Washington state’s legislature passed a 9.9% income tax on annual earnings above $1 million on March 12, 2026, sending the bill to Governor Bob Ferguson, who has said he looks forward to signing it. The Senate approved the measure 27-21, one day after the House passed it 51-46 following a 24-hour marathon debate.
Senate Bill 6346 is a historic shift for Washington, which has been one of nine states with no personal income tax. The new tax applies to individuals or couples in a household earning more than $1 million per year. Only the income above that threshold gets taxed. According to KOMO News, supporters estimate it will affect roughly 30,000 households and generate about $4 billion in annual revenue.
The tax takes effect January 1, 2028, with the first returns and payments due in 2029.
For small business owners, there are two sides to this bill. Owners of pass-through entities like S-corps, partnerships, and LLCs whose personal income exceeds $1 million will owe the new tax. But the legislation also includes what backers call the largest small business tax cut in state history. Businesses grossing less than $300,000 per year will be fully exempt from Washington’s business and occupation (B&O) tax starting in 2029, up from the current $125,000 threshold. That covers roughly 65% of all businesses in the state, according to Washington Senate Democrats. Businesses grossing $600,000 or less would also qualify for a B&O credit.
The bill also expands the Working Families Tax Credit to an additional 460,000 households, with rebates of up to $1,330 per year. Sales tax on diapers, over-the-counter drugs, and personal hygiene products would be eliminated. Free school breakfast and lunch would be funded for all K-12 students statewide.
The bill includes a pass-through entity (PTE) tax election, which lets qualifying businesses pay the 9.9% tax at the entity level. That could help owners work around the federal $10,000 SALT deduction cap, since entity-level taxes are generally deductible as a business expense.
Not everyone is on board. Critics warn the tax could push wealthy residents and employers to other states. The Tax Foundation has said the combined top rate on wage income and stock vesting in Seattle could exceed 18%, the highest in the country. Former Starbucks CEO Howard Schultz disclosed he and his wife have relocated to Miami.
Legal challenges are expected. Opponents argue that Washington’s constitution treats income as property, which must be taxed at uniform rates. A ballot initiative to repeal the tax is also expected in November 2026. Small business owners in Washington should review whether their personal income could cross the $1 million threshold and check their eligibility for the expanded B&O exemption and Working Families Tax Credit once the governor signs the bill.
