5 Taxes You Need to Know This Week

You read that correctly: Our typical "5 things you need to know this week" programming is being replaced with a proposed tax rundown! (Riveting ... we know.)

1. For Starters ... Income Tax

Based on public discussion and policy signals, a forthcoming Washington state proposal is expected to create a new individual income tax aimed at high earners, likely taking effect later this decade. Early drafts are soliciting feedback and a formal introduction is expected soon.

While the bill itself has not yet been formally released, the concepts expected to be included point to a blanket 9.9% tax on all Washingtonians, but with a large standard exemption of $1 million adjusted to inflation. The structure is intended to limit the tax to a relatively small group of high-income individuals rather than establish a broad-based income tax. 

Under the expected framework, pass-through businesses such as LLCs, partnerships, and S-corporations would not be taxed at the entity level. Instead, income would continue to “pass through” and be taxed to owners on their personal returns. 

" But Chamber team, what about capital gains???? "

The treatment of capital gains are not clearly understood at this time, except where gains are already subject to Washington’s existing capital gains tax, in which case coordination rules and credits would apply to avoid double taxation. Questions still remain about how income that is taxed at the federal level (like capital gains on the sale of a primary home) would be treated as income tax in Washington where our capital gains tax exempts real property.

The proposal is also expected to apply to out-of-state individuals who earn income connected to Washington, including nonresidents who own stakes in Washington-based pass-through businesses. In those cases, allocation and apportionment rules would be used to determine the Washington share of income subject to tax. 

To limit stacking, credits are expected for income taxes paid to other states and for certain Washington business taxes, though those credits would be limited and nonrefundable. Compliance would likely mirror federal income tax filing closely, including attaching federal returns and schedules, signaling that while the tax targets a narrow group, it would come with real administrative and enforcement teeth. 

2. Gross Margins Tax

Another tax concept under discussion in Olympia — again, not yet released as a formal public proposal — is a potential shift away from Washington’s long-standing Business & Occupation (B&O) tax toward a gross margins tax.

This idea grew out of the work of the state’s Tax Structure Work Group, which examined ways to modernize Washington’s tax system and reduce the distortions created by taxing businesses on gross receipts regardless of profitability. 

The Difference:

A gross margins tax differs from the B&O tax by allowing businesses to deduct certain costs — such as compensation or key inputs — so the tax is applied to a business’s margin rather than total revenue. 

As currently being discussed, the margins tax is intended to replace the B&O tax over time and provide some relief to businesses, particularly those with low margins or high labor costs.

What It Means:

Smaller businesses would generally be treated more lightly, while larger businesses would pay a higher rate, with different tax rates applying at different revenue levels.

The structure under consideration is modeled loosely on Texas’s margins tax and is designed to preserve revenue stability while better aligning tax liability with a firm’s ability to pay. 

The Transition:

Policymakers are also discussing a multi-year transition period, rather than an abrupt change. During this runway, the B&O tax would be gradually phased down while the margins tax phases in — for example, businesses might pay a declining share of B&O alongside a growing share of the margins tax in the early years.

This transition would give businesses time to adjust, allow certain tax preferences to expire, and potentially align with other major tax changes under consideration. While details remain fluid, the concept signals a serious rethinking of how Washington taxes business activity — and whether the B&O tax should remain the foundation of that system going forward. 

3. Estate Tax

Washington’s estate tax has been around for decades, but it has changed in meaningful ways over time — most notably when the state updated its rules after federal estate-tax changes and then periodically adjusted exclusions, deductions, and technical provisions.

The biggest recent shift came last year, when lawmakers enacted a major overhaul that raised the top marginal estate-tax rate to 35% for deaths on/after July 1, 2025, a dramatic jump from the prior 10%–20% schedule. Washington’s Department of Revenue now shows the post-July-2025 table topping out at 35%, and national surveys now describe Washington as having the highest state estate-tax rate in the country. 

That “highest-in-the-nation” label becomes clearer when you compare Washington to other high-cost states people often benchmark against: California has no state-level estate tax, while Hawaii tops out at 20% — meaning Washington’s top rate is materially higher than either.

