Olympia’s Latest Power Grab: A State Income Tax Disguised as Something Else

A long-expected bill (SB 6346) from Majority Leader Jamie Pederson (D-Seattle)  that would implement a state income tax for Washington has now been introduced. This is despite voters rejecting a statewide income tax more than ten times at the ballot box. And despite lawmakers voting in 2024 to reaffirm Washington’s ban on an income tax. Incredibly, 14 state senators that voted to ban a state income tax in 2024 are now sponsoring the bill to enact one in 2026.

Supporters are marketing this as a “tax on millionaires.” But the details paint a very different picture, one where Washington’s longstanding tax advantages are reversed, and where future tax increases could come with nothing more than a simple majority vote of lawmakers. As one Democratic state representative recently acknowledged in a public preview of the session, you “can’t trust” lawmakers’ promises that this tax wouldn’t eventually impact the middle class.

Here’s what’s included in the income tax bill:

• Imposing a 9.9% rate on taxable income above $1 million — a structure that would also pull in nearly all small and mid-sized businesses that report earnings on personal returns.
• Set the threshold at $1 million per household, meaning married couples are taxed on combined income, not individually. So, the millionaires tax is now already a $500,000 level tax.
• Raise an estimated $4 billion annually, adding a massive new revenue stream on top of recent tax increases.
• Override the 2024 income tax ban, explicitly exempting this bill from the voter-affirmed prohibition on income taxes.
• Allow taxation of public pension income, reversing long-standing protections for retirees.
• Begin in January 2028 (now a year ahead of what was in their draft proposal last week), with future changes requiring only a simple majority vote of the Legislature.

Here’s why it matters:

The Impact on Small Businesses

Despite being marketed as a “millionaires tax,” the proposal would largely bypass big multinational corporations, which are often structured to avoid personal income taxation, while falling heavily on locally owned small and mid-sized businesses.

That’s because thousands of Washington businesses operate as S corporations, LLCs, partnerships, and sole proprietorships. These are known as pass-through entities, meaning business profits are reported on the owner’s personal tax return. Under this proposal, that income would be taxed at the individual level — even if the money is reinvested into payroll, equipment, or keeping the doors open during slow periods.

This would impact a wide range of everyday employers across the state, including:

• Independent contractors and consultants
• Family-owned construction and contracting companies
• Local restaurants and franchise owners
• Real estate and property management businesses
• Medical, dental, and legal practices
• Farmers, ranchers, and other agricultural operations

Supporters point to credits tied to Business & Occupation (B&O) taxes as protection for small firms, but those credits would only offset a small portion of a potential 9.9% income tax rate. And once an income tax framework exists, a simple majority vote of the Legislature could expand rates or apply the tax to more business income over time.

Washington’s lack of a personal income tax has long been a key advantage for entrepreneurs and small employers deciding where to grow. Reversing that policy risks slowing investment, discouraging expansion, and making it harder for locally owned businesses to compete.

Curiously, the state’s largest publicly traded businesses (think Microsoft and Amazon) and their BILLIONS of income are left untouched by this tax proposal.

The Marriage Penalty

Income taxes do not exist in isolation — they come with the structural features that nearly every other state has learned the hard way.

One of the most pernicious is the marriage penalty, where two moderate earners filing jointly end up in a higher tax bracket than they would as singles. In a state without an income tax, having two incomes does not trigger a punitive cost. Under the proposed design, however, dual-income households could see significantly higher tax bills simply for being married — something Washington residents have historically avoided.

This means the income tax would apply to a married couple earning $500,000 each, further eroding the credibility of this being a “millionaires tax.”

And once a tax code is in place, a simple majority vote of the Legislature is all that’s needed to adjust rates or expand the base to include more taxpayers. This dynamic has already played out with Washington’s capital gains tax, which lawmakers expanded shortly after enactment.

That could happen even sooner than you’d think: Rep. Shaun Scott (D-Seattle) has introduced a bill that would apply stiff taxes on incomes above $125,000. And Rep. Larry Springer (D-Kirkland) admitted that lawmakers should not be trusted to only apply this income tax to high-earners.

A Tax on Retirement Income

Retirees should also be wary.

The bill’s threshold and exemptions may shield some retirement income initially, but nothing in the proposal prevents future lawmakers from taxing IRA distributions, pensions, Social Security or other forms of retirement income. Historically, every income tax that starts narrow eventually broadens to cover more types of earnings.

Washington Policy Center’s analysis underscores this pattern: “The ‘millionaires only’ promise won’t last.” Every broad-based income tax in history has begun with narrow application and moved deeper into the middle class and beyond. California’s tax and even Washington’s own capital gains tax — which started at a flat rate and was quickly expanded — illustrate exactly how that creep happens. In fact, Democratic legislative leaders specifically refused to limit future expansion of the tax, saying they “didn’t want to tie the hands” of future Legislatures.

The implications are stark: once the Legislature grants itself the authority to tax income, a simple majority vote is all that’s required to raise rates, lower thresholds, or expand coverage — with no requirement for a public vote.

The ‘Emergency’ Clause

Section 1007 of SB 6346  includes what’s commonly referred to as an “emergency clause.” By claiming this income is “necessary” for the support of state government, it makes it impossible to challenge with a citizen referendum. Remember, the last 10 times Washingtonians have been allowed to vote on an income tax, it has been rejected.

Including such a clause is a remarkably undemocratic position for the bill’s authors and sponsors to take. It also carries little credibility — how could this bill be necessary for the government to function if it’s not even effective until 2028?

Beyond these core concerns, independent tax policy analysis from Washington Policy Center points to deeper structural issues:

• It doesn’t solve the underlying problem: Washington has raised hundreds of millions in new tax revenue through recent hikes, yet the budget still faces deficits. An income tax merely adds volatility without fixing spending growth.
• Revenue swings make budgeting harder: Income tax revenues rise and fall with the economy, unlike Washington’s stable consumption-based system.
• Washington will lose competitive advantage: The current absence of an income tax is a selling point for businesses and talent. That advantage disappears with a new tax.
• Voters have repeatedly rejected income taxes: Historically, Washingtonians have said “no” to income tax proposals at the ballot box, often by wide margins.
• Legal hurdles remain: Washington’s constitution has been interpreted to require uniform taxation, and direct income taxes could face immediate challenge.

This bill signals a fundamental shift in Washington’s tax philosophy. What begins as a “millionaires tax” could become a permanent expansion of state power over personal income — driven not by wide public support, but by a simple legislative majority.

Gov. Ferguson has announced he does not support the bill in its current form, ostensibly because he wants to see more tax relief. But we heard similar things from him a year ago, when he went on to sign the largest package of tax hikes in Washington history into law, with next to no spending cuts.

Voters rejected income taxes for good reason: they inevitably grow broader, affect more people than promised, and empower lawmakers to raise rates or expand coverage without a direct vote. This proposal is no exception. It deserves scrutiny in Olympia, not blind trust — especially given the track record of the last year’s largest tax increase in state history.