What's Happening?
The Washington state legislature has concluded its 2026 session, passing significant tax legislation that includes a new state income tax, often referred to as the 'millionaires' tax,' and changes to the estate tax. The income tax, set to begin in 2028,
will impose a 9.9% tax rate on income exceeding a $1,000,000 deduction, which is indexed for inflation. This tax will apply to residents and nonresidents earning income from Washington sources. Additionally, the legislature has decided to revert the estate tax rates to pre-2025 levels, with a maximum rate of 20% for estates over $9 million. These changes are pending the signature of Governor Bob Ferguson and are expected to face legal challenges.
Why It's Important?
The introduction of the 'millionaires' tax' marks a significant shift in Washington's tax policy, potentially impacting high-income earners and businesses operating in the state. The tax aims to generate additional revenue for state programs but may also influence the economic behavior of wealthy individuals and businesses, possibly affecting investment and residency decisions. The estate tax changes could provide relief to large estates, but the freezing of the exemption at $3 million without an inflation index may limit its long-term benefits. These developments could set a precedent for other states considering similar tax reforms.
What's Next?
Governor Ferguson is expected to sign the tax bills into law, after which they will likely face legal challenges. Organizations such as the Citizen Action Defense Fund have already indicated plans to contest the income tax in court. The outcome of these legal battles will determine the future of Washington's tax landscape. Stakeholders, including taxpayers and legal experts, will closely monitor these proceedings, as the decisions could have broader implications for state tax policies nationwide.
