Washington state lawmakers last week approved what’s known as the “millionaires tax,” a landmark shift for a state that has long been a tax-friendly destination for entrepreneurs and high earners.
GeekWire spoke with legal experts and wealth advisors to learn more about how the tax may impact different people in Washington’s tech ecosystem. Here’s what we learned.
[Editor’s Note: This article is intended to provide general information and should not be relied on as legal or tax guidance. Readers should consult their own legal and tax advisors about their individual circumstances.]
What does the tax do?
SB 6346 imposes a 9.9% tax on Washington taxable income above $1 million. It will take effect Jan. 1, 2028 — if it survives a near-certain legal fight. Washington has been one of a few states without a broad personal income tax, relying instead on sales, property, and business taxes.
How many people does it affect?
The tax is estimated to affect 20,000 to 30,000 Washington households, or less than 1% of the state’s total. It adds to Washington’s capital gains tax that took effect in 2022.
Are people already leaving because of it?
“There’s no doubt that Washingtonians are leaving, and they’re citing taxes as a primary motivation,” said Steven Schindler, principal at Everbridge Law Group, which advises clients on trust and estate planning. He added: “Whether it’s a magnitude that will register on the economic radar generally — hard to tell.”
Marc Barros, longtime CEO of Seattle startup Moment, said last week he’s relocating his company to Wyoming.
But Madhu Singh, chief legal officer at Foundry Law Group who works closely with Seattle-area companies, said she hasn’t seen any slowdown in startup activity. “Every day I’m talking to new founders, starting new companies, building things,” she said.
Singh said the tax could be a bigger factor in compensation negotiations, as founders and employees weigh salary against equity and think more carefully about when income is recognized.
How would it hit a tech worker with RSUs?
An employee at Amazon or Microsoft with a large compensation package — base salary plus restricted stock units, or RSUs — could find themselves above the $1 million household income threshold in a strong vesting year. When RSUs vest, that income appears on a W-2 and flows directly into federal adjusted gross income in the year of vesting, making it subject to the new tax.
For some employees with options rather than RSUs, the 2028 start date could create more room for timing decisions around when income is recognized, said Tim Steffen, director of advanced planning at Baird.
The $1 million standard deduction will be adjusted for inflation, starting with taxes due in 2030.
What about a married couple where both partners work in tech?
The $1 million threshold effectively applies at the household level for married couples and registered domestic partners. Two people each earning $600,000 — below the threshold individually — would face a combined $1.2 million household income, putting $200,000 into the taxable range and generating roughly a $20,000 state bill, assuming no other adjustments or deductions.
Seattle startup attorney Joe Wallin, who opposed the bill and testified against related legislation during the session, called it “a real issue for dual-income professional couples, tech executives, and business owners in Washington.”
What happens when a startup founder has a big exit?
A founder spends years building with a modest salary and then sells their company for a big exit. Will they — and potentially their colleagues — owe the new millionaires tax?
There’s a critical variable: whether their stock qualifies as Qualified Small Business Stock, or QSBS, under Section 1202 of the federal tax code.
QSBS is a long-standing federal incentive designed to reward the risk of starting and funding young companies. Founders, early employees, and investors can exclude up to 100% of eligible gains from federal capital gains taxes if they meet strict requirements, including holding the stock for at least five years and the company meeting federal asset limits at the time the stock was issued. The exclusion is generally capped at the greater of $15 million or 10 times the taxpayer’s adjusted basis in the stock, for stock issued after July 4, 2025.
Because SB 6346 starts its calculation from federal adjusted gross income — gains excluded at the federal level never enter the state tax base — a founder who qualifies for QSBS exclusion should not owe the new Washington tax on those gains, either.
“The bottom line for founders selling stock: if you sell QSBS and the gain is excluded under Section 1202, that gain should not be subject to the Washington millionaires’ tax,” Wallin wrote in his blog post about the new tax.
Could that QSBS protection go away?
SB 6229, a proposed bill in Washington that would have stripped QSBS protections at the state level, failed to advance this session.
“It would have been a potentially outsized, consequential policy shift that would have maybe accelerated the move of founders and company owners sooner than the millionaire’s tax,” said Schindler.
A similar QSBS-related bill did pass in Oregon last month, drawing criticism from tech leaders and investors.
What about angel investors and VCs?
For investors, the QSBS question is equally crucial. Investments in qualifying C corporations that are held for at least five years and meet Section 1202 requirements should produce gains that remain outside the Washington tax base. But investments in LLCs, partnerships, or C corporations that don’t satisfy those requirements are a different story.
“This makes the QSBS qualification analysis even more important for Washington-based angel investors,” said Wallin.
How does the tax affect pass-through business owners?
The new tax is technically an individual income tax — but for owners of LLCs, S corporations, partnerships, and sole proprietorships, the business’ income flows directly to their personal tax returns. If their share of business income, combined with other Washington taxable income, pushes them above the threshold, they may owe.
How much depends on structure and ownership. Steffen offered an example: three equal partners in a business generating $10 million in annual profit would each report around $3.3 million in income — well above the threshold. Twenty equal partners in the same business would each report $500,000 — well below it.
A wrinkle: even if the business retains its cash and doesn’t distribute it, the income is still taxable to the owner. “It’s often referred to as phantom income,” Steffen said. “It’s income you have to pay tax on, but you didn’t actually see the cash.”
SB 6346 also creates a pass-through entity tax election, giving some Washington businesses a new way to pay the tax at the entity level rather than solely through individual owners. In some cases, that could allow business owners to deduct state taxes paid at the federal level, though the benefit would vary depending on each owner’s tax situation.
Does the tax include any breaks for small businesses?
The legislation raises the annual B&O tax return filing threshold from $125,000 to $250,000. It also increases the small-business B&O credit — the amount varies depending on the type of business — easing the tax burden for some smaller firms.
For business owners subject to both taxes, the bill also provides a credit for certain B&O and public utility taxes against the new income tax.
What about founders with large non-QSBS exits?
For founders with large non-QSBS exits, the picture is more complicated. Washington has an existing 7% capital gains tax on profits over a standard deduction threshold (currently at $278,000), and 9.9% on gains above $1 million. SB 6346 includes a credit meant to prevent direct double taxation of the same gains.
What about the legal challenges?
Washington courts have long treated income as property under the state constitution, meaning any broad income tax can face strict uniformity requirements — one reason SB 6346 is expected to face a legal challenge. The capital gains tax that took effect in 2022 survived its own court fight after the state Supreme Court ruled it was an excise tax, not an income tax. SB 6346 is explicitly structured as an income tax, which could make it more vulnerable to challenge.
Do you have more questions? Email [email protected].
