On March 30, 2026, Washington Gov. Bob Ferguson approved tax legislation that creates a new 9.9% income tax on individuals earning more than $1 million, beginning in the 2028 tax year.1 The new income tax is accompanied by a pass-through entity (PTE) tax imposed on electing PTEs.
The development of a new tax regime for the state has been designed to work in tandem with the enactment of several business and occupation (B&O) tax and sales and use tax relief provisions.2 Several lawsuits have already been filed challenging the validity of the income tax, including a failed effort to subject the tax to a voter referendum.
Income tax
Effective Jan. 1, 2028, Washington will impose an income tax on individuals at a rate of 9.9% on Washington taxable income.3 With a $1 million standard deduction, the tax effectively applies only to those individuals or households earning more than $1 million.4 The income tax applies alongside existing state taxes, including the capital gains tax.
Calculation of Washington taxable income
Washington taxable income is defined as the taxpayer’s Washington base income with modifications.5 Washington base income is calculated as an individual’s federal adjusted gross income (AGI) with modifications for the following:
- Long-term capital gains (LTCG) and losses;
- Capital gains subject to the Washington capital gains tax;
- Interest income from state and local debt obligations;
- Certain state, local, B&O and public utility taxes;
- Adjustments for carryovers;
- Income derived from federal obligations; and
- Income from incomplete non-grantor trusts.6
In computing Washington taxable income, taxpayers begin with their Washington base income with several adjustments, including the following:
- Standard deduction of $1 million per individual or household;
- Deduction for charitable contributions to a qualified organization, capped at $100,000 per household;
- Addback for distributive share of tax expense incurred by a PTE that elects to pay the PTE tax to the extent deducted in calculating the taxpayer’s federal adjusted gross income (AGI).7
Calculation of credits
A nonrefundable credit is allowed for income tax paid by a resident individual, or a PTE owned by an individual, for specific categories of taxes, including the following:
- Income tax paid to another state or political subdivision of the state on income that is also included in Washington base income, limited to the lesser of (i) the amount of tax paid to the other jurisdiction; or (ii) the amount of Washington-equivalent tax on the double-taxed income.8
- Amount of Washington B&O tax or public utility tax paid for income also subject to income tax;9
- The amount of Washington capital gains tax imposed for the same year;10 and
- The amount of tax expense incurred by a PTE attributable to the PTE owner as provided under the state’s PTE tax provisions.11
The amount of credits claimed may not exceed the income tax otherwise due. Unused credits may not be carried forward or backward.
Allocation and apportionment of income
Washington resident individuals are required to allocate all income to Washington.12 Nonresident individuals allocate income derived from Washington sources to the state, including the following items:
- Wages and other compensation from in-state employment;
- Amounts attributable to a business, trade, profession or occupation carried on in the state, including any distributive share of income from a PTE operating in the state;
- Rents, short-term gains and other amounts attributable to the ownership or disposition of any interest in real or tangible personal property in the state;
- Income from intangible personal property to the extent used in a business, trade, profession or occupation carried on in the state;
- Compensation from professional athletics.13
Nonresidents are not required to allocate income to the state if they performed services in the state for five or fewer days in the calendar year.14
For income from a business activity conducted in Washington, such income is apportioned to Washington using a single receipts factor.15 Receipts from sales of tangible personal property generally are sourced to the state if the property is delivered or shipped to a purchaser in the state.16 Market-based sourcing rules apply to receipts from sales of intangible property and services.17 When a nonresident performs services both within and outside the state, compensation is apportioned based on the ratio of days worked in Washington to total days worked, or by another approved reasonable method.18
Finally, the bill includes alternative apportionment provisions that may be requested by the taxpayer or required by the Department, where the allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s business activity in the state.19
Elective PTE tax
Beginning Jan. 1, 2028, eligible PTEs (including partnerships, LLCs and S corporations) may elect to pay an entity-level PTE tax at a rate of 9.9% on the PTE’s taxable income.20 The PTE tax election is made annually by filing an election in a manner and form prescribed by the Washington Department of Revenue by a prescribed due date that is no later than June 15 of the current tax year.21 Once made, the election is irrevocable for the tax year.22
Participating PTE owners are allowed a nonrefundable credit for their proportionate share of tax paid at the entity level.23 Unused credits may not be carried forward or backward and applied to another tax year.24 PTE owners may opt out of the election, but the PTE must list the participating and nonparticipating owners at the time the PTE elects into the PTE tax for the tax year.25
The taxable income of an electing PTE is calculated as: (i) the entire distributive share of income, gain, loss and deduction attributable to participating resident owners, regardless of source; plus (ii) the state-source distributive share of income, gain, loss and deduction attributable to participating nonresident owners.26 Taxable income also includes guaranteed payments, separately stated items and investment income to the extent such items are included in a participating owner’s individual Washington base income.27
Participating owners of an electing PTE include their distributive share of income from the PTE to determine their Washington base income subject to the newly enacted income tax.28 Estimated payments are required in the same manner as required for individual estimated tax payments.29 The Department is authorized to adopt rules necessary to administer the PTE tax.30
Long-term capital gains / estate tax provisions
In addition to the creation of an income tax and a PTE tax regime, Washington also enacted legislation addressing the state’s long-term capital gains tax and the estate tax. With respect to the capital gains tax, effective June 11, 2026, H.B. 1376 permits taxpayers to prepay their capital gains tax up to six months before the due date, with no interest accruing on any overpayment made during such payment period.31 The bill also modifies the definition of a federal net long-term capital gain (LTCG) used to calculate a taxpayer’s Washington long-term capital gains.
