Washington's Millionaires Tax: What Business Owners Need to Know

I recently attended a CEOtoCEO breakfast in Bellevue titled “The Millionaire Tax Debate: What You Need to Know.” CEOtoCEO has been running these peer breakfasts for CEOs and business owners since 2003, and this one pulled together a panel to unpack Washington’s new millionaires tax.

A quick caveat up front. This recap is based on my own notes from the event, and I didn’t catch everything, especially once I had to step out before the Q&A. Take it as my best summary, not a transcript. Nothing here is tax or legal advice, and your CPA and attorney should have the final word on how any of it applies to you.

The short version

Tax structure. Washington’s 9.9% tax on income over $1 million takes effect January 2028, with first payments due April 2029.
Legal challenge. Its constitutionality is being challenged. The core fight is whether courts treat it as an excise tax or a property tax.
Ballot history. Voters have rejected income tax measures roughly 10 times over the past 90 years, and get another chance with Initiative 645 this November.
Ballot language. I-645 is genuinely confusing. Voters beware: a YES vote repeals the tax, a NO vote keeps it.
Revenue use. Governor Ferguson says the revenue funds school meals, family rebates, and small business tax relief, but only a small slice of that is actually locked in by law. Most of it lands in the general fund like ordinary revenue.
Relocation. Some business owners are reportedly planning around the tax ahead of a sale, though this has been well covered elsewhere and I’d treat the anecdotes as directional, not definitive.
Your next step. If you lead a business here, now is the time to start planning around timing, equity events, and succession, not after the rules are set.

The panel

Joe Fain, President & CEO, Bellevue Chamber of Commerce. Former two-term WA state senator.
Mark Harmsworth, Small Business Director, Washington Policy Center. Former WA state representative.
Kevin Wallace, CEO, Wallace Properties. Former Bellevue City Council member.
Eric Johnson, moderator. Retired KOMO-TV news anchor.

The backdrop

Washington’s state budget has roughly doubled over the last decade, going from about $38 billion to $80 billion. Former Governor Christine Gregoire has been raising concerns about this herself. She’s now CEO of Challenge Seattle, an alliance of CEOs from 23 of the region’s largest employers, including Microsoft, Boeing, Starbucks, and Amazon, that works on civic issues like homelessness, housing, and transportation. At a business summit earlier this year she put it plainly: the state budget grew from about $33 billion when she left office in 2013 to around $80 billion today, and in her view that’s a spending problem, not an income problem.

One point made at our panel was that Covid-era federal funding let the state expand services and staffing, and the budget has never contracted back down since.

Where does the money actually go?

When Governor Ferguson signed the bill, he said the revenue is intended for:

Free breakfast and lunch for every K-12 student
The largest tax break in state history for small businesses, a reduction in the B&O tax
Eliminating sales tax on diapers, over the counter drugs, and hygiene products
Expanding the Working Families Tax Credit, a rebate reaching roughly 500,000 low and middle income households
Investment in childcare and early learning

Here’s the part worth knowing. Only a small piece of that is legally locked in. Five percent of the revenue is earmarked by statute for the Fair Start for Kids Account, which by law can only be spent on childcare and early learning. Another 5 to 7 percent is earmarked for a local government public defense funding stabilization account.

Everything else, including the free school meals, the Working Families Tax Credit expansion, and the small business tax break, flows into the state’s general fund and gets funded through the normal budget process. KING 5’s reporting on the bill said it plainly: the revenue is largely slated for the general fund, so legislators can use it wherever budget writers want. Ferguson has said the dollars must by law go to those specific things, but based on the bill language, that appears true mainly for the two dedicated accounts. The rest reflects this legislature’s current budget priorities, which a future legislature can revisit in any future biennial budget.

Is this a Washington practice? Yes, there’s real precedent. The clearest example is the state lottery. When it launched in 1982, proceeds went straight into the general fund. Voters passed Initiative 728 in 2000 specifically to redirect lottery revenue to education. Then in 2009, facing a budget crunch, lawmakers redirected that money back to the general fund, and in 2010 redirected it again to a different account for higher education. So a pattern of promising revenue for a specific purpose and later reallocating it isn’t hypothetical here. It’s happened before.

The legal question, explained

This is the part that confused me too, so here’s the plain-English version.

Washington’s constitution caps property taxes at 1 percent and requires them to be applied uniformly. Back in 1933, the state supreme court ruled that income counts as “property” under that clause, which is why Washington has never had a traditional income tax.

An excise tax is different. It’s a tax on an activity or transaction, like the sale of something, rather than on ownership itself. In 2023, the state supreme court upheld Washington’s capital gains tax by ruling it’s an excise tax on the act of selling an asset, not a property tax on the gain itself, so it sidesteps the 1 percent cap.

The millionaires tax is built the same way, as a tax on the “privilege” of receiving income rather than a direct tax on income as property. Panelists at the event argued this new tax should fail that test because of how directly it’s tied to income rather than a transaction, and expect this to be the central legal battle if it’s challenged in court.

Why Washington is the only one, even though other states have similar taxes

This one tripped me up too. California, New York, New Jersey, and Massachusetts tax high earners through traditional, standard income tax systems. Washington can’t legally do that because of the constitutional issue above, so it built this as an excise tax instead, a structurally different legal animal aimed at a similar practical outcome, more tax collected from high earners.

So Washington isn’t really the odd one out on intent. It’s the odd one out on legal mechanism.

What’s happening in other states

Panelists argued that aggregate income has trended downward in those four higher tax states while trending upward in more business-friendly states. I’d treat that comparison as the panel’s read rather than settled data. On the relocation question specifically, this has been heavily covered in the news already, so I won’t rehash it here beyond saying it came up as a live concern for panelists and attendees alike.

Two takeaways from the panel

One comment that stuck with me: every side of this debate can produce data that supports its position, so it’s worth staying skeptical of any single source.

Another panelist pointed out that the state’s deficits are, in part, self-imposed. Despite recent record tax increases, the state is still running a deficit, in part because there’s little political reward for cutting a program once it exists.

Why this matters for you

A few practical implications I’m chewing on for our own businesses:

If you’re planning an exit or sale, the tax doesn’t take effect until January 2028, with first payments due in April 2029. That gives some runway to think through timing, residency, and structure with your CPA and estate attorney before decisions get made for you.
Watch Initiative 645 this November, and double check the ballot language before you vote. Remember, YES repeals the tax and NO keeps it.
If you have key employees with RSUs or equity compensation near the million dollar threshold, this could start showing up in retention and compensation conversations well before 2028.
Stay grounded on the relocation headlines. It’s a real conversation happening in board rooms, but the coverage has outpaced the hard data so far.
Don’t assume the stated uses of the revenue are permanent. Beyond the two dedicated accounts, this is ordinary general fund spending, subject to change in future budgets.

Questions worth asking yourself

This is exactly the kind of issue that tends to surface in our C12 Seattle North forum conversations, where CEOs work through real decisions together rather than in isolation. A few questions worth sitting with:

How exposed is my business, or my own compensation, to this tax as currently structured?
Do I have a clear plan for timing a future sale or equity event, or am I just hoping the rules stay the same?
Is my succession planning solid regardless of which way the tax debate goes?
Who am I processing decisions like this with, and is that enough?

That last one is usually the one that matters most. Most owners I talk with are carrying decisions like this alone, or running them past people who have a stake in the answer.

If you’re wrestling with questions like these and want a peer group built for exactly this kind of thing, I’d love to talk it through with you. Reach out here and we’ll set up a conversation.