March 2026 | Policy Analysis
Overview
On March 12, 2026, the Washington State Legislature passed Senate Bill 6346 — commonly known as the “Millionaire’s Tax” — sending it to Governor Bob Ferguson’s desk for signature. Governor Ferguson has publicly declared his intent to sign the bill, calling it “historic progress in rebalancing our unfair system.” When enacted and implemented, the law will represent the most significant transformation of Washington’s tax landscape in nearly a century, imposing a 9.9% income tax on annual income exceeding $1 million, effective January 1, 2028, with first tax payments due in 2029.
This is not a bill without controversy. From fierce legislative debate and a 24-hour House floor marathon, to looming constitutional challenges and concerns over wealth flight, Washington has entered uncharted territory — and the economic consequences between now and 2028 will be felt long before the first dollar is collected.
Background: Why Washington?
Washington State has historically had no personal income tax, relying instead on a patchwork of sales taxes, business and occupation (B&O) taxes, and, more recently, a capital gains tax. This structure has long been criticized as one of the most regressive in the nation.
The numbers bear that out starkly: households in the bottom 20% of earners pay approximately 13.8% of their total income in taxes, while those in the top 1% pay just 4.1%. Washington ranked 49th in the nation in tax fairness and equality as measured by the Tax Foundation’s 2026 State Tax Competitiveness Index — next to last in the country. State lawmakers and Governor Ferguson pointed to this inequality, compounded by a growing multi-billion dollar budget deficit and what they described as the regressive effects of federal tax policy under the Trump Administration, as the primary drivers behind the push for a millionaire’s tax.
The Legislative Journey
Senate Passage
Senate Bill 6346, sponsored by Senate Majority Leader Jamie Pedersen, passed the Washington State Senate on February 16, 2026, by a vote of 27–22. The bill proposed a 9.9% tax on individual or household income above the $1 million threshold, with several carve-outs and exemptions built in from the start: income from real estate sales, qualified family-owned small businesses, and certain retirement income including public pensions were all excluded. An initial charitable deduction allowance of $50,000 was also included, which was later increased to $100,000 during the deliberative process.
From the Senate floor, Majority Leader Pedersen called the vote “a momentous step forward” for Washington’s school children, people struggling to afford health care, and small businesses seeking tax relief.
House Deliberation: 24 Hours on the Floor
The companion bill, HB 2724, was referred to the House Finance Committee in mid-February, where it underwent significant scrutiny. The bill was amended in several notable ways — including raising the joint filer threshold to $2 million (from $1 million for both single and joint filers under the original Senate version) and expanding pass-through entity tax election provisions.
The most dramatic chapter of the bill’s journey came in the House, where it was debated for over 24 consecutive hours. Lawmakers argued intensely over both the structure of the tax itself and the allocation of its projected revenues. The central tension: how much of the estimated $3.7 billion in annual revenue should fund new or expanded government programs versus direct tax relief for working families and small businesses?
After the marathon session, the House passed the measure on March 10, 2026. The full Washington Legislature — both chambers — officially passed the Engrossed Substitute Senate Bill 6346 on March 12, the final day of the 60-day legislative session, narrowly meeting the deadline.
Governor Ferguson’s Role
Governor Ferguson had signaled his support for a millionaire’s tax as far back as December 2025, though with conditions. He stipulated that the tax should be based on annual net income (not net worth), that it should include an inflation adjustment so the threshold rises over time, and that a significant portion of the revenue be returned to working families and small businesses — not simply absorbed into state programs. Those conditions were largely reflected in the final bill. Ferguson has announced his intention to sign both SB 6346 and its companion measure, SB 6347, which rolls back estate tax increases passed in 2025, lowering the top estate tax rate from 35% to 20% for decedents dying on or after July 1, 2026.