Also effective June 11, 2026, H.B. 6347 restores the state’s estate tax rates to the levels that were in place prior to July 2025.32 Estate tax rates range from 10% to 20%, depending upon the Washington taxable estate of the decedent. The top estate tax rate is reduced from 35% to 20% for decedents dying on or after July 1, 2026.
Commentary
Washington’s newly minted income tax has been the subject of controversy since it was first proposed by state lawmakers and supported by the governor. Proponents have maintained that the tax is essential to address the state’s budget deficit and fund targeted programs, including child care, tax credits for working families and additional tax relief for small businesses. In addition, the bill enacting the income tax included numerous relief provisions designed to ameliorate some of the more significant state B&O and sales and use tax increases in last year’s Washington budget.
Expected to impact approximately 30,000 of Washington’s wealthiest residents, the income tax comes as other states are proposing and debating their own taxes on the wealthy. In 2022, Massachusetts enacted a 4% surtax on annual incomes over $1 million, which first took effect in 2023.33 Maine enacted a 2% surcharge on millionaires in April,34 and a 3% surtax on millionaires passed the Rhode Island legislature and has recently been enacted.35
Just two weeks after the enactment of the new income tax, a lawsuit challenging the legality of the tax was promptly filed on April 9, 2026.36 The plaintiffs are seeking a declaratory judgment that the income tax is an illegal tax on property in violation of the Washington Constitution and state Supreme Court precedent, which specifically prohibits nonuniform taxes on property, in addition to progressive income tax rates in excess of 1%.
The income tax has also already faced voter referendum efforts. In a separate petition challenging the income tax, the plaintiffs alleged that the tax should be subject to a voter referendum during the next election cycle.
In an expedited decision, the Washington Supreme Court rejected the petition, finding that the tax falls under an exception to the state’s referendum power.37 The Washington Constitution provides for an exception from the referendum power for laws necessary for the support of the state government, which has been interpreted to include revenue-generating measures. The court ruled that the tax falls under the exception because the tax “is necessary for the support of the state government and its existing public institutions.”
In response to the court’s decision, sponsors of the referendum petition introduced a ballot initiative petition to invalidate the income tax through an ordinary ballot measure.38 The petition must collect approximately 400,000 signatures in order to appear on the ballot during the next general election.
Washington’s income tax also includes the enactment of an elective PTE tax, a popular workaround to the federal state and local tax (SALT) deduction limitation that was first enacted under the Tax Cuts and Jobs Act of 2017 and extended under the One Big Beautiful Bill Act. Elective state entity-level tax regimes have been attractive to owners of PTEs operating in states imposing personal income taxes.
The enactment of this significant tax legislation in Washington requires evaluation and planning from businesses operating in the state, including PTEs with nonresident owners that may now be subject to the state’s income tax and evaluation of whether to make a PTE tax election in the state.
1 Ch. 238 (S.B. 6346), Laws 2026.
2 For further discussion of this legislation, see GT SALT Alert: Washington Enacts Significant Legislation Imposing B&O Tax and Retail Sales Tax Changes and Clarifications.
3 S.B. 6346, § 201.
4 S.B. 6346, § 314.
5 S.B. 6346, § 101(12).
6 S.B. 6346, §§ 101(11); 302-308.
7 S.B. 6346, §§ 309-314.
8 S.B. 6346, § 203.
9 S.B. 6346, § 204.
10 S.B. 6346, § 205.
11 S.B. 6346, § 206.
12 S.B. 6346, § 401(1).
13 S.B. 6346, § 401(2).
14 S.B. 6346, § 401(3).
15 S.B. 6346, § 405(3).
16 S.B. 6346, § 405(3)(a).
17 S.B. 6346, § 405(3)(b).
18 S.B. 6346, § 403(2).
19 S.B. 6346, § 405(4).
20 S.B. 6346, § 502(1).
21 S.B. 6346, § 502(2)(a).
22 S.B. 6346, § 502(2)(b).
23 S.B. 6346, § 206(1), 502(5)(a).
24 S.B. 6346, § 206(2).
25 S.B. 6346, § 502(2)(d).
26 S.B. 6346, § 502(3)(a).
27 S.B. 6346, § 502(3)(c).
28 S.B. 6346, § 502(5)(b), (c).
29 S.B. 6346, § 502(4)(a).
30 S.B. 6346, § 502(6)(b).
31 Ch. 191 (H.B. 1376), Laws 2026. Washington imposes a 7% excise tax on the Washington-allocated LTCG of individuals over $250,000 resulting from the sale of certain capital assets held for at least one year, plus a supplemental LTCG tax of 2.9% of an individual’s Washington capital gains exceeding $1 million. WASH. REV. CODE §§ 82.87.010-82.87.150.
32 Ch. 69 (H.B. 6347), Laws 2026, amending WASH. REV. CODE § 83.100.040.
33 Mass. Gen. Laws. Ch. 62, §§ 4(d), 5A.
34 Maine L.D. 2212, Laws 2026. The tax applies to the portion of income exceeding $1 million for single filers and $1.5 million for joint filers.
35 R.I. H. 7127.
36 Petter, et al. v. Washington, Washinton Superior Court (Klickitat County), filed April 9, 2026.
37 Heywood et al. v. Hobbs, No. 105220-1, Washington Supreme Court, May 4, 2026.
38 Initiative to the People #IP26-645, introduced May 12, 2026.
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