Washington State’s Proposed Income Tax Raises Concerns

Washington state’s proposed income tax, which includes what tax experts say is the largest “marriage penalty” in the country, could lead to higher taxes for some couples filing jointly.

The state House of Representatives has approved this new income tax, which imposes a 9.9% rate on earnings exceeding $1 million. The state Senate has also passed the bill, and it is expected to be signed into law by the governor. Currently, Washington is one of nine states without a state income tax, and this new tax would be one of the highest in the nation.

Democrats have labeled it the “billionaire tax,” and the marriage penalty is significant as it affects some taxpayers who individually earn much less. The tax is levied at an income threshold of $1 million and applies to individuals, couples, and domestic partners. Essentially, two individuals making $600,000 each would be taxed as a couple with a combined income of $1.2 million.

Joe Wallin, a lawyer in Washington, pointed out, “It should be called the 500,000 Person Tax,” emphasizing that the exemption is not higher for married couples. This kind of marriage penalty isn’t unique, but Washington’s version is especially striking in its size. Most states have separate income thresholds for individuals and married couples, typically with the latter being double that amount. High-tax states like California and New York generally apply marriage penalties only to those at the top income levels, according to the Tax Foundation.

For instance, in New York, the income threshold for joint filers is doubled under a 9.65% tax rate, which applies to incomes over $1,077,550 for singles and $2,155,350 for couples. Meanwhile, special millionaire surtaxes exist for those earning above $5 million and $25 million but apply equally to singles and married couples.

California also doubles bracket thresholds for joint filers, though the 1% Mental Health Services Act tax applies equally to both single and married individuals with incomes over $1 million.

Jared Walczak from the Tax Foundation noted that the marriage penalties in California and New York are relatively modest, representing a tax rate difference of 1% and 0.65%, respectively. By contrast, in Washington, the penalty could be as high as 9.9%. He illustrated this by saying that if two single filers both made $1 million, they would owe nothing, but if they married, their tax bill would skyrocket to $99,000. “Washington state’s marriage fine will be the largest ever,” he remarked.

The Democratic lawmakers and governor have yet to address the marriage penalty issue directly. State Senator Noel Frame, who leads fiscal policy for Senate Democrats, justified the $1 million standard deduction per household as a method to align tax structures within the state.

He mentioned, “Many high-income couples won’t face the same tax burden, even if their combined income exceeds $1 million.” However, Washington’s economy heavily relies on highly skilled workers, as seen with companies like Amazon and Microsoft, and analysts warn that many working families could be impacted by the tax.

Brian Heywood, a hedge fund manager in Washington and a critic of the tax, said, “There’s this notion that we’re just taxing rich people on yachts,” suggesting a lack of honesty regarding the tax’s reach.

Wallin humorously added that some dual-income couples might even consider legal separation for tax advantages, with potential savings that could outweigh the cost of an attorney.

This marriage penalty represents a new chapter in the debate surrounding Washington’s income tax—part of broader Democratic efforts to tax the wealthy. Across the country, from Rhode Island to Virginia, Democrats are pushing to address rising inequality and cuts in federal funding for health care through increased taxation on high earners. California is even contemplating an initiative for a state wealth tax on the net worth of billionaires.

Washington’s tax changes mark a significant experiment in the impact of state tax hikes on wealth mobility. Recently, well-known entrepreneurs like Jeff Bezos from Amazon and Howard Schultz from Starbucks have relocated to Florida, a state without an income tax. Bezos plans to move to Miami in 2023, reportedly in response to Washington’s new capital gains tax, which has allowed him to save a substantial amount on taxes. Schultz has also moved from Seattle after 44 years, though he stated that his foundation would continue to operate from the city.

“It is our hope that Washington continues to be a place where business and entrepreneurship thrive,” he expressed.