A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
Washington state’s proposed new income tax includes the nation’s largest “marriage penalty,” tax experts say, and would impose higher taxes on certain couples who file jointly.
The state House of Representatives has approved Washington’s first income tax, imposing a 9.9% tax on income over $1 million annually. The state Senate has passed the bill, and it will now go to the governor, who will sign it into law. Washington is currently one of nine states with no state income tax, and the new tax rate would be one of the highest in the nation.
Democrats call it the “billionaire tax,” but the high marriage penalty also leaves some taxpayers with much lower incomes on the hook. According to the law, the tax threshold is $1 million and applies to individuals, couples, and companions. Therefore, if a couple each earns $600,000, their combined income would be taxable at $1.2 million.
“According to the law, it doesn’t matter if you’re single or married, the exemption is $1 million,” said Joe Wallin, a Washington lawyer who advises businesses and tech founders. “It should be called the 500,000 Person Tax.”
Marriage penalties are not uncommon in state or federal tax law, but Washington state’s tax law stands out for its sheer size. Most states use two income thresholds for tax brackets, one for individuals and one for married couples, usually twice that amount. Some high-tax states, such as California and New York, apply marriage penalties only to the highest earners, according to the Tax Foundation, a nonprofit tax policy think tank.
For example, in New York State, the income threshold for each class of joint filers is doubled by a 9.65% tax rate, which applies to income above $1,077,550 for single filers and $2,155,350 for joint filers. However, the special millionaire surtax rates of 10.3% and 10.9% apply to those with incomes above $5 million and $25 million, respectively, and the income threshold is the same for joint and single filers.
In California, bracket thresholds are doubled for joint filers, except for the 1% Mental Health Services Act, which applies to income over $1 million for both single and married filers.
Jared Walczak, a senior fellow at the Tax Foundation, said the penalties for marriage between New York and California are relatively small, equating to a 1% tax rate difference in California and 0.65% in New York. In Washington state, however, the difference could be as much as 9.9%.
“In the most extreme case, if you had two single filers and each earned exactly $1 million, they would owe $0, but if they were married and had the same income, they would owe $99,000,” he said. “Washington state marriage fine will be largest ever.”
The state’s Democratic lawmakers and governor have not specifically addressed concerns about marriage penalties. State Sen. Noel Frame, the state Senate Democratic fiscal policy lead, said the $1 million standard deduction per household is the same mechanism used for the state’s capital gains sales tax passed by voters in 2021.
“We are working to align our two separate tax structures, and bringing consistency to deductions will help both the Department of Revenue manage taxes and simplify it for taxpayers,” he said in a statement. “This tax doesn’t apply to incomes below $1 million, so there are many high-income couples who won’t be affected by the tax as much, even if their combined income is more than $1 million.”
However, this state relies on highly skilled and highly paid workers for businesses such as Amazon, microsoft Analysts said many working families could be affected by the tax.
“There’s this idea, ‘We’re just taxing rich people on yachts,'” said Brian Heywood, a Washington hedge fund manager who founded Let’s Go Washington, a conservative political action committee that opposes the tax. “They’re not very honest about who they’re chasing and what their numbers are.”
Wallin joked that some dual-earner couples might consider a legal divorce for tax reasons, even if they want to remain de facto married. “The tax savings alone more than cover the cost of a divorce attorney,” he said.
The marriage penalty is the latest controversy over Washington’s new income tax, a beacon of Democratic efforts to raise taxes on the wealthy. From Rhode Island and New York to Virginia and Michigan, Democrats in state legislatures are trying to counter rising inequality and cuts to federal funding for health care by raising taxes on high earners. California is considering a ballot initiative to create the first state wealth tax that would tax the total net worth of the state’s billionaires.
In the debate over the effects of state tax hikes on wealth mobility, Washington will be a notable experiment.
Two of the state’s most prominent entrepreneurs, Amazon’s Jeff Bezos and Starbucks’ Howard Schultz, have already left the state for Florida, which has no income tax. Bezos announced he will move to Miami in 2023 in response to the state’s new 7% capital gains tax. He sold $9 billion worth of Amazon stock in 2024, effectively saving him more than $600 million in capital gains taxes he would have had to pay to Washington state.
Schultz recently announced that he moved from Seattle for the first time in 44 years. He said his family’s offices will also be relocated to Miami, but the foundation will continue to operate from Seattle.
“It is our hope that Washington continues to be a place where business and entrepreneurship thrive, creating vital opportunities for the people of Seattle and the surrounding region,” he wrote.
