And Why That Matters for Washington
By Joe Wallin | The Startup Law Blog | @joewallin
March 2026
Every time a state proposes a new income tax or millionaire surtax, the pitch is the same: “This will raise $X billion and solve our budget problems.” But more often than not, the actual revenue falls short—sometimes dramatically.
This isn't speculation. It's a pattern backed by decades of data from states that tried it. Washington's legislature just passed a millionaire's tax, and the governor has said he will sign it into law. The math behind the revenue projections doesn't work the way the fiscal notes suggest.
The $3.2 Billion Question
The Washington Legislature's fiscal notes projected that the millionaire's tax (SB 6346/HB 2724) would raise approximately $3.2 billion in new revenue. That's the number legislators used to justify new spending commitments.
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Our Prediction We put a marker in the ground before this tax passed: actual revenue from the millionaire’s tax will fall significantly short of $3.2 billion—potentially by 30% or more—for the same reasons new income taxes have historically underperformed in other states. We believe the real number will be closer to $2 billion, and possibly less. We are willing to be measured against this prediction. |
The Behavioral Response Problem
Politicians assume people will just pay the higher tax and nothing else will change. But in reality, taxpayers respond. High earners move out of state. They defer or accelerate income. They switch to different forms of compensation. Suddenly, the base you thought you were taxing starts to shrink.
This “behavioral response” effect is well-documented, though economists disagree about its magnitude. Young and Varner (2011) found that millionaire migration effects in New Jersey were modest—but they also found that top-bracket revenue was significantly more volatile than static projections assumed, because high earners can shift the timing and form of their income. Even small migration effects, combined with income-timing shifts, can meaningfully erode projected revenue.
We’ve seen this pattern in other states. When New York raised its top tax rate in 2009, collections from high earners proved far more volatile than projected. New Jersey’s 2004 millionaire’s tax underperformed initial revenue estimates. In each case, the combination of income timing, migration, and economic cycles produced revenue below what static fiscal notes projected.
California: The Classic Case Study
The most instructive example may be California. In 2012, voters approved Proposition 30, temporarily increasing the top income tax rate from 10.3% to 13.3% for high earners. Proponents promised it would raise $6 billion per year for education.
What happened? Revenues were highly volatile. Collections spiked initially, partly because taxpayers accelerated income into 2012. In subsequent years, revenue swung significantly depending on stock market performance and capital gains realizations. The Legislative Analyst’s Office repeatedly emphasized that revenue from high-income taxpayers was far more volatile than from other sources—making it a risky foundation for ongoing spending commitments.
Meanwhile, California’s top marginal tax rate of 13.3% remains the highest in the nation. High earners have options: moving to states like Nevada or Texas, shifting income into pass-through entities, or engaging in complex tax planning. Whether or not migration is the primary driver, the long-term revenue picture has been far more volatile than the original forecasts assumed.
What This Means for Washington
Washington has historically had no broad-based income tax, but that just changed. The state’s capital gains tax was already effectively an income tax on certain investment gains. The legislature has passed a 9.9% tax on income above $1 million—with married couples getting only a single $1 million deduction, not two—and the governor has said he will sign it into law.
Supporters said this tax would raise $3.2 billion to fund education, childcare, and housing. But history suggests the actual revenue will be lower—potentially much lower—due to behavioral responses and the volatility of capital gains. Washington’s wealthiest residents can now be expected to move to no-tax states like Nevada or Texas. Business owners will delay selling their companies. Investors will time their trades to minimize taxable gains.
There’s another wrinkle: Washington’s constitution requires taxes to be uniform. The state Supreme Court narrowly upheld the capital gains tax by reclassifying it as an excise tax. The new millionaire’s tax will almost certainly face a similar legal challenge. If courts eventually strike it down, the revenue will disappear overnight.
A Better Way?
Rather than banking on uncertain revenue from a small group of taxpayers, Washington should have focused on broad-based, stable revenue sources that don’t discourage investment and entrepreneurship. Options included a modest increase in the sales tax base or targeted spending reforms to free up resources. Instead, the legislature chose the path that has historically underperformed in other states.
At a minimum, legislators should temper their expectations going forward. They should not commit to billions in new spending based on optimistic revenue projections that ignore the behavioral response problem. California, New York, and other states that have tried to extract large sums from a mobile, sophisticated group of taxpayers have seen revenue fall short.
Legal note: In Quinn v. State (2023), the Washington Supreme Court treated the capital gains tax as an excise tax, meaning article VII uniformity/levy limits did not apply. A future tax challenge will depend heavily on how the tax is structured and classified.
Sources (key references):
- Washington State Standard, “Tax fight crescendos in the Washington Legislature” (Apr. 19, 2025): https://washingtonstatestandard.com/2025/04/19/tax-fight-crescendos-in-the-washington-legislature/
- OFM fiscal note packages: https://fnspublic.ofm.wa.gov/FNSPublicSearch/GetPDF?packageID=77469 and https://fnspublic.ofm.wa.gov/FNSPublicSearch/GetPDF?packageID=77319
- Washington bills: https://app.leg.wa.gov/billsummary/?BillNumber=6346&Initiative=false&Year=2025 and https://app.leg.wa.gov/BillSummary/?BillNumber=2724&Initiative=false&Year=2025
- Washington Supreme Court opinion (Quinn v. State): https://www.courts.wa.gov/opinions/pdf/1007698.pdf
- Research on millionaire migration/behavioral responses: Young & Varner (2011): https://cristobalyoung.com/wp-content/uploads/2018/11/NTJ-millionaire-migration-state-taxation.pdf
- California Prop 30 revenues/projections (LAO): https://lao.ca.gov/LAOEconTax/Article/Detail/174 and https://lao.ca.gov/LAOEconTax/Article/Detail/187
This post is general information, not legal advice. Talk to your advisor about your specific situation.
The bottom line: State income tax hikes almost always raise less than promised. Washington’s new millionaire’s tax will be no exception. We’ll be tracking actual revenue against projections—and we expect the shortfall to be significant.
Need help assessing how Washington tax developments could affect your company, equity, or liquidity planning? Book a call to discuss your situation. Also see: Washington State Taxes Guide | Services