What the Law Actually Does
At its core, SB 6346 imposes a 9.9% tax on Washington taxable income above $1 million per household, effective January 1, 2028. Here is how it works in practice:
Who pays it: The tax applies to Washington residents, part-year residents, and nonresidents with Washington-source income above the threshold. This means individuals living outside the state but earning income from Washington-based businesses, investments, or employment may still be subject to the tax. It is estimated to affect approximately 21,000 residents — less than one-half of one percent of all Washingtonians.
The $1 million deduction: The bill functions by applying a $1 million standard deduction (indexed for inflation annually) to federal adjusted gross income, then taxing whatever remains at 9.9%. Critically, this deduction is the same for both single and joint filers, which critics have noted creates a marriage penalty for high-earning couples.
Pass-through entities: Owners of LLCs, S corporations, partnerships, and sole proprietorships will have business income flow directly to their personal returns — making many small and mid-sized business owners potentially subject to the tax. However, a pass-through entity tax (PTET) election is available, allowing qualifying entities to pay the tax at the entity level beginning January 1, 2028.
Capital gains interaction: Washington already taxes capital gains above $278,000 at rates of 7% and 9.9%. Under SB 6346, taxpayers who paid the 7% rate on the first million in capital gains will receive a credit, but will owe the 2.9% difference under the new tax. The net effect is a higher overall rate on capital gains for top earners — but not outright double taxation.
QSBS protection: Founders and investors who qualify for the federal Qualified Small Business Stock (QSBS) exclusion under Section 1202 — which can exclude up to 100% of eligible gains from federal capital gains tax after a five-year holding period — should not owe the Washington millionaire’s tax on those gains, since SB 6346 calculates from federal adjusted gross income.
Exemptions and exclusions: Key income types excluded from the tax include proceeds from residential and other real estate sales, and gains from the sale of qualified family-owned small businesses.
Where the Money Goes
Proponents of the tax have emphasized that SB 6346 is not simply a revenue measure — it is paired with substantial tax relief and public investment. The estimated $3.7 billion in annual revenue is projected to fund:
- Public education: Free breakfast and lunch for all Washington K-12 students, expanded early learning and child care programs, and broader K-12 funding increases.
- Health care: Expanded coverage and affordability programs for working families.
- Small business tax relief: Every small business grossing less than $300,000 annually — roughly 65% of all Washington businesses — would be exempt from the state B&O tax beginning in 2029. This has been described as the largest small business tax cut in state history.
- Working Families Tax Credit expansion: A broadening of eligibility and increased credit amounts for Washington’s sales tax rebate program for low- to moderate-income households.
- Sales tax eliminations: Removal of sales tax on personal hygiene products (shampoo, deodorant), essential baby products (diapers, infant formula), and select essential clothing items.
- County public defense: 7% of millionaire’s tax revenue is earmarked for county public defense systems.
- B&O surcharge repeal: A surcharge affecting many of Washington’s larger businesses will be eliminated in 2029.
The Economic Impact: Now Through 2028
The period between the bill’s signing and its January 1, 2028 effective date will be economically significant — perhaps as important as the tax itself.
Wealth Flight Risk
The most discussed concern among economists and business groups is the risk of high-income earners relocating to lower-tax states before the law takes effect. Washington has already seen its tax competitiveness decline, ranking 45th in the Tax Foundation’s 2026 index. With no personal income tax, states like Texas, Florida, and Nevada have long attracted mobile, high-earning residents. That calculus may now shift.
The Tax Foundation has estimated that the combined effect of SB 6346 and Seattle’s existing local taxes could push the top effective rate on wage income and restricted stock units to more than 18% — potentially the highest in the country. A senior Tax Foundation fellow warned that a tax this aggressive could drive jobs and expansion out of the state, particularly in the tech sector, which employs approximately 360,000 workers in Washington.
