Washington State has approved a landmark shift in its tax structure. Senate Bill 6346 introduces a 9.9% tax on individual income above $1 million annually, marking a historic departure for a state that has long operated without a personal income tax. Governor Bob Ferguson has pledged to sign the bill into law.

Set to take effect in 2028, the tax is projected to generate approximately $4 billion per year, funding education and public services, including health care, higher education, and human services.

For most residents, the change will go largely unnoticed. State estimates suggest the tax will impact between 20,000 and 30,000 households, which is less than 1% of Washington’s population. But within the state’s business and technology sectors, the implications are being debated intensely.

How the tax hits pass-through businesses and owner income

A central concern involves pass-through businesses, a common structure among small businesses, partnerships, and startups. These entities do not pay corporate income tax; instead, profits are reported as personal income by owners.

Under SB 6346, income exceeding $1 million flowing through to individuals would be taxed at the new rate. Critics argue this could reduce capital available for reinvestment, such as hiring, equipment purchases, or debt reduction.

Business sentiment appears to be shifting. A survey from the Association of Washington Business found that 17% of employers are considering relocating out of state due to tax changes, up from 9% the previous year.

Startup backlash: Equity pay, RSUs, and fears of relocation

Opposition has been particularly vocal in Washington’s tech and startup ecosystem. Founders argue the tax disproportionately affects those compensated with equity, especially through restricted stock units (RSUs).

Because RSUs often vest all at once during an IPO or acquisition, founders may experience a one-time income spike that exceeds $1 million, triggering the tax even if their average annual earnings are significantly lower.

Some have already acted. Marc Barros, CEO of Seattle-based startup Moment, announced plans to relocate his company to Wyoming. Another founder, Aviel Ginzburg, described the policy as “economic suicide” for the startup community.

Still, not all industry voices agree. Seattle attorney Ben Golden has argued that most critics will remain in the state regardless of the tax. Veteran founder Justin Beals emphasizes that talent and ecosystem strength outweigh tax considerations in startup location decisions. Madhu Singh, chief legal officer at Foundry Law Group, reports no observable slowdown in startup formation.

What relief measures mean for small businesses

Lawmakers incorporated measures to ease the burden on smaller businesses. Governor Ferguson pushed for expanded relief provisions as a condition of his support.

The final bill includes an expanded tax credit for lower-income households and dedicates 5% of revenue to the Fair Start for Kids Act, supporting early childhood education and childcare.

Additionally, at the local level, Seattle’s Proposition 2, effective January 1, 2026, raised the threshold for the city’s Business and Occupation (B&O) tax from $100,000 to $2 million in gross receipts. This effectively eliminates B&O tax liability for most small businesses in the city and reduces costs for others near the threshold.

Can the tax deliver stable revenue over time?

Even supporters acknowledge uncertainty around the tax’s long-term reliability. High-income earnings, especially those tied to investments and equity, can fluctuate significantly year to year.

Jared Walczak of the Tax Foundation cautioned that revenue from high earners is inherently volatile. “It’s not stable enough for what Washington intends to do,” he said.

Joe Nguyen, president of the Seattle Metropolitan Chamber of Commerce, also expressed skepticism about whether the tax will deliver consistent funding for public services.

As Washington prepares for implementation in 2028, the debate is unlikely to fade. The policy’s real-world impact on business behavior, migration, and state revenues will ultimately determine whether this historic tax achieves its intended goals.