Washington’s Income Tax Debate: Capital Gains, the Millionaires’ Tax, and What Comes Next

Like Texas, Washington does not impose state income tax. In fact, the last time Washington voters approved a statewide income tax was in 1932, and the measure was struck down the following year as unconstitutional. The Washington state constitution prohibits graduated taxes on “property,” which the courts have historically interpreted to include money and income.

Since then, there have been more than 10 attempts to implement a state-level income tax. None has succeeded.

Washington capital gains tax

On May 4, 2021, Gov. Jay Inslee signed into law a 7% tax on long-term capital gains exceeding $250,000 annually, with the threshold indexed for inflation. In March 2023, the Washington Supreme Court upheld this tax as constitutional.

In May 2025, the state added an additional 2.9% surtax on capital gains exceeding $1 million, bringing the top Washington capital gains tax rate to 9.9%.

In its decision, the court stated that a tax on capital gains is “appropriately characterized as an excise [tax] because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.” This distinction — taxing the transaction rather than the property — proved critical to the law’s constitutionality.

The proposed Millionaires’ Tax

Building on the momentum of the capital gains tax, the Washington Senate passed a proposed legislation establishing a so-called Millionaires’ Tax. As drafted, the tax would impose a 9.9% levy on annual income exceeding $1 million, beginning in 2028.

Under the proposal, taxable income would include:

• Wages and compensation
• Investment income, including interest, dividends, and capital gains
• Business income from self-employment and pass-through entities
• Rental income
• Alimony
• Other forms of taxable income for full-time, part-time, and even certain nonresidents with Washington-source income
• Charitable deductions for federal purposes above $100,000 per household are added back

Key exclusions include:

• The first $1 million of income per household (single and MFJ get the same $1 million creating a significant marriage penalty)
• Assets such as home value and retirement savings
• If capital gains create exposure to the Washington state excise tax, they are included in the tax base, but a credit offsets some overlap with the existing capital gains tax.

Constitutional questions and legal risk

The central question surrounding the Millionaires’ Tax is whether it can survive constitutional scrutiny without an amendment to the Washington state constitution. The capital gains tax was upheld because it was framed as a tax on the exercise of property rights, rather than a tax on the property itself.

For nearly 90 years, Washington courts have held that salaries and wages constitute “property” and therefore cannot be subject to a graduated tax. Whether the state can successfully recharacterize a broad-based tax on income, particularly wages and compensation, as an excise tax remains uncertain. That legal distinction will likely determine the fate of the proposed legislation

Conclusion

While the Millionaires’ Tax is far from finalized, it represents the most direct attempt in decades to establish a form of broad-based income taxation in Washington.  If the measure advances, legal challenges may arise, similar to those associated with the capital gains tax.

The outcome may hinge on whether the courts are willing to further redefine how “income” is treated under the state constitution, potentially reframing it from a prohibited property tax into an excise tax on the privilege of earning income or working in the state.

For Washington residents with significant income, investments, or business interests, the proposal underscores the importance of proactive tax planning and close attention to legislative developments. We will continue to monitor how the bill evolves in the House and what it could mean for high-net-worth individuals and families across the state.