Washington State’s New Income Tax: Biggest ‘Marriage Penalty’ in US?

A Taxing Equation for Couples: Washington State’s New Millionaire Tax and Its Unintended Consequences

Washington state is poised to enact its first-ever state income tax, a 9.9% levy on annual income exceeding $1 million. While framed as a “millionaire’s tax” by its proponents, the legislation contains a significant “marriage penalty” that could impact couples with combined incomes well below that threshold, sparking debate among tax experts and raising concerns about its potential impact on the state’s workforce. The new tax structure, approved by both the state House and Senate, awaits the governor’s signature.

How the ‘Marriage Penalty’ Works

The core of the controversy lies in the tax’s $1 million income threshold, which applies uniformly to individuals, married couples, and domestic partners. This means a married couple, each earning $600,000 annually – a combined income of $1.2 million – would be subject to the 9.9% tax. As Joe Wallin, an attorney advising companies and tech founders in Washington, pointed out, the tax effectively becomes a “half-millionaire tax” for couples. “According to the statute, it doesn’t matter if you’re single or married, the exemption is $1 million,” Wallin said.

This differs significantly from tax structures in many other states, where income thresholds for tax brackets are typically doubled for married couples. For example, in New York, the income thresholds for each bracket are doubled for joint filers up to a certain income level, while California likewise doubles bracket thresholds for joint filers, with a limited exception. The Tax Foundation, a nonprofit tax policy think tank, notes that New York and California’s marriage penalties are relatively small, amounting to a 1% tax rate difference in California and a 0.65% difference in New York. In Washington, the potential difference could be as high as 9.9%, making it the largest marriage penalty in the country, according to Jared Walczak, a senior fellow at the Tax Foundation.

Walczak illustrated the potential impact with a stark example: two single filers each earning $1 million would owe no tax under the new law. However, if they marry and maintain the same income, they would collectively owe $99,000 in taxes.

Beyond the Headline: A Broader Seem at Washington’s Tax Landscape

Washington is one of only nine states without a state income tax, a long-standing feature of its economic identity. The proposed 9.9% rate would be among the highest in the nation, potentially altering the state’s attractiveness to high-income earners. The new tax builds upon a 7% capital gains excise tax passed by voters in 2021, further shifting the state’s revenue model. Jeff Bezos, founder of Amazon, recently relocated to Florida, a state with no income tax, after the capital gains tax took effect, reportedly saving over $600 million in taxes on stock sales. Similarly, Howard Schultz, former CEO of Starbucks, has also moved to Florida.

Impact on Washington’s Key Industries

The new tax could disproportionately affect dual-income families working in Washington’s thriving tech sector, home to companies like Amazon and Microsoft. These companies employ a significant number of highly skilled, highly paid workers, many of whom are in dual-income households. Brian Heywood, founder of the conservative political action committee Let’s Go Washington, criticized the tax, arguing that it targets more than just the wealthiest individuals. “There’s this idea that, ‘We’re just taxing rich dudes with yachts,'” Heywood said. “They’ve been less than honest with who they’re going after and what the numbers are.”

The potential for couples to consider legal separation or divorce solely for tax purposes, while perhaps extreme, has even been raised by legal professionals. Wallin joked that the tax savings could outweigh the costs of a divorce, highlighting the significant financial implications of the marriage penalty.

Legislative Response and Justification

State Sen. Noel Frame, who leads fiscal policy for the state Senate Democrats, defended the tax structure, stating that the $1 million household deduction mirrors the structure used for the state’s capital gains excise tax. “As we work to develop the two separate tax structures work together, having consistency in the deduction helps with both administration of the tax by our Department of Revenue and simplicity for taxpayers,” Frame said in a statement. She also noted that many high-earning couples would not be significantly impacted by the tax, even with combined incomes exceeding $1 million.

A National Trend: State Tax Increases on High Earners

Washington’s move to tax high earners is part of a broader national trend. Democrats in several state legislatures, including Rhode Island, New York, Virginia, and Michigan, are exploring ways to increase taxes on the wealthy to address rising inequality and offset federal funding cuts. California is even considering a ballot initiative to create the first state wealth tax, targeting the net worth of its wealthiest residents. Washington’s experiment will be closely watched as a case study in the potential effects of higher state taxes on wealth migration and economic activity.

What’s Next for Washington’s Tax Law

The legislation now awaits the governor’s signature, which is expected. Following enactment, the Washington State Department of Revenue will be responsible for implementing the new tax and addressing potential challenges related to the marriage penalty. Further legal challenges are possible, and the long-term impact on the state’s economy and tax base remains to be seen. The state’s fiscal health and its ability to retain high-income earners will be key indicators to watch in the coming years. Further debate is expected as the implications of the new tax become clearer.