New York’s socialist mayor, Zohran Mamdani, grabs headlines for trying to raise taxes on the rich. His city currently has the highest top marginal state and local income tax rate in the country at 14.776 percent.
To this, Seattle responds: “Hold my kombucha.”
Under a proposed “millionaire’s tax” in the state of Washington, Seattle’s top marginal rate would rise to 18.037 percent, according to analysis by Jared Walczak of the Tax Foundation.
Democrats in Olympia want to create a statewide tax of 9.9 percent on income over $1 million. High earners in Seattle already pay the state’s long-term care insurance tax and the city’s payroll taxes to fund housing, economic development and climate programs. Combined with federal taxes, Emerald City residents would face a top marginal income tax rate of 57.937 percent.
This rate is all the more remarkable because Washington’s state Constitution prohibits a progressive income tax, and the legislature passed a law banning state or local income taxes in 2024.
The state enacted a tax on large capital gains in 2021. Even though capital gains are a type of income, and the tax is only paid by high-earners, the state’s liberal Supreme Court claimed it was an excise tax and allowed it in 2023. That isn’t included in the 57.9 percent rate because it doesn’t affect the marginal tax rate, but it is another tax that high earners now face which didn’t exist a few years ago.
Crucially for Seattle, the proposed “millionaire’s tax” would count the vesting of restricted stock units as income. These RSUs are a common part of technology companies’ compensation packages. Employees are given shares of stock in their employer after a certain number of years or certain performance targets are met. Vesting of RSUs is considered ordinary income, not capital gains, so it is currently not taxed by Washington.
As usual, lost in the discussion are the small businesses that file taxes through the individual income tax code. These pass-through businesses often have incomes over $1 million and get swept up in political hysteria about taxing “the rich,” even though they are mom-and-pop shops that employ middle-class workers.
If passed, the “millionaire’s tax” would face fresh constitutional and legal challenges. Gov. Bob Ferguson (D), who supports the tax, acknowledgesit would not close his state’s current budget gap because it won’t collect until 2029 at the earliest.
Ferguson has estimated that the tax would affect fewer than 0.5 percent of Washington’s residents. Basing a tax on such a narrow slice of the state’s income is a recipe for volatile revenue and creates strong incentives for those targeted by it to move to other states, as many have done in recent years.
Washingtonians should beware: Income taxes, historically, have started with “the rich.” When the U.S. adopted the income tax in 1913, less than 1 percent of the population paid it. Within a few decades, it covered almost everyone.
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