Washington lawmakers are considering the most significant change to the state's tax system in decades: a new 9.9% tax on income above $1 million per year, commonly called the "millionaires tax." The proposal — currently appearing as House Bill 2724 — would raise billions annually for education, health care, and tax relief, while reopening a long-running constitutional debate about whether Washington can tax income at all.
Here's a plain-language explanation of what the bill does, who it affects, why the name is a little misleading, and why its legality is already being questioned.
What the Bill Does
HB 2724 would impose a 9.9% tax on "Washington taxable income" above $1 million per year. The first $1 million is exempt — if you earn less than $1 million, you owe nothing under this tax. The $1 million threshold is indexed for inflation. The tax applies beginning in 2028, with first payments due in 2029. Lawmakers estimate roughly the top 0.5% of households would be affected.
"Washington taxable income" is calculated by starting with federal adjusted gross income (AGI), subtracting long-term capital gains (already subject to Washington's separate capital gains excise tax), adding back certain losses and tax-exempt interest, applying Washington-specific deductions, and then subtracting the $1 million standard deduction.
Several categories of income are excluded entirely, including home sales and real estate gains, sales of qualified family-owned small businesses, and long-term capital gains. Credits are also available for Washington capital gains tax, B&O tax, and certain pass-through entity taxes paid. Charitable contributions up to $50,000 per year can be deducted.
Who Pays — and Who Doesn't
People who would pay: Washington residents with more than $1 million in annual income, nonresidents with more than $1 million of Washington-sourced income, and part-year residents on a prorated basis.
People who would not pay: anyone earning under $1 million, most retirees, most business owners, and nearly all wage earners.
The Married Couples Wrinkle
Here's a detail that often gets lost in the debate: the "millionaire tax" label is misleading for married couples.
Under the proposal, the $1 million exemption applies per household, not per person. A married couple does not get two $1 million exemptions. Even if spouses file separate returns, their combined exemption is capped at $1 million total.
In practical terms, a married couple begins paying this tax once their combined income exceeds $1 million — meaning it can apply when each spouse earns roughly $500,000. For dual-income professional households in the Seattle tech economy, that threshold is not as distant as the "millionaires tax" label implies.
What This Means for Founders and Investors
If you run a startup, hold stock options, or have RSUs vesting in the coming years, this tax could alter your after-tax picture significantly.
Equity compensation timing: Large RSU vests or option exercises could push you over the $1 million threshold, potentially subjecting a portion of your income to the 9.9% state tax. Planning around vesting schedules and exercise timing will matter.
Liquidity events and exits: Founders selling shares during an acquisition or secondary could face additional state tax on proceeds above $1 million, affecting net returns. Note that long-term capital gains are excluded from the tax base — but wages, bonuses, and short-term gains are not.
Combined rate risk: Analysts have noted that combining this proposed tax with existing payroll and city taxes — including Seattle's JumpStart tax and the long-term care insurance tax — could push the top effective rate for some Seattle residents above 18%. That would be higher than New York City.
Relocation: High combined tax rates are already influencing decisions about where to domicile, incorporate, or expand. Whether or not this bill passes, it's a signal worth factoring into longer-term planning.
Although the tax is not yet law and would not take effect until 2028 at the earliest, the most effective planning happens years before a liquidity event — not months before closing.
The Constitutional Question
Washington's constitution has long been interpreted to prohibit a graduated income tax. Courts have historically treated income as a form of property, which must be taxed uniformly — and a 9.9% tax that only applies above a threshold is plainly non-uniform.
The key precedent is Culliton v. Chase (1933), in which the Washington Supreme Court held that income is "property" under Article VII of the state constitution. That classification matters because property taxes must be uniform within the same class. A tax that applies at 0% below $1 million and 9.9% above is the exact kind of structure Washington courts have struck down.
Seattle tested this directly with a high-earner income tax, which was invalidated in Kunath v. City of Seattle (Wash. Ct. App. 2019) on the same uniformity grounds. The state Supreme Court let that decision stand.
The Legislature's Theory
HB 2724 doesn't call the new levy an "income tax." Instead, it describes it as a tax on the "receipt of Washington taxable income" — framing it as an excise tax on an event or activity, not a direct tax on property.
This mirrors the argument that succeeded in Quinn v. State (2023), where the Washington Supreme Court upheld the state capital gains tax as an excise on transactions rather than income itself. But there's a meaningful distinction: the capital gains tax targets a specific transaction (the sale or exchange of assets), while HB 2724 taxes aggregate annual income above a threshold. That difference is likely to be the heart of any court challenge.
There's also an Initiative 2111 problem. In 2024, voters enacted I-2111, which explicitly prohibits state and local taxes on personal income. HB 2724 addresses this by carving itself out of that prohibition — stating that the income-tax ban does not apply to this new tax. Whether that statutory carve-out is legally sufficient is an open question.
If enacted, the bill is virtually certain to face immediate legal challenges and possibly a voter referendum as well. Even supporters acknowledge that revenue would likely not materialize until 2029 at the earliest, given the administrative setup time and anticipated litigation.
Bottom Line
HB 2724 is carefully designed, narrowly targeted, and politically consequential. Whether it is constitutional — or merely clever — will be decided not in committee rooms, but in courts and potentially at the ballot box.
For founders and high-income professionals in Washington, the practical takeaway is this: whether or not this proposal ultimately passes, it is a signal that the state is actively exploring new ways to tax high earners. That signal is worth treating as a prompt to update your planning assumptions now — not after a term sheet or LOI is signed.
