Washington state is poised to make a historic shift in its fiscal landscape, moving from one of the few states without a broad income tax to one with a substantial levy on high earners. The state House of Representatives and Senate have both approved, and the governor plans to sign into law, a new 9.9% income tax on earnings exceeding $1 million annually. While proponents champion it as "the millionaire’s tax" aimed at addressing economic inequality and funding critical state services, a closer examination by tax experts reveals a controversial and uniquely large "marriage penalty" embedded within the legislation, which could subject many dual-income couples earning significantly less than $1 million individually to the tax. This development positions Washington as a crucial testing ground in the national debate over progressive taxation, wealth migration, and state economic competitiveness.
A Historic Shift: Washington’s New Income Tax Landscape
For decades, Washington has stood as one of just nine U.S. states that eschew a broad state income tax, relying instead on a highly regressive sales tax system, property taxes, and business and occupation taxes. This fiscal model has long been a point of contention, with critics arguing that it disproportionately burdens lower and middle-income families, while proponents have highlighted the state’s robust economic growth, often attributed to its tax-friendly environment for businesses and high-net-worth individuals. The passage of this new income tax marks a significant departure from this long-standing tradition.
The legislative journey for the income tax saw it clear both chambers with Democratic support. The House initially approved the measure, followed by its passage in the Senate. Governor Jay Inslee has publicly stated his intention to sign the bill, cementing it into law and initiating a new chapter in Washington’s tax policy. The 9.9% rate on income exceeding $1 million would place Washington’s top marginal income tax rate among the highest in the nation, alongside states like California and New York, albeit with a higher income threshold for its application.
This move follows a trend among some states, particularly those with Democratic majorities, to explore new revenue streams and address perceived income inequality by targeting high earners. The push for a state income tax in Washington has been fueled by a desire to fund public education, infrastructure, and social programs, as well as to create a more progressive tax system. It also comes on the heels of the state’s controversial capital gains excise tax, which was passed by voters in 2021 and has faced legal challenges. The consistency in the $1 million exemption threshold between the capital gains tax and the new income tax is a point legislators have highlighted as beneficial for administration and taxpayer simplicity.
Unpacking the Nation’s Largest Marriage Penalty
At the heart of the current controversy is the proposed income tax’s structure regarding filing status. The legislation stipulates that the $1 million income threshold applies uniformly to individuals, married couples, and domestic partners. This single threshold, unlike the dual thresholds typically seen in other states, creates what tax experts are calling the largest "marriage penalty" in the United States.
To illustrate, consider a married couple where each spouse earns $600,000 annually. Individually, neither would cross the $1 million threshold. However, their combined income of $1.2 million would trigger the tax, subjecting $200,000 of their income to the 9.9% rate, resulting in an additional tax liability of $19,800. If they were single, each earning $600,000, they would owe nothing under this tax. This stark difference has led attorney Joe Wallin, who advises tech founders and companies in Washington, to quip that it should be called "the half-millionaire tax," highlighting how couples earning significantly less than $1 million each could still be impacted.
The concept of a marriage penalty is not entirely new to U.S. tax codes, existing in varying degrees at both federal and state levels. However, its scale in Washington’s proposed law is unprecedented. Most states with income taxes employ different income thresholds for single and joint filers, with the joint threshold typically set at roughly double the single threshold for most tax brackets.
Comparatively, high-tax states like California and New York also have elements of marriage penalties, but they are generally much narrower in scope and impact. In New York, for example, income thresholds for most tax brackets are indeed doubled for joint filers. It is only at the very highest income levels – specifically for the millionaire surtax rates of 10.3% and 10.9% (applying to income above $5 million and $25 million, respectively) – that the income thresholds become the same for joint and single filers. Similarly, California doubles bracket thresholds for joint filers, with the notable exception of the 1% Mental Health Services Act, which applies to income above $1 million for both single and married filers.
Jared Walczak, a senior fellow at the Tax Foundation, a non-profit tax policy think tank, underscores the magnitude of Washington’s penalty. He notes that the marriage penalties in New York and California generally amount to a relatively minor percentage difference in tax rates, perhaps 0.65% in New York or 1% in California. In contrast, Washington’s proposal could result in a full 9.9% difference. Walczak provided a compelling hypothetical: "In the most extreme case, if you had two single filers who both earned exactly $1 million, they would owe $0, but if they married and earned the same income, they would owe $99,000." This example vividly illustrates why Washington’s marriage penalty is being described as "the largest by far."
