Our state’s Governor is considering a new 9.9% personal income tax that would collect nearly $4 billion per year from our state’s residents. While lawmakers claim the new income tax – a so-called “Millionaires Tax” – is only for the highest earners, many small businesses would be affected if they are organized as sole-proprietorships, LLCs, partnerships, or S-corporations and report business earnings on their personal income tax return.
A big new tax on Washington’s small businesses would hurt their ability to keep their doors open, invest in employees, create jobs, and give back to our communities.
Learn more about this new income tax and how it would affect small businesses:
Created a Business & Occupation Tax surcharge (0.5%) on certain businesses grossing at least $250 million per year.
Increased base B&O rates to 0.5% for all businesses, which takes effect January 1, 2027.
Added sales tax to several services, such as IT, custom software, security, staffing services, digital advertising, and in-person instruction.
Raised the capital gains tax from 7% to 9.9% on long-term gains of $1 million or more.
Increased the estate tax to a new top rate of 35% on estates over $9 million.
Raised gas taxes to 6¢ per gallon, increasing vehicle weight fees, raising the tax on vehicle sales from 0.3% to 0.5%, creating a new 8% luxury tax on noncommercial vehicles costing over $100,000, and raising the tire replacement fee from $1 to $5 per tire.
Small business owners filing single or those filing jointly making at least $1 million annually would be impacted by this tax.
Future legislatures can lower or eliminate the $1 million deduction at any time because this new income tax is created through a bill rather than a constitutional amendment. The Senate Majority Leader, and prime sponsor of the “Millionaire Tax” bill, has said as much.
If you’re a sole proprietor or owner of a pass-through entity who reports business earnings and expenses on your personal federal income tax return, like a partnership, LLC, or S-corporation, and your business earns $1 million or more, you could be subject to the tax or its filing requirements.
C-corporations are exempt from this new income tax.
The tax will be based on your federal adjusted gross income (AGI), then you add in your portion of B&O taxes paid and any undistributed or retained earnings, deduct that year’s losses, subtract charitable contributions (under the limit), calculate any income from or taxes paid to other states, figure out if you paid more in B&O than your income tax liability, and more. With the complicated calculations expected to be a part of this new income tax, many small business owners who aren’t millionaires may be swept into this so-called “Millionaire Tax” based on business earnings, not take-home pay.
Not exactly. Overturning a 1933 Washington State Supreme Court ruling would allow for an income tax to be imposed on all Washingtonians.
Future legislators can repeal a 2025 initiative prohibiting state and local income taxes.
Lawmakers could also exempt new taxes from it, just like the so-called “Millionaire Tax” legislation does.
Most of this new, $4 billion-a-year tax revenue would go to the state’s general fund, which covers spending outside the transportation and capital budgets.
Proponents plan to spend these funds on:
Ending a Business & Occupation (B&O) Tax surcharge one year early for firms grossing $250 million (one-time revenue loss) – $500 million
County public defense fund – $185-$280 million
Sales tax exemption for grooming and hygiene products – $86 million
Increasing the Working Families Tax Credit – $44 million
Small business tax relief – $108 million by increasing the B&O tax filing threshold to $250,000, which exempts 65% of small firms, and doubling the Small Business Tax Credit for firms grossing up to approximately $500,000 per year.
Big businesses, startups, and very small firms may see some relief, but the bill does nothing to help the small businesses that are likely to pay the new tax.
NFIB is urging small business owners and supporters of small business to reach out to Governor Ferguson with a customized message using our simple email tool.
NFIB balloted our members on the proposed “Millionaire Tax.” 98% of respondents oppose this income tax.
NFIB’s Washington State Director and small business owners, including the chair of NFIB’s Leadership Council, testified before the state Senate Ways & Means Committee, offering solutions and bringing several key arguments in defense of Main Street:
Sole proprietors and owners of pass-through entities will be ensnared in the new tax because it would apply to business earnings, not just salary or wages.
Taxing undistributed funds or retained earnings would squeeze cash flow and jeopardize capital investments.
Small businesses organized as pass-through entities are specifically targeted by the tax, while the bill exempts C-corporations entirely.
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Taking a look at the Millionaire’s Tax that just passed the Senate
