security, but there is no meaningful way in which a completely separate Washington tax, for unrelated purposes, is simply the removal of that cap.

It is, however, a significant new tax on employment at a time when many companies, particularly in the tech sector, are shedding jobs.

Over time, an employer-remitted payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. and a similar tax on high earners’ incomes would amount to roughly the same thing. Eventually, the employees themselves will bear much of the incidence of the tax in the form of lower wages so long as they remain in Washington. This will itself have the effect of reducing in-state employment by making it more expensive and less remunerative. But for the intermediate term, wages are sticky; it’s hard to actually cut salaries in the wake of a tax like this one, meaning that for at least a few years, much of the incidence would be borne by employers themselves.

The likely result is additional layoffs, and a long-term trend of shifting more employment out of state, with attrition in Washington offices and expansion elsewhere. That’s already the case under Seattle’s own version of a payroll expense tax, the JumpStart tax, with rates ranging from 0.746 percent to 2.557 percent based on each employee’s annual compensation and the total payroll expenses of the employer. City officials recently reported that the tax brought in $47 million less than expected last year, which coincided with large employers shifting more employees outside city limits. That result, however, did not prevent Seattle voters from approving a new 5 percent payroll tax on compensation above $1 million earlier this year, which is destined to drive even more high earners out of the city—and perhaps the state.

The proposed 5 percent statewide payroll expense tax would provide a credit for taxes paid under Seattle’s existing JumpStart tax, but not under the city’s newest tax, meaning that businesses could face a 10 percent tax rate on their highest-compensated employees’ income. That’s before the state’s payroll taxes to fund paid family and medical leave (0.92 percent in 2025) and long-term care (0.58 percent), for an all-in top rate of 11.5 percent on the highest earners’ wage income in a state that putatively doesn’t impose income taxes. By contrast, the median top rate nationwide is 5 percent. (Separately, of course, Washington now also imposes a 7 percent tax on high earners’ capital gains income.)

Amazon has shifted more than 10,000 employees from Seattle to Bellevue in recent years, as Seattle’s business tax burdens have risen. Even more than that, as the Bellevue Chamber notes, the company’s global workforce has grown 20 percent since the pandemic, but has shrunk by the same amount in Seattle and even dropped statewide. Meanwhile, Microsoft President Brad Smith expressed fears that a new state payroll expense tax would do lasting damage, telling an audience that “I have, frankly, never been more worried about the future of the tech sector in Washington state as I am today, in part because of the proposal,” and observing that “Unfortunately, if you make jobs more expensive, it becomes harder to keep jobs or to grow jobs here.”

Lawmakers are proposing this new tax in part as a response to the state’s considerable budget shortfalls, but unfortunately, it’s just more of the same approach to taxation that yielded the shortfall in the first place. While the national economy is certainly showing signs of strain in 2025, and markets are down, most states’ revenues have been robust in recent years. But through its constant focus on novel, and often highly uncompetitive, approaches to generating new revenue, Washington is succeeding in driving out the very businesses and individuals it relies on to fund its budget.

In all, Washington lawmakers are proposing $17 billion in new taxes—almost twice the maintenance-level shortfall. The state, with its high-rate, economically distortionary Business & Occupation 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. and a 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. that captures an unusually wide range of business-to-business purchases (especially in the digital space), has always compensated by not imposing an 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 of tax revenue in the U.S. . But increasingly, at least for some of the state’s most mobile employees, that’s true in name only. With a wealth tax, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. increases, and this new payroll tax on the agenda, among other revenue-raisers, Washington lawmakers have reason to fear that many employers could be looking for the exits.

It’s true, of course, that most companies won’t just close up shop in Washington. But layoffs are a serious threat, and whenever it comes time to decide where attrition should take place, or where new hires should be located, Washington risks making itself an unattractive option for growth and an obvious candidate for reductions in force.

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