Legislative Justifications and Fierce Opposition
Democratic legislators and Governor Inslee have not directly addressed the specific concerns regarding the marriage penalty’s disproportionate impact. Instead, State Senator Noel Frame, who spearheads fiscal policy for the state Senate Democrats, emphasized consistency with existing tax structures. She explained that the $1 million standard deduction per household mirrors the structure used for the state’s capital gains excise tax, which voters approved in 2021.
"As we work to make the two separate tax structures work together, having consistency in the deduction helps with both administration of the tax by our Department of Revenue and simplicity for taxpayers," Senator Frame stated. She further argued that "since the tax doesn’t apply to income less than $1 million, there are many high-earning couples that still won’t see much of a tax impact even if their combined incomes are more than $1 million." This perspective suggests that the legislative intent was to simplify the tax code across different wealth-related taxes rather than to create an explicit marriage penalty.
However, critics from various sectors have voiced strong opposition, challenging both the rationale and the potential consequences of the new tax, especially its marriage penalty. Brian Heywood, a Washington hedge-fund manager and founder of Let’s Go Washington, a conservative political action committee actively opposing the tax, accused proponents of misrepresenting the tax’s true scope. "There’s this idea that, ‘We’re just taxing rich dudes with yachts,’" Heywood remarked, suggesting that the tax’s impact extends far beyond the super-wealthy. "They’ve been less than honest with who they’re going after and what the numbers are."
The debate also touches on the demographic realities of Washington’s economy. The state is home to a thriving tech industry, anchored by giants like Amazon and Microsoft, along with numerous startups and related businesses. This environment fosters a significant number of highly skilled, highly paid workers, many of whom are in dual-income households. Analysts predict that a substantial portion of these families, who are crucial to the state’s economic engine, could find themselves subject to the new tax due to the marriage penalty, even if neither spouse individually earns $1 million. The potential for such families to be caught in the tax net has raised concerns about the state’s ability to retain and attract top talent. Attorney Joe Wallin even light-heartedly, yet pointedly, joked about the extreme possibility of dual-earning couples exploring a "tax divorce" to avoid the penalty, noting that "the tax savings alone would more than pay the costs of a divorce lawyer."
Broader Implications: Economic Competitiveness and Wealth Migration
Washington’s new income tax and its unique marriage penalty are more than just local fiscal policy; they represent a closely watched experiment in the broader national debate over progressive taxation and its impact on wealth migration. The Democratic Party, both federally and at the state level, has increasingly advocated for higher taxes on the wealthy to combat rising inequality and secure funding for public services. States like Rhode Island, New York, Virginia, and Michigan have seen similar legislative pushes to increase taxes on top earners, and California is even considering a ballot initiative to create the first state wealth tax, taxing the total net worth of its billionaires. Washington’s experience will undoubtedly serve as a case study for these other states.
A primary concern raised by opponents is the potential for accelerated wealth migration from Washington. The state has already seen high-profile departures of celebrated entrepreneurs who have openly cited tax considerations as a factor in their relocation decisions. Jeff Bezos, the founder of Amazon, announced his move from Washington to Miami, Florida, in 2023. This move came after Washington’s 7% capital gains tax took effect. In early 2024, Bezos proceeded to sell over $9 billion worth of Amazon stock. By relocating to Florida, which has no state income or capital gains tax, Bezos effectively saved an estimated $600 million in capital gains taxes that he would have otherwise owed to Washington state.
Similarly, Howard Schultz, the former CEO of Starbucks and a long-time Seattle resident, recently announced his departure after 44 years. While his foundation will continue to operate in Seattle, his family office will also relocate to Miami. Schultz expressed his hopes that "Washington will remain a place for business and entrepreneurship to thrive, creating essential opportunity for those in Seattle and the surrounding areas," a sentiment that implicitly underscores the concerns surrounding the state’s evolving tax environment. These high-profile exits, while perhaps not solely driven by tax policy, certainly lend credence to the arguments made by those who fear an exodus of capital and talent.
The long-term implications for Washington’s economy remain to be seen. Proponents argue that the increased revenue will allow for investments in education and infrastructure that ultimately enhance the state’s attractiveness and foster a more equitable society. The Department of Revenue will face the challenge of administering this new, complex tax, especially given its unique features like the marriage penalty. Opponents, on the other hand, warn of a chilling effect on entrepreneurship, a decline in business investment, and a continued flight of high-net-worth individuals and the jobs they create. The debate is far from over, and the outcome of Washington’s "millionaire’s tax" – and its unprecedented marriage penalty – will be closely scrutinized by policymakers, economists, and taxpayers across the nation.