Washington State “Millionaire” Tax Soon to Be Law

The Washington State Legislature just enacted legislation imposing a 9.9% income tax on individuals with annual gross income of $1 million or more (statutorily referred to as the “millionaires’ tax”). This new income tax will be effective for tax years beginning January 1, 2028 and later. Governor Furguson is expected to sign the new tax into law shortly.

Both Washington State residents and nonresidents can be subject to this new millionaires’ tax. Essentially, this new tax provides for a $1 million standard deduction (not increased for married filers), indexed for inflation and subject to specific modifications (for example, capital gains already subject to Washington tax), and then imposes tax on the remainder.

Income allocated on Schedules K-1 from pass-through entities is included. Nonresidents with Washington state sourced income generally compute their standard deduction based upon the percentage of their Washington state sourced income over their total federal adjusted gross income from all sources.

Certain sources of income will be excluded from this new millionaires’ tax, including income from the sale of residential and other real property and gain from the sale of qualified family-owned small businesses.

Likely Challenges to the Millionaire Tax

The Washington State Constitution provides that all taxes shall be “uniform” within the state, and courts have previously held this provision means a graduated income tax (applying non-uniform tax rates) is not constitutional.

In 2024, the Washington legislature enshrined a citizen’s initiative into law, establishing that state and local governments may not impose an income tax. Based upon this, there will no doubt be various legal challenges to this millionaires’ tax, and the Washington Supreme Court will likely have final say on whether this tax is constitutional.

The Washington Supreme Court creatively upheld as constitutional a recent capital gains tax as an “excise tax” and there will no doubt be pressure again on the Court to conclude this millionaires’ tax accords with the Washington State Constitution.

The Washington State Legislature and the Governor claim that a portion of the new tax revenue will be used to provide family tax credits and to reduce the business and occupations tax rate for small businesses. These policy arguments, though, would not necessarily be relevant for a court considering the constitutionality of an income tax under the Washington State Constitution.

The End Result

This millionaires’ tax, once signed into law, will not be effective for almost two more years (January 1, 2028). In the meantime, there will likely be numerous legal challenges. Whether the law actually takes effect in 2028 will depend upon the results of this litigation (and probably ultimately a decision by the Washington Supreme Court).

The Washington Department of Revenue (DOR) will also need to promulgate regulations providing definitions and methods to compute the tax, as well as publishing new tax forms for purposes of reporting the tax.

We recommend affected taxpayers begin planning now for the tax year 2028.