A Misguided Millionaire Tax Comes to Washington State

Governments love to talk about fair taxation. In the State of Washington, lawmakers decided to do something about having what they claimed was the second most regressive tax system in the country to deal with that perceived unfairness. In response, Governor Bob Ferguson signed into law a 9.9 percent excise tax on any income that exceeds over $1 million, which will take into effect in 2028. While the idea of fighting for the little guy while making sure people pay their "fair share" (whatever that means), the unintended consequences are exactly why this sort of tax is ill-advised. 

First, let's tackle the fairness argument. As the Left-leaning Institute for Taxation and Economic Policy (ITEP) points out, the bottom quintile pay 13.5 percent of their income to state and local taxes, as opposed to 4.1 percent for the Top 1 percent. However, that's an incomplete picture. About three quarters of those earning less than $25,000 do not pay federal income taxes. More to the point, as the Washington Policy Center details, the top earners pay way more in absolute dollars than everyone else (see below). 

And then there's the fact that this new tax will make Seattle have the highest de facto income tax rate in the country, which I can tell you will do nothing for tax competitiveness. The lack of a de jure income tax was one of the last few positive features of Washington's tax system. This will take away Washington's tax competitive edge. The Common Sense Foundation estimated that if 5 percent of the millionaires left Washington, it would mean a loss of 8,000 private sector jobs and a decline of personal income of $19 billion from 2028 to 2032. 

Similar to the U.S. federal government, Washington State does not have a revenue problem: it has a spending problem. Washington State passed $9 billion in tax hikes last year, which is the largest in the state's history. The state still managed to create a $2.3 billion deficit that it needs to solve this year. And the proponents wanted to pass this millionaire tax to fund even more money on education, healthcare, and other government services? 

Washington's millionaire tax is an exercise of what it looks like to have an obsessive, singular, narrow focus on "fairness" without looking at the bigger picture. The top earners already contribute more. Yet this risks driving away high earners, deterring businesses to move to Washington, shrink private-sector jobs, and slow economic growth. Rather than solve fiscal problems, this tax will further erode Washington's competitiveness while ignoring the fact that Washington continues to be a state that continues to spend more than it makes. Chasing fairness seems noble until you realize that ignoring the consequences is expensive.