Washington Democratic Gov. Bob Ferguson on March 30 signed historic legislation creating an income tax, saying it is a critical step toward making the state’s system of taxation less regressive.

“Thank you, thank you, thank you. We did it everybody,” Ferguson turned and exclaimed to the throng of lawmakers, union members and pro-tax advocates who squeezed into the state reception room at the Capitol to witness the signing of Senate Bill 6346.

The bill imposes a 9.9% levy on households with income above $1 million a year. Collections would begin in 2029 and generate around $3 billion a year from an estimated 21,000 filers. Approximately 450 taxpayers in the legislative districts encompassing the Tri-Cities and surrounding counties are anticipated to pay the tax.

Supporters viewed its enactment as a momentous stride toward reengineering a tax code that forces lower-income residents to pay an outsized share of their earnings in taxes and fees compared to the wealthy.

“We’ve asked Washington’s working families for far too long to shoulder far too much of the tax burden for the things that we all care about. We have not asked enough of our wealthiest neighbors,” Senate Majority Leader Jamie Pedersen, D-Seattle, the bill’s sponsor, told the crowd.

But it must clear formidable hurdles before taking effect.

The Citizen Action Defense Fund announced it plans to sue, arguing it is unconstitutional and conflicts with the state Supreme Court precedent set in 1933 when it invalidated a voter-approved income tax. Rob McKenna, a former state attorney general and 2012 Republican candidate for Washington governor, will lead the litigation.

“Washington’s constitution is clear, and the courts have been equally clear for nearly a century — income is property, and progressive income taxes are unconstitutional under existing law,” McKenna said in a statement. 

Other opponents also may mount a legal challenge in hopes of giving voters a chance to repeal the law by referendum this fall. Absent that option, they say they intend to pursue an initiative either this year or next to try to derail the legislation.

Until March 30, Washington had been one of nine states that does not tax individual wage and salary income.

The state had an income tax on the books after voters approved one in 1932. But a year later, a divided state Supreme Court tossed it. Since then, voters have rejected variations of the idea multiple times, most recently in 2010 when the income level for individuals was $200,000.

“We’re going to begin to right a historic wrong that has plagued our state for nearly 100 years and made our tax system one of the worst and most regressive in the entire country,” Pedersen said.  “I hope and believe that one day we’re going to look back on this day as the day when things really started to change for us, when our state and our system started to get more fair.”

Nuts and bolts

Senate Bill 6346 passed by margins of 51-46 in the House and 27-21 in the Senate. Overall, all  Republicans and 11 Democrats — three in the Senate and eight in the House — opposed the legislation. 

The linchpin is the 9.9% levy on adjusted gross household income above $1 million a year. It would take effect Jan. 1, 2028, with payments due the following year. The threshold would be adjusted for inflation every two years.

An estimated 21,000 filers would be subject to the tax March 30 with one-third residing in the 41st, 45th and 48th legislative districts in King County, according to the state Department of Revenue. These include high-end zip codes in Hunts Point, Medina, Clyde Hill, Mercer Island, Bellevue, Redmond, Issaquah and Sammamish.

Republicans contend the tax will eventually drop down the income ladder.

“Today is a dark day in our state’s history. Republicans have said all along that an income tax on anyone in our state will become an income tax on everyone,” Senate Minority Leader John Braun, R-Centralia, said in a statement.

Statewide business associations warn the new tax will not benefit most small companies. And successful tech entrepreneurs warn of an exodus of those willing to settle here and launch start-ups.

“We’ve seen what happens when states pursue this path: wealth leaves,” said Seattle entrepreneur Jesse Proudman. “I’ve spent decades building businesses in Washington and want to stay. But either the constitution constrains government power, or it doesn’t and I’m willing to fight over that point.”

The tax itself was not the point of contention among Democrats in the session. Rather it was how much of the $3 billion in anticipated receipts to pledge for tax relief and how much to steer into the operating budget to pay for an array of services and programs.

One of the largest chunks of proceeds will go to expand the state’s Working Families Tax Credit to cover people who are at least 18 years old and to boost the income levels for eligibility.

It is estimated the credits, which range from $50 to $1,330 a year, would be available to 810,000 lower-income households, up from the current 350,000. This change will cost roughly $230 million a year.

The law earmarks 5% of annual tax proceeds for the state’s Fair Start for Kids Act starting in 2029. This would shore up financial support for child care and early learning programs.

If the law stands, companies grossing less than $300,000 a year will be exempt from paying the state’s main business tax. Sales tax for diapers, personal care products, like shampoo and deodorant, and many over the counter drugs will be eliminated on Jan. 1, 2029.

And most retail sales taxes lawmakers adopted last year on services will end on Jan. 1, 2029. A tax on advertising services that drew a lawsuit from cable giant Comcast will remain in place.

Starting July 1, public schools will be exempt from paying this new sales tax on services, including for live presentations, temporary staffing and security. However, this could change if the law is paused due to a legal challenge. 

Language added in the House aims to assure the public that if household income is below a million dollars, you won’t ever be subject to the tax.

It says that the provision exempting the tax from a ban on personal income taxes adopted in 2024 is only effective “so long as the standard deduction is at least $1,000,000 for a household.”

Democrats also reworked the opening section laying out the purpose and intent of the legislation. It is filled with aspirational ideas and nonbinding pledges, such as free school lunches for public school students, that became critically important to secure votes.

The law directs the state Department of Revenue to begin setting up the means for administering this new tax system. It also establishes an advisory council of tax experts, lawyers and lawmakers to monitor its development and rollout.

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.