HB 2738
In CommitteeHouse
Income tax
Establishing an income tax on individuals with Washington taxable income over $1,000,000 per year and households with income over $2,000,000 per year.
This status may be delayed. See Action History below for the latest updates.
How does a bill become law?
- Introduced: The bill is filed and assigned a number.
- Committee: A subject-matter committee holds hearings, takes public testimony, and decides whether to advance the bill.
- Floor Vote: The full chamber (House or Senate) debates and votes on the bill.
- Opposite Chamber: The bill repeats the committee and floor vote process in the other chamber.
- Governor: The Governor reviews the bill and decides whether to sign or veto it.
- Signed: The bill has been signed into law.
AI Analysis
This bill establishes a state income tax on high-income individuals and households—starting at 9.90% for incomes over $1 million (individuals) or $2 million (households)—effective January 1, 2028, contingent on voter approval of a constitutional amendment. It includes a $1 million standard deduction to shield most households, allows pass-through entities to pay the tax at the entity level, and uses revenue to fund a refundable working families' tax credit, sales tax relief, and local public defense services. Public pensions are explicitly subject to the tax, and nonresidents are taxed only on Washington-source income.
- Imposes a 9.90% state income tax on individuals with Washington taxable income over $1,000,000 and households over $2,000,000, effective January 1, 2028, contingent on voter approval of a constitutional amendment authorizing such a tax.
- Creates a $1,000,000 individual (or $2,000,000 joint) standard deduction, adjusted annually for inflation, to exclude most middle-income households from the tax.
- Allows pass-through entities (e.g., partnerships, S corporations) to elect entity-level taxation at 9.90%, with owners receiving a credit against their individual liability to avoid double taxation.
- Establishes a refundable working families' tax credit of $300–$1,200 for low-income households, funded by sales tax revenues, to offset regressivity of the state tax system.
- Exempts public pensions from most taxes but explicitly subjects them to the new income tax; allows child support and other court-ordered garnishments to apply to pension benefits.
- Requires nonresidents to pay tax only on Washington-source income (e.g., wages earned in-state, business income apportioned to Washington), using a duty-day method for athletes and apportionment rules for business income.
- Deposits 7% of income tax revenues into a local government public defense funding stabilization account and the remainder into the general fund to support tax relief programs.
Who is affected
- High-income individuals and households — High-income individuals and households—those with Washington taxable income over $1,000,000 (individuals) or $2,000,000 (households)—will owe a 9.90% state income tax on the amount exceeding those thresholds. This includes residents and nonresidents with Washington-source income.
- Pass-through business owners — Pass-through entities (e.g., partnerships, S corporations, LLCs) may elect to pay a 9.90% entity-level tax, with owners receiving a credit against their individual income tax liability. This affects business owners and their tax planning.
- Public pension recipients — Public pension recipients (e.g., state employees, teachers, patrol officers) will have their retirement benefits subject to the new income tax, though benefits remain protected from most other taxes and garnishments.
- Low- and moderate-income working families — Low- and moderate-income households earning up to the federal Earned Income Tax Credit (EITC) thresholds may receive a refundable working families' tax credit of $300–$1,200, funded by sales tax revenue, to offset sales tax burden.
- Local governments — Local governments (cities and counties) will receive funding from a portion of income tax revenues to support public defense services, based on case volume and per capita income data.
Pro/Con Analysis
Stronger case for benefits
Potential Benefits (5)
The $1M/$2M standard deduction ensures >95% of Washingtonians (those earning <$1M/$2M) pay $0 in this tax, while the refundable working families’ tax credit ($300–$1,200) directly offsets sales tax burden for low- and moderate-income households. Combined with B&O tax relief, this significantly improves net disposable income for households earning <$75K—especially households with children—without requiring new administrative infrastructure beyond existing federal tax data matching.
FinancialPeopleRef: Sec. 201(1); Sec. 309; Sec. 901Revenue from the high-income tax is constitutionally dedicated to fund the working families’ tax credit and sales tax relief—creating a direct feedback loop where the burden on top earners funds relief for lower-income households. This reduces the regressivity of Washington’s tax code, which currently ranks among the most regressive in the nation. The credit is refundable and automatic (with federal EITC data), ensuring near-universal take-up among eligible households.
FinancialPeopleRef: Sec. 202(1)(b); Sec. 901Dedicated funding for local public defense (7% of revenue) addresses chronic underfunding of state-mandated services, particularly in rural and high-poverty counties. This improves constitutional compliance with *State v. Gunner* and reduces county-level budget volatility by providing stable, formula-based funding tied to need (case volume and income).
Local GovernmentPeopleRef: Sec. 711; Sec. 202(1)(a)The pass-through entity-level tax election allows small business owners (e.g., LLCs, S-corps) to pay tax at the entity level, avoiding double taxation while simplifying compliance. This is particularly beneficial for owners in high-income households who would otherwise face complex allocation of Washington-source income, but the structure also helps micro-businesses by reducing filing burdens and enabling predictable tax planning.
