Key Findings

• By implementing one of the largest increases in the top income tax rate ever for a state, Washington would have the fifth highest income tax rate at 9.9%.
•  If ruled constitutional, Washington will be the sixth state to raise its income tax rate since 2020. By contrast, 21 states have opted to lower their top income tax rate.
•  If only 10% of the 21,000 millionaire households decide to move out of the state and half of the households that would move to the state opt to fly over, the economic impact is:

• A loss in annual private sector jobs of over 19,000, and 
• A decline in personal income of $35 billion from 2028 through 2032.

• In a more limited case, if only 5% of the 21,000 millionaire households decide to move out of the state and half of the households that would move to the state opt to fly over, the economic impact is more modest:

•  A loss in annual private sector jobs of almost 8,000, and
•  A decline in personal income of almost $19 billion from 2028 through 2032.

Introduction

Washington policymakers  passed Senate Bill 6346, a proposal to impose a 9.9% tax on individuals’ earnings over $1 million.[i] The proposal is more commonly referred to as the “Millionaires Tax.” If passed, ruled constitutional, and enacted, the policy would represent a significant structural change to Washington’s tax system, which historically has relied on sales tax, business taxes, and property taxes.

Up to this point, Washington has been one of the leaders in inviting businesses to the state through a key selling point—no income tax. That economic development selling point appears to be going away. Should Washington opt to impose a 9.9% tax on incomes above $1 million, the state would go from having the lowest top marginal income tax rate (0%) to fifth highest, surpassed only by California, Hawaii, New York, New Jersey, and tied with Oregon. Washington would join five other states in imposing higher top marginal income tax rates since 2020.

Figure 1

As written, the legislation would apply to taxpayers with Washington adjusted gross income exceeding $1 million, which is estimated to apply to approximately 21,000 taxpayers.[ii] The static fiscal note estimates the bill will generate $3.45 billion in annual tax revenue in the 2029 to 2031 biennium.[iii]Should the bill pass, it would be one of the largest increase in the top income tax rate by a state ever.

The bill directs the additional tax revenue towards education, health care, and other state government spending, while also expanding programs such as the Working Families Tax Credit and providing tax relief for certain small businesses. A portion of the tax revenue would also be dedicated to county-level public defense services.

Figure 2

The Gamble

By opting to impose one of the highest income tax rates in the country, Washington is taking a gamble: First, that the 21,000 or so millionaire households in the state will stay in the state and continue to invest in a state where they are potentially financially better off elsewhere. Second, that the state’s share of mobile millionaires, at least 15,000 to 20,000 each year, will continue to choose Washington at the same rate as it has in the past.[iv] Both are risky propositions.

What’s the Impact if a Small Portion Move Out and Half of the Households that Would Move In Opt to Fly Over the State?

Some empirical research on high-income migration suggests that responses to state tax changes may be modest. For example, work by Cristobal Young and Charles Varner using tax return data finds that migration accounts for a small share of changes in the millionaire population, with estimated responses to tax changes typically limited in magnitude. At the same time, much of the existing academic literature focuses on out-migration and may not fully capture potential changes in in-migration decisions—particularly the possibility that some high-income households may choose not to move to a state following a tax increase (“flyover” effects). Additionally, Washington has long benefited from migration from high-tax states, particularly California and Oregon—see, for instance, the IRS statistics on migration.[v] The impact estimates from New Jersey and California are likely lower since unlike Washington, those states did not attract many migrants before their tax increases.

To reflect this uncertainty, the analysis below presents a range of scenarios, including first a higher-response case in which 10% of current millionaire households leave the state and half of potential millionaires moving to the state opt to fly over. The second is a more limited impact, assuming a 5% departure rate. Both scenarios also incorporate a reduction in in-migration, with a portion of households that would otherwise move to the state opting to locate elsewhere.

Figure 3

The following is the economic impact for the 10% scenario. Overall, the number of private sector jobs drops by almost 20,000 annually and personal income drops by $35 billion from 2028 through 2032. For the most part, these are jobs and wages that would happen, but because of the large increase in the top marginal income tax rate, fail to materialize. 

The following is the impact for the more limited, 5% impact scenario. Overall, the number of private sector jobs drops by almost 8,000 annually and personal income drops by almost $19 billion from 2028 through 2032. For the most part, these are jobs and wages that would happen, but because of the large increase in the top marginal income tax rate, fail to materialize.

Figure 4

References