The income tax bill language has now been introduced. SB 6346 and HB 2724 are identical; SB 6346 is scheduled for a public hearing in the Senate Ways & Means Committee on Friday.

Before I get into the details of the text, I want to make three overarching points:

• No new tax stream will magically create sustainable budgets. The Legislature must choose to budget within its means, whatever those means are. Last year, the Legislature adopted historically large tax increases, yet they still increased net policy spending and failed to close the gap between spending and revenues.
• Sen. Pedersen said yesterday that because most states levy income taxes, this addition would not make Washington uncompetitive. But Washington’s tax structure (before a potential income tax and even before most of the taxes adopted last year) is already the sixth worst in the country. The cumulative impact of taxes matters.
• The bill states that its intent is “to help meet the state’s paramount duty of amply providing every child in the state with an education and supporting the health and well-being of Washingtonians.” The state constitution’s paramount duty clause means that K–12 education must be funded first. The Legislature could double K–12 funding within existing resources if it wanted to. If this tax is enacted, it would be to increase funding on other things.

Calculating the tax

The bill would impose a 9.9% tax on Washington taxable income. The tax would be imposed beginning Jan. 1, 2028. Taxes would be due on the same day as federal taxes (April 17, 2029) and 6-month filing extensions would be allowed.

To determine the tax due, individuals would first compute their Washington base income. The exercise would begin with the taxpayer’s federal adjusted gross income. Then,

• Deduct any federal long-term capital gains,
• Deduct income the state is prohibited from taxing,
• Add federal capital losses,
• Add any carryover amounts that had been deducted from federal adjusted gross income,
• Add state and local income taxes that had been deducted from federal adjusted gross income,
• Add taxes paid that were deducted from federal adjusted gross income but are allowed a B&O or public utility tax credit,
• Add income from federally tax-exempt interest on state and local bonds (except interest on Washington bonds),
• Add capital gains subject to Washington’s capital gains tax, and
• Add the amount deducted from Washington’s capital gains tax under the standard and charitable donation deductions (but not gains from the sale or transfer of interest in a qualified family-owned small business).

Next, to compute Washington taxable income, start with Washington base income. Then,

• Deduct $1.0 million per individual or couple (this amount would be adjusted annually for inflation, and it would be reduced for nonresidents),
• Deduct charitable contributions up to $50,000 per individual or couple (this amount would not be adjusted for inflation).
• Add the taxpayer’s share of the tax expense incurred by a pass-through entity that elects to pay the Washington income tax, to the extent that the expense is deducted from federal adjusted gross income.

Finally, several credits would be allowed against the income tax:

• For income taxes paid to other state or local jurisdictions,
• For business and occupation (B&O) and public utility taxes paid,
• For Washington capital gains taxes paid, and
• For Washington income taxes paid by a pass-through entity (if the entity elects to pay the tax).

Pass-through entities would be allowed to elect to pay the income tax. If they do so, as noted above, their owners would be allowed a credit against the tax. (Federal law has limited the amount of state and local taxes that individuals may deduct, but pass-through entities may still take the full deduction.)

For the purposes of the bill, a resident is defined as an individual domiciled in Washington (unless he maintained no permanent home in Washington, maintained a permanent home elsewhere, and spent 30 days or less in Washington) or an individual not domiciled in Washington but who maintained a home here and was in Washington more than 183 days. The bill spells out how to apportion income from nonresidents, including professional and student athletes.

Other notable provisions of the bill:

• It specifies that the income tax would apply to pension income.
• It would amend I-2111. The initiative, which was approved in 2024, prohibited the state and any local jurisdiction from imposing income taxes. The income tax bill would amend the statute to allow the state income tax, but it would leave the prohibition on local income taxes in place.
• If the income tax is determined to be unconstitutional, the entire bill would be null and void.
• There is an emergency clause, which would prevent a referendum.

Interactions with the capital gains tax

The treatment of charitable donations is different in the income tax bill than in the capital gains tax statute. First, the charitable donation amount is adjusted annually for inflation in the capital gains tax statute but not in the income tax bill.

For the capital gains tax, a taxpayer has to have charitable donations of more than $278,000 (in 2025) in order to deduct up to $111,000 (in 2025). Additionally, in the capital gains tax, to qualify for a deduction, the charitable donation must be made to nonprofits that are principally directed and managed within the state of Washington. By contrast, in the income tax bill, the charitable donation deduction would be limited to $50,000 (not adjusted for inflation) and there is no requirement that the donations be to Washington nonprofits.

Additionally, the capital gains tax rate is 7% on taxable income up to $1 million. Beginning with tax year 2025, the portion of taxable capital gains income over $1 million is taxed at a rate of 9.9%. The proposed income tax rate would be 9.9% on income over $1 million. Washington capital gains income would be included in Washington taxable income for the income tax. Thus, I think the income tax bill could effectively increase the tax rate on capital gains income under $1 million (for taxpayers who are also subject to the income tax), because the credit for capital gains tax paid wouldn’t fully offset the income tax due on the same income.

Use of revenues

A fiscal note has not yet been published, but legislators said yesterday that the bill could increase revenues by about $3.5 billion a year. The first revenues would be collected in FY 2029 and additional revenues on 2028 taxable activity could be collected in FY 2030, depending on extensions.

Of the collections, the first 5% would be deposited in a new county public defense funding stabilization account. Funds in the account would be distributed to counties based on the ratio of the county’s personal income to state personal income.

Remaining income tax collections would be deposited in the general fund–state (GFS). It is a good thing that most of the proceeds would go to the GFS. Income taxes are more volatile than sales taxes, so introducing an income tax would make Washington’s tax structure more volatile. Consequently, the state would need to maintain higher reserves in order to smooth out spending when revenue is low. Revenues that are deposited in the GFS automatically feed in to the constitutionally-required deposits to the budget stabilization account.

The bill includes several tax relief provisions:

• It would double the B&O tax small business credits and increase the B&O tax filing threshold from $125,000 to $250,000.
• The temporary B&O tax surcharge on businesses with income over $250 million would sunset a year earlier, on Dec. 31, 2028.
• It would extend eligibility for the Working Families Tax Credit to individuals without children who are 18 or older. (Under current law, individuals without children are eligible if they are between the ages of 25 and 65.)
• It would exempt certain grooming and hygiene products from sales and use tax. (The eligible products are defined exclusively as soaps and cleaning solutions, shampoo, toothpaste, mouthwash, antiperspirants, and sun tan lotions and screens.)

Gov. Ferguson said yesterday that, although he supports an income tax in principle, he does not support the proposed bill because it would not provide enough tax relief. He said that one year of the tax relief in the bill would represent only about 7% of the annual revenue increase from the income tax.