Washington’s Novel Millionaires Tax Inches Closer to Reality

States are struggling to make up for revenue gaps in the wake of federal cuts and President Donald Trump’s tax-and-spending law.

In Washington state, lawmakers have answered the challenge with a novel tax on millionaires. The legislature recently sent a bill (S.B. 6346) to Gov. Bob Ferguson (D) that would create the state’s first income tax.

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If Ferguson signs it, which he is expected to do, individuals and households in Washington making more than $1 million a year would be subject to a 9.9% income tax.

But things won’t change in Washington right away. The tax will likely be challenged both in court and at the ballot box, where 10 previous attempts at an income tax have failed.

Proponents of the bill say the measure helps correct the state’s regressive tax structure that is heavily reliant on sales tax, while opponents say the tax will make the state less competitive.

On this episode of Talking Tax, Correspondent Casey Murray discusses the politics and long path ahead for the tax.

Do you have feedback on this episode of Talking Tax? Give us a call and leave a voicemail at 703-341-3690.

This transcript was produced by Bloomberg Law Automation.

David Schultz:

From Washington, I’m David Schultz, and this is Talking Tax.

And then there were eight. There will soon be only eight states that have no income tax after Bob Ferguson, the Democratic governor of Washington state, signs into law what legislators there are calling the millionaire’s tax. The tax passed out of the statehouse last week would only apply to Washingtonians with incomes of a million dollars or more, hence the name. But as you’ll hear in a bit, it’s far from clear whether any millionaires will ever actually pay a dime of this new income tax.

To explain why, we’re going to hear today from Bloomberg tax correspondent Casey Murray. She’s going to get into other similar measures working their way through other states and why the political branding here really matters.

First I asked her to explain to me what Washington state lawmakers did and how this new tax will work.

Casey Murray:

So the millionaire’s tax, which just passed the legislature recently, is a 9.9% tax on households or individuals making over a million dollars a year. It’ll first be collected in 2029, applying to the tax year 2028. The state is currently one of nine that has no income tax. So if this is successfully implemented, it would be a pretty significant change for the state. They’re facing some pretty significant budget issues, so this would also go a long way in kind of helping them patch up the gaps they’re looking to fill.

David Schultz:

.So for most people in most states, I think they would hear this and think like, okay, income tax, like big deal, who cares? But Washington is not a state that has had an income tax before. And there’s a long drawn out history of the state not having an income tax, but almost having one and then rejecting it. Can you get a little bit into that about why the state never had never adopted an income tax?

Casey Murray:

Yeah. So legislators have wanted to get an income tax done in Washington state for years and years now, partly because the state does have a pretty regressive tax structure. That’s partly because there’s no income tax. So the state heavily relies on sales tax instead. But the reason they don’t have one is a 1933 state supreme court ruling that basically said that there’s language in the constitution that bars a graduated tax rate. So the decision basically said Washington could institute a flat income tax rate if they wanted to, which some states do have. But that would mean every Washingtonian would pay, you know, 9.9% income tax, which is obviously not going to be popular. You know, there’s like a million reasons why legislators would not want to institute that as the state’s first income tax.

So they’ve tried. There’s been 10 different times total that an income tax has been attempted.

David Schultz:

10 times?

Casey Murray:

Yes. At least through some sort of ballot measure. And the attempts have either been invalidated in court or invalidated at the ballot box. The most recent attempt was in 2010. That tax would have applied to households making over $200,000 a year. It never reached a court challenge because it was invalidated at the ballot box. So it’s been a struggle for them. And I think now they’re kind of legislators are latching onto this populist movement where taxing the rich is a lot more popular than it could have been. And I think they’re hoping that that will float the tax ultimately with voters. And then hopefully through the supreme court, lawmakers have kind of made an argument that this supreme court ruling is super old and it’s never been challenged, really. And so there’s an opportunity now for the modern supreme court to take a different side.

Right. It’s not that uncommon that court rulings are overturned when, you know, thought changes and law changes. And so proponents of the tax argue that the arguments, the 1933 ruling is based on are obsolete. Obviously, opponents of the tax don’t feel that way.

David Schultz:

But that’s a really good point that, you know, this is a long way to go before it becomes a reality. It could get overturned in court theoretically, although it sounds like the people who are drafting this are optimistic that won’t happen, or it could get thrown out by the voters in a ballot initiative. So this is it’s a long way from a done deal, it sounds like.

