Washington State Tax Legislation—Not Every Ox Got Gored

The 2026 “short” legislative session in Olympia is finally over, though few who participated are likely to describe the session as short given the long hours of debate. Despite the compressed timeline, the Legislature passed one of the most consequential tax bills in decades. We defer to our elected officials as to the wisdom of the tax policies enacted and rejected. And we defer to the courts to determine whether legislation enacted violates Washington State’s Constitution. Our job is simply to alert our clients to the legal developments.

The result is that Washington State will have a 9.9% income tax on income over $1 million (excluding capital gains taxed under the separate “excise” tax regime). The income tax will begin in 2028—if the State Supreme Court reverses almost a century of precedent holding that the State Constitution requires both (1) that any state income tax must be uniformly applied to all income, and (2) the income tax rate cannot exceed one percent.

The other significant legislative tax policy action involved the roll-back of last year's increase to the estate tax. Although Washington State still retains its position as having the highest estate tax of any state in the Union, it now has to share (again) that title with Hawaii. Our return to a top 20% rate, for those who wait until July 1 of this year to die, is a marked improvement over the 35% top rate the legislature enacted last year. Anecdotally, at least, we found the 35% estate tax rate responsible for encouraging an exodus of wealthy Washingtonians more than any other tax policy.

Garnering far less press, however, were several other tax initiatives that did not pass during this legislative session, and those are summarized here.

First, some cities lobbied to be able to impose their own income taxes. Following much behind-the-scenes discussions, the legislature agreed to allow cities, counties, and municipalities to impose their own income tax, but only so long as any such tax included a $1 million standard deduction. See Section 1201 of the bill. Of course, it was only a year ago that the same legislature prohibited the State from enacting an income tax, so expect some cities to seek reconsideration of this limitation if the supreme court allows the new income tax to go into effect.

Entrepreneurs generally should be pleased that gains from Qualified Small Business Stock will continue to be excluded from Washington State’s capital gains tax to the same extent such gains are excluded from federal taxable income under IRC Section 1202. We described that legislative initiative here. In this regard, Washington State seems to have proven that it is at least more business-friendly than its immediate neighbor south of the Columbia River, as we described here.

The following tax bills (identified by the GOP caucus) never became law:

• Tobacco Taxes (SB 6129)
• Tax on Data Centers (SB 6231)
• Tax on Health Insurance Reserves (HB 2073)
• B&O Increase on Insurance 66
• Tax on Bottles (HB 1607)
• Sugar Beverage Tax (HB 2734)
• Paper Bag Fees (SB 5965)
• Tire Fees (HB 2421)
• Tax on Clothing (HB 1420)
• Rental Housing Tax (HB 2559)
• Public Utility Tax (HB 1702)
• B&O Increase on Large Tech Companies (HB 2098)
• Payroll Tax (HB 2100)
• Wealth Tax (SB 5797)

Failed tax initiatives tend to resurrect themselves the next time the legislature needs money. Accordingly, it might be prudent to characterize these proposals as temporarily dormant rather than dead.

Copyright © 2026 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.