The policy debate now isn’t just about fairness; it’s about behavior and competitiveness. Estate-planning professionals and business groups have been blunt that a steep estate tax changes incentives, and research on estate taxes more broadly finds that very high-net-worth individuals can be sensitive to state “death tax” exposure when deciding domicile.

In Practice:

In practice, many advisors say a growing share of their client work has shifted toward residency and “redomicile” planning ... not because people want to leave, but because the tax consequences in Washington have become too large for them to ignore. 

In Politic-Speak:

That’s why you’re hearing more conversation — even among people who supported last year’s package — about whether the new top rate is so high it could become self-defeating, pushing enough planning (and eventually, wealth) out of the state that Washington collects less than forecasted.

No specific “rate rollback” bill has emerged as the consensus vehicle yet, but the fact that lawmakers already have bills on file to repeal the estate tax underscores how quickly the issue has become a live one in the 2025–26 biennium.

4. Financial Intangible Assets (Wealth Tax)

A wealth tax is also on the list of ideas Washington Democrats have already tried to advance ... and it’s likely to stay in the mix as budget debates continue. Last year, lawmakers introduced (and the Senate passed) ESB 5797, which would impose a new state-level tax on certain “financial intangible assets” held by Washington residents — specifically things like publicly traded stocks and bonds, exchange-traded funds, and mutual funds — with a large exemption so only very high net-worth households would pay. The bill’s structure is notable: It tries to frame the tax as a type of property tax on intangible financial assets (not an income tax), in part because the legal fight over what Washington can tax — and how — is a central feature of this whole conversation. 

California’s experience shows why even talk of a wealth tax can become economically and politically volatile. In recent weeks, California has “flirted” with a Billionaire Tax Act ballot initiative that would impose a one-time 5% tax on residents worth more than $1 billion, and major outlets have reported an unusually loud backlash from tech billionaires alongside growing public discussion of relocation and asset moves to states like Florida and Texas. Democratic Gov. Gavin Newsom has come out firmly against the measure, warning it would discourage investment and accelerate an exodus of wealthy residents; reporting also notes he’s treating it as a top political priority to defeat. 

Back in Washington, Gov. Bob Ferguson’s posture has been cautious and strategic. When lawmakers floated a wealth tax as a way to close near-term budget gaps, Ferguson publicly rejected that approach, arguing the state should not rely on a large, “untested” new tax to balance the budget. At the same time, multiple reports describe a narrower “test-balloon” concept: Moving something smaller and more legally targeted to get a court ruling on whether Washington can tax this kind of wealth as property — which is broadly consistent with how proponents have described the role of bills like ESB 5797 (high exemptions, limited asset categories, and a design aimed at surviving constitutional scrutiny). 

5. Last But Unfortunately Not Least ... Payroll Tax

House Bill 2100, sponsored by Rep. Shaun Scott, is getting a hearing Thursday afternoon, and our business partners are flocking to Olympia to vehemently oppose the legislation.

Designed to defend taxpayers from federal funding cuts in HR 1, the legislation is modeled after Seattle’s JumpStart Tax, and would impose a 5% payroll tax on private employers with workers earning more than $125,000 a year. 

It applies to companies with more than 20 employees, payroll in excess of $7 million, and gross receipts of more than $5 million. 

Why We Oppose:

Since Seattle adopted their “jump start” payroll tax, jobs in Bellevue have grown by over 4,000 positions while Seattle has lost over 5,000. 

Such a move would be a direct hit to job creation and wages, and would only further reduce Washington’s competitiveness.

(And that isn’t even to mention that businesses paying the Seattle payroll tax would be credited the amount they pay to the City, essentially forcing employers outside of Seattle to subsidize the City’s budget.)

What You Can Do:

Help us spread the word! As mentioned, there is a public hearing scheduled for Thursday, January 22 at 1:30 p.m. and we encourage folks to tell lawmakers you oppose this tax by noting your position as CON on the bill.

You can also submit your written testimony here.