Washington's Millionaire Tax Sparks Debate Over Largest Marriage Penalty in U.S.

Washington state has enacted a new income tax with a 9.9% rate on earnings above $1 million, but its uniform threshold for individuals and couples has created the nation's most significant 'marriage penalty,' drawing scrutiny from tax experts and policymakers.

Overview of the Tax Legislation

• The Washington State House and Senate passed the first-ever state income tax, imposing a 9.9% tax on annual income exceeding $1 million.
• The governor is expected to sign the bill into law, ending Washington's status as one of nine states with no income tax.
• The tax is part of a broader Democratic effort to increase taxes on the wealthy.

The Marriage Penalty Explained

• The legislation sets a single $1 million income threshold for both individual filers and married couples filing jointly.
• This means dual-income couples can face the tax even if each earns less than $1 million individually. For example, a couple each earning $600,000 would have a combined income of $1.2 million, subject to the 9.9% tax.
• Tax attorney Joe Wallin noted, "According to the statute, it doesn't matter if you're single or married, the exemption is $1 million. It should be called the half-millionaire tax."

Comparison with California and New York

• Most states with high-income taxes have separate thresholds for individuals and couples, typically doubling for joint filers.
• In California, bracket thresholds double for joint filers except for the 1% Mental Health Services Act, which applies at $1 million for both single and married filers.
• In New York, thresholds double for most brackets, but for the millionaire surtaxes (10.3% and 10.9%), the same income levels apply to both filing statuses.
• Jared Walczak of the Tax Foundation stated that marriage penalties in California and New York result in a 1% and 0.65% tax rate difference, respectively, while Washington's can be up to 9.9%.

Lawmaker and Analyst Reactions

• State Senator Noel Frame defended the tax, citing consistency with the existing capital gains excise tax and administrative simplicity. She argued that many high-earning couples with combined incomes just over $1 million would see minimal impact.
• Critics, like hedge-fund manager Brian Heywood, accused lawmakers of misrepresenting the tax's targets, saying, "They've been less than honest with who they're going after and what the numbers are."
• Wallin humorously suggested some couples might consider legal divorces to avoid the tax, as savings could exceed divorce costs.

Tech Industry and Wealth Migration Context

• Washington's economy relies heavily on high-income tech workers from companies like Amazon and Microsoft.
• The tax comes after billionaires Jeff Bezos and Howard Schultz relocated to Florida, which has no income tax. Bezos saved over $600 million by selling Amazon stock after Washington's capital gains tax took effect.
• Schultz moved after 44 years in Seattle, though his foundation will remain operational there.

National Significance

• Washington's tax is being watched as a test case for Democratic-led wealth tax initiatives across the U.S.
• Other states, including California considering a wealth tax, are exploring similar measures to address inequality and funding gaps.
• The outcome may influence debates on how state tax policies affect the migration of wealthy individuals and businesses.