Washington Gov. Bob Ferguson and Democrats in the state Legislature are divided over how to use the expected revenue from a newly proposed income tax on higher earners.

Lead lawmakers in the House and Senate unveiled the legislation Jan. 3.

It calls for a 9.9% tax on personal adjusted gross income over $1 million. Income below that level would not be subject to the tax. The levy would take effect Jan. 1, 2028, with first payments due in April 2029. Backers estimate the tax would raise about $3.5 billion a year, roughly equivalent to a little less than 10% of the state’s current annual operating budget. 

Democratic lawmakers and the governor agree revenue from the proposed tax should go toward tax relief, both for individuals and businesses. But less than two hours before legislators rolled out their proposal on the morning of Jan 3, Ferguson, who is also a Democrat, blasted out a statement saying he did not support the bill in its current form because it does not do enough on this front.

“I have repeatedly insisted that a significant percentage of the revenue generated by the Millionaire’s Tax must go back into the pockets of Washingtonians to make life more affordable,” the governor said. “This proposal does not come close.”

If enacted, Washington would shed its status as one of nine states without an income tax on personal wages and salaries. 

Supporters see the bill as a step toward reengineering a state tax code that favors the rich and forces lower-income residents to pay an outsized share of their income in taxes and fees.

“We have a broken, upside-down tax system that we have been stuck with for 90 years. We have a generational opportunity in front of us to change that trajectory and to make the whole system fairer,” Senate Majority Leader Jamie Pedersen, D-Seattle, told reporters Jan. 3.

Pedersen said he and other Democrats are “interested in shifting the tax system, shifting the tax burden so that it’s paid by wealthier people and large businesses who have the capacity to pay.”

The bill is sparking bitter pushback from Republican legislators and others, who see it as opening the door to a type of taxation that the state Supreme Court ruled against in 1933 and that voters have rejected multiple times since, most recently in 2010.

Critics believe the tax will eventually creep down the income ladder and that, even now, it will deal a blow to small businesses that pass through earnings to their owners.

“It’s only a tax on millionaires this session. It will quickly become a tax on people like you and me,” said House Minority Leader Drew Stokesbary, R-Auburn.

Ferguson has said he will not sign off on taxing income under $1 million.

House Majority Leader Joe Fitzgibbon, D-West Seattle, on Jan. 3 said lawmakers aren’t looking at lowering the tax threshold. But he stopped short of saying it could never happen.

“We’re not going to bind future legislatures,” he said. “But that’s not a proposal that we support.”

Fitzgibbon and Pedersen are the lead sponsors of the bill in their respective chambers.

With majorities in the House and Senate and Ferguson in the governor’s office, Democrats have the power to pass the tax over GOP opposition. They also believe public opinion is in their favor, pointing to signals like voters in 2024 upholding a tax on capital gains. But with 37 days to go in the session, they’ll need to come to an agreement over how to use the revenue.

Tax relief

As written, the bill would use revenue from the income tax to pay for expanding age eligibility for the Working Families Tax Credit, which goes to low- and moderate-income households. The bill would open the program to those 18 and older, allowing about 120,000 more people to qualify, lawmakers said.

The legislation would also remove the state’s retail sales tax on grooming and hygiene products, like soap and toothpaste.

Other provisions offer tax breaks for businesses.

One would double a tax exemption from the state’s main business tax for smaller companies, raising the threshold to $250,000 a year in gross receipts.

Another would bring an early end to a 0.5% tax surcharge on large companies with more than $250 million in annual revenue, phasing it out after 2028 instead of Dec. 31, 2029.

Some money from the income tax would also flow to counties to cover the costs of public defenders for people who can’t afford lawyers, a part of the justice system that’s been under strain.

Pedersen said about 20% of revenue from the tax would go to the various tax relief measures Democrats embedded in the bill, including those for businesses and individuals, while the other 80% would go to general spending.

Ferguson said that the proposals to expand the Working Families Tax Credit, eliminate the retail sales tax on some goods, and expand the tax break for small businesses add up to around $230 million, or roughly 7% of the expected revenue. 

He said that share is much too low, but declined to give a specific benchmark he is aiming for.

