WA's Income Tax Creep—Will the Millionaires' Tax Survive Scrutiny?

Washington State recently enacted an income tax, effective January 1, 2028, on earners with income in excess of $1 million, which has left critics speculating that this tax will rapidly expand to other taxpayers in future years. Such speculation is on strong ground as Washington State is already broadly taxing its residents by merely attaching different labels to the income taxes that it is already imposing. The IRS recently ruled that PFML (paid family and medical leave) premiums, and by analogy, the WA Cares premiums paid by employees, are income taxes imposed on all workers in Washington State. Similarly, the State has labeled its capital gains tax as an excise tax to avoid its historical label as an income tax by other states. Now, the State is imposing an income tax on earnings in excess of $1 million and, in so doing, is attempting to directly redefine the definition of "property" under Washington State case law and its Constitution. Will this name game continue, or will the new Washington State income tax be ruled unconstitutional?

Background: The Washington State Constitution

Article VII, Section 1 of the Washington Constitution requires that all taxes be uniform on the same classes of property. The same section defines "property" in the broadest terms possible to "mean and include everything, whether tangible or intangible." Article VII, Section 2, establishes the upper limit on such tax—limiting any property tax to no more than 1% of the value of the property. Applying the broad definition of property contained in the Constitution, the Washington State Supreme Court has held for nearly a century that in Washington State, "income" is "property" within the meaning of the State Constitution. Culliton v. Chase (striking down an initiative instituting the payment of a graduated income tax); Jensen v. Henneford (striking down a personal income tax); Petrol Navigation Co. v Henneford ( striking down a corporate net income tax).

In 1934, the year after the Culliton decision, the legislature sent to the voters a constitutional amendment to delete the definition of "property" in Article VII of the Constitution and allow for the imposition of a graduated income tax. The voters rejected the amendment and have since rejected five other constitutional amendments that would give the legislature the power to impose an income tax.

Capital Gains Tax as an Excise Tax

In Quinn v. Washington, the Washington State Supreme Court examined the state's 7% tax on long-term capital gains in excess of $250,000. The issue was whether the capital gains tax was an income/property tax subject to the uniformity and 1% property tax limitation of the Washington Constitution. Despite the fact that capital gains are generally associated with income taxes, the Washington State Supreme Court held that the capital gains tax was an excise tax—a tax imposed not on mere income, but on a capital transaction the sale or exchange of a capital asset for a gain. Because it was an excise tax, the Constitutional limitations on taxing income as property were not applicable. The Quinn Court refused to reexamine the Culliton decision finding that the constitution's limitations do not apply to excise taxes.

Income Tax Nature of PFML and WA Cares Premiums

As of January 1, 2026, Washington State imposes a premium tax of 1.13% on an employee's gross wages, up to the Social Security Wage Base Cap, for paid family and medical leave. Employees pay 71.43% of this premium, while employers pay the remaining 28.75%. In addition, the State imposes a premium tax of 0.58% of gross wages, with no wage cap, for WA Cares. The WA Cares premium is entirely employee-paid. The characterization of these taxes is a conundrum. The State has indicated that these premiums are excise taxes, but it has not addressed another old precedent, Cary v. City of Bellingham (1952), which held that earning an income through employment is a right that cannot be subjected to a privilege tax. On the other hand, under Quinn, because the taxes are imposed on gross wages and not on a transaction, the taxes should be classified as income taxes and not excise taxes.

Moreover, the IRS has recently issued tax rulings classifying the premiums paid by employees as income taxes and not excise taxes. In Revenue Ruling 2025-4, the IRS ruled that compulsory premiums based on an employee's gross income are income taxes and not excise taxes. Therefore, the employer must withhold federal income taxes and payroll taxes on the premiums paid by the employee to PFML programs as income taxes. Only the employer-paid portion of the premium can be classified as an excise tax. IRS Notice 2026-6 extended the time period to comply with its ruling to January 1, 2027.

If these taxes were challenged in court, under existing precedent, it is likely that the WA Cares premium would be found to be an income tax and would be void as it does not meet the uniformity requirements of the State Constitution, and/or the PFML and WA Cares premiums would be subject to a proportionate reduction to meet the 1% constitutional limitation on property taxes (discussed in a previous advisory).

The Income Tax Lawsuit and Possible Repercussions

On April 9, a lawsuit was filed challenging the new income tax on wages in excess of $1 million as being void and unenforceable since it violates the State Constitution. A lawsuit was also filed to seek a referendum to have voters overturn the newly passed law. If the law is upheld, and a referendum challenge is denied, the legislature will have the unchecked ability, for the first time in nearly a century, to impose income taxes on the wage earners in Washington State. If the law is struck down, or a referendum challenge upheld, the legislature will likely continue to play name games and there will be more lawsuits to enforce the provisions of the Washington State Constitution.

And Another Thing—Real Property Rentals and Corporate Income Tax

If the income tax is upheld via reasoning that removes "income" from the constitutional concept of "property," another sea change in Washington taxation could follow—that is, the removal of current excise tax exemptions for rentals from real property. The Supreme Court has held that the right to receive rental income is one of the components of ownership of real property and hence is subject to the uniformity clause, and that a tax on rentals is not "uniform" if owner-occupied property is not subject to the same tax. Apartment Operators Ass'n of Seattle v. Schumacher (1960); Harbour Village Apts. v. City of Mukilteo (1999). A decision validating the income tax could open up a new "income" tax imposed purely on the receipt of rental income or the repeal of the existing exemptions under the state and city B&O taxes for real property rentals. In the same manner, it would open the door for new corporate income tax and possible other changes in the existing B&O tax structure.

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Richard Birmingham is a partner in the Seattle office of DWT. For questions or more insights, please reach out to Richard or another member of our employment services team and sign up for our alerts.