Casey Murray:

It is. The tax wouldn’t be instituted for several more years anyway, but there will definitely be some sort of ballot fight. And then ultimately, if the tax is enacted, there will definitely be court cases. And so, yeah, I mean, we’ll see. It’s still going to be a story for the next few years, I think, as people try to actually get it done.

David Schultz:

Yeah. Even though, you know, it’s not a done deal and it won’t go into effect for a long time. A lot of people are already talking about it. I happen to be reading ESPN.com.

Casey Murray:

My favorite tax news site. Yeah.

David Schultz:

Yeah, right. ESPNtaxnews.com. And the general manager of the Seattle Seahawks said this could actually affect the team because it will be harder to sort of lure athletes making a lot of money to Washington now that it has an income tax. I mean, this is a big deal, even though it’s still preliminary-ish.

Casey Murray:

Right. I mean, that’s one of the biggest arguments made by opponents of the tax. I know there was one business leader in Washington that said this is the state’s one big incentive, that not having an income tax is part of what has borne out this sort of startup tech industry that they have. Obviously, others disagree, right? They feel that these large successful companies and the individuals who have made money working from them should give back more to the state. And so that is part of the core debate here, right, is if the state needs more money, how are they going to get it? And do general Washingtonians think it should come from people making a million dollars a year who are not necessarily the most sympathetic? But business leaders are trying to make an argument that it hurts everyone if individuals who are founding companies and supporting some of the largest employers in the state leave.

David Schultz:

Is this going to happen in any of the other states without an income tax? You know, I guess now there are only eight. Could we see this spread?

Casey Murray:

So Washington is a bit of an outlier already. It’s one of the few blue states that does not have an income tax. Most of the other states would be sort of the likely suspects, like Texas and Florida. So I don’t necessarily know that this is a theme that will spread because most states have an income tax. I think there are ongoing changes to tax code as states are struggling to make up the gaps left by Trump’s tax bill. Even in places like Texas and Florida who are debating other ways to make up the gap. But I think there are a long list of wealth tax efforts that are growing. I’m based in California and there’s no shortage of efforts to increase the tax burden on the wealthy here. There’s a ballot measure that’s currently being qualified for the November ballot that would tax billionaires. That’s a unique measure because it’s not just about income. It’s trying to take a holistic look at wealth and capital to determine billionaires. It’s a one-time tax, which is really unique.

Massachusetts passed a 4% surtax on incomes over a million a few years ago. Colorado has improved some measures. So Zohran Mamdani in New York, campaigned on raising the city’s income tax on millionaires by two percentage points. So in blue states, this is not necessarily a new thing. It’s just Washington hasn’t been able to join them on that.

David Schultz:

Well, one thing that I’m hearing from you in that list is the cutoff for income seems to be very similar in a lot of these states and it seems to be around a million dollars or I guess in California, a billion dollars. That can’t be a coincidence. It has to be sort of a branding thing where it’s like people, when they hear I make over a million dollars in a year, something kicks in psychologically that says like, yeah, it’s okay to go after those people. Is that part of it that makes it more politically palatable that we’re saying this tax will only apply to millionaires?

Casey Murray:

I think it definitely is. I would actually refer to the Los Angeles mansion tax as sort of an example of this because the mansion tax was passed. It’s formally known as Measure ULA, but its slogan was the mansion tax. And that slogan was very influential in getting support, even though Measure ULA does a lot of things that are not just taxing quote unquote mansions. And so that measure has become the center of a huge political fight in the whole state of California because of the kind of reverberating effects of the measure that had nothing to do with mansions.

San Francisco has a like quote unquote, it’s called like overpaid CEO’s tax or something like that. That’s like the slogan. These slogans are clearly, you know, politically constructed to make voters think something about it and to kind of garner that populist support. I think obviously whether or not that’s justified is, you know, in the eye of the beholder, but certainly the millionaires tax, I think Americans have long held millionaires as that’s sort of the peak identity of wealth and privilege is when your income hits a million dollars.

David Schultz:

All right. That was Casey Murray talking with us about the millionaires tax in Washington state and elsewhere. Casey, thank you so much for doing this. I really appreciate it.

Casey Murray:

Thank you so much for having me. This was fun.

David Schultz:

And that’s it for today’s podcast. You can find up to the minute news in the latest tax and accounting developments at our website, news.bloombergtax.com. That website once again is news.bloombergtax.com.

Today’s episode is produced by myself, David Schultz, and our editor was Amelia Gruber.

From Washington, I’m David Schultz. Thanks for listening.