The 2026 supplemental operating budget, as passed by the Legislature, assumes that the income tax bill (ESSB 6346) would reduce revenues to funds subject to the outlook (NGFO) by $55.4 million in 2025–27 and increase NGFO revenues by $2.292 billion in 2027–29. (The governor has not yet signed either the operating budget or the income tax bill.)

The revenues assumed in the operating budget reflect a striking amendment proposed by House Finance Committee Chair Berg. However, the striker was amended before final passage. There is not yet a fiscal note for the version of the bill that was passed by the Legislature.

Since the bill was introduced, there have been some changes to the structure of the income tax and many changes to how the revenues would be used. (I’ve written previously about the bill as introduced, the bill as passed by the Senate, and Chair Berg’s striker.)

As passed by the Legislature, ESSB 6346 would impose a 9.9% tax on income, effective Jan. 1, 2028. Other key provisions include:

• A standard deduction of $1 million, which would be adjusted for inflation every other year (more on this unusual inflation adjustment here).
• Credits for income taxes paid to other states, for business and occupation (B&O) and public utility taxes paid, and for Washington capital gains taxes paid.
• Owners of pass-through entities would be allowed to elect to have the entity pay the income tax. If so, the owners would be allowed a credit against the income tax.
• A deduction for 80% of the amount of net operating loss carryover that is deducted for federal tax purposes.
• A deduction for charitable contributions up to $100,000. This limit would not be adjusted for inflation, and it would be limited to contributions to organizations in Washington.
• No income of nonresidents (other than athletes and entertainers) who perform services in Washington for five or fewer days would be allocated to Washington.

Tax Relief

ESSB 6346 specifies that all revenues would be deposited in the general fund–state (GFS). This is appropriate, because it means that the revenues would contribute to constitutionally-required deposits to the budget stabilization account each year. Thus, this would help manage revenue volatility.

Beginning in FY 2030, 5% of the revenues collected in the prior year would be deposited in the fair start for kids account (FSKA). Both the GFS and the FSKA are funds subject to the outlook.

ESSB 6346 contains several tax relief provisions that would become effective Jan. 1, 2029, during the first year of income tax revenue collections:

• Age limits for the Working Families Tax Credit (WFTC) would be removed.
• The maximum qualifying incomes for the WFTC would be increased to the need and payment standards the state uses for cash assistance programs. (For example, currently, a single individual with one child is eligible for a WFTC remittance if income is less than $50,434. Under the need standard, such a family of two would be eligible with income up to $72,528.)
• Certain hygiene products, diapers, and over-the-counter drugs would be exempt from sales and use taxes.
• Small business B&O tax credits would be increased so that about $300,000 of business income would be exempt, with a full phase out at about $600,000.
• The B&O tax filing threshold would be increased from $125,000 to $250,000.
• The temporary B&O tax surcharge would be ended one year early for hospitals, health care providers, and warehousers and resellers of prescription drugs.
• Most provisions of ESSB 5814, which was enacted last year and applied the sales tax to many services, would be repealed. (Advertising services would still be subject to sales tax.)

Additionally, ESSB 6346 would provide some tax relief beginning July 1, 2026:

• Temporary staffing services, which are subject to sales tax under ESSB 5814, would not include staffing services used by hospital-based clinical providers to supplement hospital staffing.
• Live presentations, which are subject to sales tax under ESSB 5814, would not include before- and after-school care at schools; presentations by nonprofits; musical, dramatic, or comedic performances; one-on-one instruction; or music lessons.
• Sales of certain services subject to tax under ESSB 5814 to libraries, schools, school districts, and educational service districts would not be subject to sales and use tax.
• The temporary B&O tax surcharge would not apply to wholesale sales of food and food ingredients.

The tax relief that would take effect this July would remain law even if the income tax is held to be invalid. If the income tax is invalidated, the tax relief effective Jan. 1, 2029 would not remain law.