BREAKING DOWN THE INCOME TAX

BREAKING DOWN THE INCOME TAX 

Senate Bill 6346

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Myth vs. Reality

Background

In 1933, the Washington State Supreme Court ruled that a graduated income tax violates the state constitution’s requirement for uniform property taxation. The Court has consistently reaffirmed that any graduated income tax would require a constitutional amendment.

Voters have repeatedly said they don’t want a state income tax. Since 1934, ten separate ballot initiatives to enact a graduated income tax have all been rejected—most recently in 2010.

In 2024, voters sent I-2111 to the Legislature, explicitly prohibiting the state and local governments from imposing an income tax. The measure passed the House 76–21, with unanimous Republican support.

How the Tax Works

  • Imposes a 9.9% state income tax on income earned in Washington—or by Washington residents in other jurisdictions—with a $1 million standard deduction for both individuals and married couples.
  • First payments would be due in April 2030.
  • Applies broadly to income, starting with federal adjusted gross income (AGI), which includes:
    • Wages and salaries
    • Pass-through business income
    • Investment income from Washington-based rental properties
  • Provides limited credits for:
    • Taxes paid to other jurisdictions
    • B&O taxes paid on the same income
    • State capital gains taxes
  • Amends I-2111 to exempt this policy from the voter-approved income tax ban.
  • Makes intentional nonpayment or failure to collect the tax a Class C felony.

Estimated annual revenue: $3.4 billion.

Who Pays

While framed as a “millionaires’ tax,” the structure is broad and far-reaching and applies to:

  • Washington residents: Taxed on all income, regardless of where it is earned.
  • Non-residents: Taxed on income sourced to Washington, including wages, business activity, and property income.
  • Small business owners: Owners of LLCs, S-corporations, and sole proprietorships are taxed on business profits—even if those earnings are reinvested rather than taken as income.
  • Athletes: Professional “duty days” and college NIL earnings tied to Washington are targeted.

What is Exempt

  • First $1 million of income (standard deduction).
  • Real estate sales.
  • Qualified family business sales.
  • Up to $100,000 in charitable contributions.
  • Tribal income.

Key issue: Married couples receive the same $1 million deduction as single filers—penalizing marriage.

Tax Reductions

Although the income tax was sold as a way to make the state tax code less regressive, only 30% of the revenue is going back to the people in tax relief:

  • Provides limited sales tax exemptions (e.g., hygiene products, diapers, OTC drugs).
  • Expands the Working Families Tax Credit (modestly expands age and income-eligibility).
  • Increases B&O tax credits for very small businesses (increases the filing threshold to $250,000 and makes minor adjustments to other credits).
  • Eliminates sales tax on certain services (repeals the 2025 tax increases except advertising services).
  • Modifies the high-earner B&O surcharge for certain health care entities and food producers.

However, broader tax relief—such as lowering the overall sales tax rate—was rejected.

False Promises

The bill includes a number of promises that were not supported by legislative action:

  • The bill purports to be a millionaires’ tax, but structurally it’s a tax on everyone with a temporary $1 million deduction. Dems refused to set the $1 million threshold in the state constitution.
  • The bill states that the Legislature intends to provide free breakfast and lunch for all students, but the Legislature did not appropriate any actual funding for these meals.
  • The bill states that the Legislature intends to provide more funding to cities and counties through a new account, but the Legislature did not create the account or provide any funding.
  • While the budget outlook includes placeholders for both school lunches and local government funding, it is only an accounting document, and neither the income tax bill nor the budget bill imposes any binding requirement to fund these items.

Bottom Line

This bill:

  • Contradicts longstanding constitutional precedent and almost a century of voter direction.
  • Creates a broad-based income tax framework using federal AGI.
  • Targets small businesses and mobile taxpayers.
  • Provides limited, temporary offsets while rejecting broader tax relief.
  • Opens the door to future expansion to all income levels.

This proposal is not just a tax on high earners—it is a structural shift toward a statewide income tax system.

WASHINGTON STATE HOUSE REPUBLICANS