WA Democrats’ ‘millionaires tax’ is here, but Ferguson doesn’t support it yet

Washington state Democrats are set to unveil their proposal for an income tax on “high earners.” Gov. Bob Ferguson said Tuesday that he’s skeptical of this version of the bill.

The so-called “millionaires’ tax” would apply to a household’s income over a million dollars. It would tax 9.9% of income over $1 million. People who earn less than a million wouldn’t pay the tax.

Democrats say the tax will be paid by around 20,000 households and would raise $3.7 billion, which they say will fund tax relief for small businesses and low-income families. It would also repeal some sales taxes on products like soap, toothpaste, antiperspirants and sun tan lotions, according to a draft of the bill obtained by KUOW and filed in the state Senate on Monday.

What Democrats are calling the “millionaire’s tax” wouldn’t tax all millionaires, since it doesn’t include assets. Homeowners of million-dollar homes who make less than a million would be exempted.

The bill is expected to pass in some form – all but four Democrats in the state Senate signed on – however, Gov. Ferguson, who threw his support behind such a tax at the end of last year, didn’t endorse this version.

“It’s a good start, but I cannot support it in this form,” Ferguson, a Democrat, said in a statement. “I have repeatedly insisted that a significant percentage of the revenue generated by the Millionaire’s Tax must go back into the pockets of Washingtonians to make life more affordable. This proposal does not come close to doing that. I look forward to making sure we change that in the coming weeks.”

House majority leader Joe Fitzgibbon, who sponsored the tax’s House companion bill, told KUOW in a text that Democrats would work to get the governor on board eventually.

"We intend to arrive at a proposal that he supports,” Fitzgibbon wrote.

While the tax wouldn’t be imposed until January 2028 and perhaps not collected until the following year or even later, Democrats have for years been moving money around to fill giant budget holes caused by a massive increase in spending over the last decade plus.

This tax bill has been heralded by progressives as a fix to the state’s “upside-down” tax code, where upper classes pay a smaller percentage of their income in taxes. Detractors say passing this income tax would mark the end of an era for a startup state that gave the world Microsoft and Amazon.

“We can’t go on asking the middle class to pay higher rates than millionaires,” said Rian Watt, executive director at the Economic Opportunity Institute, a progressive think tank. “We’re also glad to see a focus on using the dollars raised to put money back in working families’ pockets.”

Republicans excoriated the tax.

“Washingtonians have rejected income taxes again and again because they know better,” Rep. Travis Couture, the Republican budget lead in the state House, said in a statement.

He referenced a comment Pedersen made to KUOW back in December:

“We’re told this will only hit millionaires, but political promises are like pie crust: easily made and easily broken. Every income tax starts this way. It’s millionaires today, and the rest of us tomorrow. Despite the bill’s promises, there is no guarantee of regressive tax relief. It’s an unconstitutional general income tax with thresholds and penalties that can be changed at the whims of a simple majority.”

Washington voters passed a short-lived income tax in 1932, but the Supreme Court rejected it. Since then, voters have rejected ten efforts statewide to institute income taxes. This new tax would likely face a challenge at the ballot and in the state Supreme Court, which held in a famous 1933 decision that under Washington’s constitution, income must be taxed “uniformly,” seemingly ruling out a tax that exempts some incomes.

RELATED: Washington state voters have rejected income taxes 10 times. Is this year different?

Combined with capital gains taxes passed in recent years, Washington could become some of the highest-tax jurisdictions for “top incomes” in the country if this income tax passed, according to business-friendly nonprofit the Tax Foundation – and Seattle, with several payroll taxes on top of that, would be number one.

Business boosters and even some Democrats argue the taxes will fall heavily on employees of startups that are about to go public and tech workers paid in stocks that are about to vest.

“Radically shifting the tax structure in a very short period of time… does the potential of a very real damage to our economic engine,” said Reuven Carlyle, former chair of the House Finance committee and founder of climate investment firm Earth Finance. “We’re walking away from a really unique system that has attracted entrepreneurs for generations.”

But many in the business community have signaled either openness to the tax or a desire to negotiate rather than fight it. There’s been “progress” from the “first conversations to now” on business tax reductions and other issues important to employers, according to Washington Roundtable, a nonprofit whose members include CEOs and presidents of Microsoft, Nordstrom, Windermere and other major corporations.

“We not only know the bill will change; we expect it to, and with more of the business community concerns addressed and priority provisions included,” Rachel Smith, the Roundtable’s president, said in a statement. “If the Legislature is going to advance a proposal of this magnitude, it must be the product of serious discussion, collaboration, and a shared commitment to getting it right.”

In the Democrats’ proposal, only 5% of the revenue from the tax is promised for a specific program: a fund to help counties pay for public defenders. The Senate proposal’s stated intent is to spend the rest on tax relief, education and health care, but they’re not bound by that.

“We didn’t ask for that, and we didn’t expect that,” said Michele Thomas, an influential housing advocate who helped lead a rally on the steps of the state capitol last week, attended by 700 or more pushing for housing and education funding using taxes on the wealthy. “Putting it in the general fund allows them I think appropriate flexibility to make decisions as they change.”