The governor did suggest he wants to go further than legislators have proposed in expanding the Working Families Tax Credit. 

“The eligibility is too narrow right now. Too many working families don’t qualify,” he said on Jan. 3.

He added that he wants to see the amount of the credit expanded as well, from its current range, which tops out at around $1,300 a year.

The governor also indicated he wants to see tax relief for small businesses that goes well beyond what’s in the bill. And he said he supports broader retail sales tax rollbacks for essential goods, including items like diapers and other baby products.

“I remain confident that we’ll get where we need to be,” Ferguson said. “There’s still plenty of time left in this legislative session.”

Ferguson has talked for months with the legislators developing the proposal. When he announced his position on Jan. 3, it caught them offguard.

“We were a little surprised by the governor’s statement, given the fact that less than 24 hours ago, we had a very positive conversation with him about our progress,” Fitzgibbon said. “His statement this morning was a little bit different than what we heard from him yesterday.”

Still, both Fitzgibbon and Pedersen described the bill as a starting point for further discussions.

Where the tax will not help is with the state’s immediate budget difficulties. Lawmakers this year are trying to solve a financial shortfall of around $2 billion.

On the Democratic Party’s left flank, progressives have pushed for a new statewide payroll tax on large companies. They’ve argued it could raise money quickly to help avoid budget cuts and cover new costs the state is confronting due to Republican-backed federal policies.

Pedersen has said that the timing issue is moot and that the income tax would come online around the same time as the payroll tax.

Rep. Shaun Scott of Seattle, a Democratic Socialist, who is championing the payroll tax legislation, welcomed the income tax bill.

“This is a win,” he said. “People have kept alive the idea that Washington can do what most other states in our union do, which is make the ultra-wealthy individuals pay their fair share.”

One provision Scott wants to see removed is the earlier sunsetting of the surcharge on large businesses, a move that could siphon $600 million from the general fund that lawmakers counted on when they imposed it last session. Scott also said lawmakers shouldn’t lose sight of the near-term budget problems as they hash out the tax legislation.

The fine print

The bill specifies that it would not cover income when homes or certain small businesses are sold. Taxpayers would get a credit for capital gains taxes they pay to the state.

Professional athletes who aren’t Washington residents would be taxed on the portion of their income tied to games and other days working here. College athletes with “name, image, likeness” earnings could also have to pay depending on their connections to Washington.

Opponents of the bill have seized on what they describe as a “marriage penalty,” because the $1 million threshold for paying the tax does not go higher for married couples. That income floor would rise in future years to account for inflation, beginning in 2029.

Pedersen said the bill takes steps to address concerns about the tax falling too heavily on people with earnings from pass-through businesses, like limited liability corporations and S corporations. For example, there’s a credit for business taxes paid, and an option for companies to pay the tax on behalf of the owners and then claim it as a tax-deductible expense.

In a joint statement, major business associations in the state said they are “carefully reviewing” the proposal.

“Though framed as a personal income tax, this legislation has clear and significant implications for business activity,” reads the statement from the Washington Roundtable, Association of Washington Business, Bellevue Chamber of Commerce, Seattle Metropolitan Chamber of Commerce, and Greater Spokane Inc.

Joe Fain, president and chief executive officer of the Bellevue Chamber, cited concerns about issues like the treatment of pass-through entities, charitable deductions and interactions with other state tax policies. He flagged recent slow growth and job losses in the private sector.

A committee hearing on the bill is scheduled this Jan. 6 in the Senate Ways and Means Committee.

If the tax passes, challenges at the ballot box and in court are all but guaranteed.

A so-called “necessity clause,” tacked onto the income tax bill, would shield it from a referendum. An initiative campaign to reverse it would still be possible. But an initiative requires thousands more signatures to send to legislators or voters than a referendum, making it a more time-consuming and expensive undertaking.

Pedersen said he expects voters will get to weigh in on the tax through an initiative this fall.

Washington State Standard reporter Jerry Cornfield contributed to this report.

This story is republished from the Washington State Standard, a nonprofit, nonpartisan news outlet that provides original reporting, analysis and commentary on Washington state government and politics.