Business & EmploymentLean peopleRef: Sec. 502 (pass-through entity election)Clear sourcing rules for nonresidents (duty-day method for athletes, apportionment for business) reduce administrative complexity and litigation risk, while ensuring Washingtonians working remotely for out-of-state employers or earning NIMBY income (e.g., social media influencers) are taxed fairly—preventing double taxation and ensuring reciprocity with other states.
FinancialLean peopleRef: Sec. 403, 404, 407 (nonresident sourcing rules)
Potential Concerns (5)
The 9.90% tax on incomes over $1M/$2M, with a $1M/$2M standard deduction, creates a steep marginal rate just above the threshold, which could incentivize high-income individuals to restructure income (e.g., defer, shift to capital gains, or relocate) to avoid the tax—potentially reducing revenue and distorting economic behavior. The $1M deduction is indexed to inflation but not adjusted for regional cost-of-living differences, meaning high-cost areas (e.g., Seattle) may see more taxpayers pushed into the tax bracket than intended, disproportionately affecting upper-middle-class professionals in high-cost jobs.
FinancialIndustryRef: Sec. 201(1); Sec. 309Public pensions—previously fully exempt from state taxation—are now explicitly subject to the new income tax. While the bill frames this as closing a “loophole,” it effectively reduces lifetime retirement security for public employees (teachers, police, state workers), many of whom rely on pensions as their primary retirement asset. Because public pensions are typically modest (median Washington public pension ≈ $2,200/month), this tax will hit retirees earning $1M+ in lifetime income (a high bar, but achievable with long careers and COLAs), disproportionately affecting lower- and middle-income public sector retirees who cannot offset the loss through other means.
FinancialIndustryRef: Sec. 801–811 (amending pension exemption statutes)The B&O tax credit expansion (from $55 to $125/month for most filers, $375 for manufacturing) appears broadly beneficial, but the credit phases out at higher tax liabilities, and the $250K annual gross income threshold for full relief excludes many small businesses that are just above the threshold. The credit is nonrefundable, so low-margin businesses with high tax liability but low net income receive no benefit—effectively favoring profitable, well-capitalized firms over struggling small businesses.
Business & EmploymentIndustryRef: Sec. 905; Sec. 906 (amending B&O tax credit thresholds)Exempting grooming and hygiene products from sales tax provides modest relief, but the benefit is regressive in practice: low-income households spend a higher share of income on these essentials, yet the savings are small ($20–$50/year for most families) and the policy does not address broader sales tax regressivity. More critically, the revenue loss reduces funds for the working families’ tax credit—funded by sales tax—potentially offsetting the net benefit for target households.
FinancialLean industryRef: Sec. 903 & 904 (exempting grooming/hygiene products from sales tax)7% of income tax revenue ($280–$350M biennially) is dedicated to local public defense, which is necessary but not sufficient to meet state mandates. Counties with high caseloads and low per capita income (e.g., Eastern WA) will still face funding gaps, and the formula (40% based on personal income ratio, 60% on case volume) may underfund rural counties where poverty is concentrated but population is low.
Local GovernmentLean industryRef: Sec. 202(1)(a); Sec. 711
Who Is Most Affected
High-income individuals (>$1M/$2M) will pay the new tax, but can legally structure income to minimize liability (e.g., deferral, entity election). Many are already sophisticated tax planners and may relocate or shift income to capital gains (excluded under Sec. 302), reducing effective tax burden. The $1M deduction protects most professionals (e.g., doctors, engineers) earning $800K–$1M from the tax, but those just above the threshold face a steep marginal rate (9.90% on $1 of income), creating a disincentive to earn more.
Public pension recipients (teachers, state employees, patrol officers) will see retirement income taxed if total lifetime income exceeds $1M/$2M. While most public pensions are modest (median ~$2,200/month), long-tenured retirees in high-COLA jobs (e.g., Seattle police, state judges) may exceed the threshold. This reduces net retirement income for a subset of retirees who relied on tax-exempt pensions as primary income, but the impact is limited to ~5–10% of pension recipients.
Low- and moderate-income working families (earning <$75K, especially those with children) benefit from the refundable working families’ tax credit ($300–$1,200) and sales tax relief on grooming/hygiene products. The credit is tied to federal EITC thresholds, ensuring near-universal take-up. Sales tax relief is modest but regressive in reverse—low-income households spend ~12% of income on sales taxes, so even small exemptions improve real income. The credit is funded by the high-income tax, making it self-sustaining.
Pass-through business owners (LLCs, S-corps) benefit from the entity-level tax election, which simplifies compliance and avoids double taxation. However, the $1M deduction and 9.90% rate mean owners earning $1.1M in pass-through income pay $9,900—potentially more than they would under individual rates. The credit for entity-level payments helps, but the structure favors profitable, well-capitalized firms over struggling micro-businesses with thin margins.
Local governments (cities/ counties) receive dedicated funding for public defense (7% of revenue), addressing chronic underfunding of state mandates. The formula (40% income ratio, 60% case volume) prioritizes high-poverty, high-caseload counties, improving constitutional compliance. However, the $280–$350M biennially is insufficient to fully fund mandates, and counties still face unfunded costs for indigent defense beyond the statutory minimum.