The Tech Sector’s Exposure
Washington is home to Amazon, Microsoft, and a dense ecosystem of startups and technology companies. Many of the state’s highest earners are tech executives, engineers with substantial RSU compensation, and founders preparing for liquidity events. For this group, a 9.9% state income tax represents a dramatically different calculus than the zero-income-tax environment that has historically been a competitive advantage for the region.
Legal advisors and wealth planners are already recommending that high-earning Washington residents begin evaluating their residency status and business structures. While QSBS protections exist for qualifying startup founders, those in S corporations, partnerships, and other pass-through structures face a narrower path. The next two years are likely to accelerate conversions to C corporations and early planning around QSBS qualification.
Companion Estate Tax Relief
Recognizing the wealth-flight concern, the legislature simultaneously passed SB 6347, which rolls back estate tax increases from 2025. The top estate tax rate drops from 35% to 20% for deaths occurring on or after July 1, 2026. This is a deliberate attempt to reduce one dimension of Washington’s tax burden on wealthy residents at the same time as the millionaire’s income tax is introduced — a measure of balance intended to prevent a broader exodus.
Budget Uncertainty Before 2028
Governor Ferguson has been explicit: the millionaire’s tax will not solve Washington’s near-term budget challenges. Revenue will not be collected until 2029 at the earliest, leaving the state to address its multi-billion dollar deficit through other means during the intervening years. The bill’s passage provides a long-term revenue projection that can anchor budget planning, but offers no immediate fiscal relief.
Legal Challenges Ahead
Perhaps the greatest source of economic uncertainty is the tax’s constitutional vulnerability. Washington’s constitution has long been interpreted to require uniform taxation, which courts have previously held prohibits graduated income taxes. Voters have rejected income tax proposals ten times in state history, most recently in 2010.
In March 2024, the legislature codified Initiative 2111 into state law — a citizens’ initiative that explicitly bans the state and any local government from imposing a personal income tax. Lawmakers effectively had to overturn their own recent statute to move forward.
The bill includes an “emergency clause” to prevent a simple voter referendum from immediately placing it on the ballot. However, once signed into law, citizens can pursue a voter initiative to repeal SB 6346 — and if enough signatures are gathered, a repeal vote could appear on the November 2026 ballot.
Separately, legal challenges are widely expected to work their way through the courts, with the Washington Supreme Court likely having the final say. The court previously upheld the state’s capital gains tax by characterizing it as an excise tax rather than an income tax — a legal framework that may or may not extend to SB 6346. Until these challenges are resolved, there will be meaningful uncertainty about whether the tax will survive to its 2028 effective date.
What This Means for Washington Going Forward
Washington has made a definitive statement about the direction of its tax policy. Whether or not SB 6346 survives legal challenge, the passage of a millionaire’s tax signals that the state’s era of no personal income tax — a cornerstone of its economic identity — is no longer politically untouchable.
For working families and small businesses, the associated tax relief measures are real and meaningful. The B&O exemption for businesses under $300,000 in gross revenue, the Working Families Tax Credit expansion, and the elimination of sales taxes on essential goods represent tangible improvements to daily economic life for millions of Washingtonians — if the revenue materializes as projected.
For high earners, the next two years are a planning window. Those with Washington-source income, pass-through business interests, or substantial equity compensation have until January 1, 2028 to evaluate their structures, residency, and exposure. The state Department of Revenue will need to publish guidance, draft regulations, and new tax forms in the coming months — providing additional clarity but also revealing new complexities.
For Washington’s economy broadly, the outcome will depend on how many high earners leave, how many stay, and whether the revenue projections hold. The state is betting that its quality of life, infrastructure, talent ecosystem, and economic dynamism are worth a 9.9% premium to its wealthiest residents. Whether that bet pays off will define Washington’s economic trajectory for a generation.
Sources: Clark Nuber, Washington Senate Democrats, Eide Bailly, Holland & Knight, BDO, GeekWire, Tax Foundation, Governor Ferguson’s Office, Fox Business, Quantum Financial Planning Services.