Washington State’s New Tax: A ‘Marriage Penalty’ for High-Income Couples

Washington state’s newly enacted 9.9% tax on income exceeding $1 million is drawing scrutiny for its potential impact on married couples, creating what some experts are calling the largest “marriage penalty” in the nation. While proponents label it a “millionaire’s tax,” the structure disproportionately affects dual-income households, even those with incomes below $2 million.

Understanding the ‘Marriage Penalty’

The new tax, approved by the state House and Senate and slated to be signed into law by the governor, applies the 9.9% rate to income above $1 million, regardless of filing status. This means the $1 million threshold applies to individuals, couples and domestic partners alike. A married couple with a combined income just over $1 million will be subject to the tax, while two single individuals each earning $600,000 would not.

“According to the statute, it doesn’t matter if you’re single or married, the exemption is $1 million,” explained Joe Wallin, an attorney advising companies and tech founders in Washington state. “It should be called the half-millionaire tax.”

How Washington’s Penalty Compares

Marriage penalties, where married couples pay more in taxes than if they were single, are not uncommon. However, Washington’s penalty stands out due to its magnitude. Most states utilize different income thresholds for tax brackets based on filing status, often doubling the individual threshold for married couples.

For example, New York doubles income thresholds for joint filers up to a certain income level, while California does the same except for a specific mental health services act. In contrast, Washington state maintains a single $1 million threshold for all filers.

Jared Walczak, a senior fellow at the Tax Foundation, highlighted the disparity: “In the most extreme case, if you had two single filers who both earned exactly $1 million, they would owe $0, but if they married and earned the same income, they would owe $99,000.”

Impact on Washington’s Workforce

The tax is raising concerns among analysts, particularly given Washington state’s reliance on highly skilled, high-earning workers employed by companies like Amazon and Microsoft. Many dual-income families could be significantly impacted.

Brian Heywood, founder of the political action committee Let’s Go Washington, criticized the tax, stating, “There’s this idea that, ‘We’re just taxing rich dudes with yachts.’ They’ve been less than honest with who they’re going after and what the numbers are.”

Some have even joked about the potential for couples to consider legal separation solely for tax purposes, with Wallin noting the savings could outweigh the costs of a divorce.

Broader Tax Trends and Wealth Migration

Washington’s new tax is part of a broader trend among Democratic lawmakers seeking to increase taxes on high earners to address income inequality and funding shortfalls. Other states, including California and New York, are exploring similar measures, including wealth taxes.

The implementation of Washington’s tax is being closely watched as an experiment in the potential impact of higher state taxes on wealth migration. Jeff Bezos and Howard Schultz have already relocated to Florida, a state with no income tax, after the implementation of a 7% capital gains tax in Washington. Bezos’s move is estimated to have saved him over $600 million in capital gains taxes.

Key Takeaways

• Washington state’s new 9.9% income tax applies to income exceeding $1 million, regardless of filing status.
• The tax creates a significant “marriage penalty,” potentially impacting dual-income households even below a $2 million combined income.
• Washington’s marriage penalty is the largest in the nation, exceeding those in states like New York and California.
• The tax is part of a broader trend of increased taxation on high earners in Democratic-led states.
• The implementation of the tax may influence wealth migration patterns.

As Washington state ventures into its first state income tax, the impact of this “marriage penalty” will be a key area to watch, potentially influencing future tax policy and economic trends within the state.