Negative Impacts to Washington State Revenue from Enacting an Income Tax

12/4/2025

By Cindy Alia

The idea of an unconstitutional income tax on Washington's citizens is especially daunting when viewed from to lens of those already over taxed and over burdened.  We all want to keep more of the money we earn, but taxation especially stings and hits hard when it is collected then wasted by poor oversight, lack of meaningful auditing, and self serving programs.  People are aware of these faults and at some point will vote with their feet, increased taxation feeds this behavior.

While some in the state legislature are grasping for ever expanding revenue sources, read additional taxation, an income tax would actually create a loss in hoped for revenue.  A compounding factor of an income tax, aside from the unconstitutional basis, is the strong feelings of resentment from all economic levels...many tax paying citizens have cried out for cuts, for oversight on spending, and other common sense remedies for saving revenue and find it has fallen on the deaf ears of those in control of state legislation and budgeting.  This fuels the migration of top earners seeking relief from out of control spending by the government which takes from them.

Washington State currently lacks a broad personal income tax, relying heavily on sales taxes, business and occupation (B&O) taxes, property taxes, and a limited capital gains tax for revenue. Proponents of an income tax often argue it would provide a more stable and progressive revenue source, but critics highlight several potential negative effects on overall state revenue. These stem from behavioral responses by residents and businesses, as well as the tax's inherent volatility. Below, I outline the key negative impacts, drawing on economic analyses and migration data.

1. Capital Flight and Loss of High-Income Taxpayers

• High earners (e.g., those above $1 million in income) are highly mobile, especially in a remote-work era. An income tax could accelerate out-migration to no-income-tax states like Nevada, Texas, or Florida, reducing the taxable base for all state revenue sources—not just the new income tax.
• Evidence from Washington's 2022 capital gains tax (now at 9.9%) shows early signs of this: The state lost a net 222 high-earning millennial households (incomes over $200,000) between 2021 and 2022, ranking eighth-highest nationally for such outflows. Ultra-high-net-worth individuals (assets over $50 million) saw only 42.6% growth from 2022–2024, far below the 46.9% for the broader "millionaire class," indicating top talent is leaving. High-profile relocations include Amazon founder Jeff Bezos to Florida in 2023 and Microsoft/Amazon executives to Las Vegas.
• Revenue impact: If just 25% of high earners (about 40,000 individuals) relocate, it could mean $16 billion less in statewide wages, leading to a $1.6 billion drop in combined taxes (sales, B&O, estate, etc.) at a conservative 10% effective rate. This "vicious cycle" amplifies losses as departing residents cut spending on taxable goods and services.

2. Business Relocation and Reduced Economic Activity

• Businesses, particularly in tech and services, cite Washington's no-income-tax status as a key competitive edge. An income tax could prompt relocations or expansions elsewhere, eroding the B&O tax base (21% of state revenue) and sales taxes (nearly 50%).
• Washington's 2025 State Tax Competitiveness Index ranking fell to 45th overall after capital gains hikes, with business leaders like MoxiWorks CEO York Baur warning it makes the state "less competitive in attracting and retaining tech companies and employees." Venture capitalist Anthony Bontrager noted remote work enables easy shifts to low-tax states.
• Revenue impact: Laid-off employees from relocating firms lose income, further slashing sales and B&O taxes. For context, the capital gains tax raised $1.2 billion but risks "billions in lost economic activity" from reduced investments, home remodeling, and startup funding by departing innovators. A full income tax could compound this, as states with high income taxes collect $131 per $1,000 of household income in taxes vs. $89 in no-income-tax states, stifling growth.

3. Revenue Volatility and Cyclical Shortfalls

• Income taxes are highly sensitive to economic downturns, as they fluctuate with wages and investments. Washington's current sales-tax-heavy system is already volatile (elasticity of 1.2, meaning revenues swing more than the economy), but adding an income tax could worsen this without offsetting regressive taxes.
• S&P's July 2025 credit rating praised Washington's sales-tax structure for being "less sensitive to economic cycles than income-tax-reliant states." In recessions, income tax revenue could plummet faster, forcing cuts or hikes elsewhere.
• Revenue impact: Projections for a millionaire-focused income tax (9.9% on income over $1 million) estimate $3 billion annually from 20,000 households, but volatility could undercut this by 20–30% in downturns. Historical rejections of income taxes (11 ballot defeats) reflect fears of unreliable funding for programs.

Summary of Potential Revenue Losses

In aggregate, these effects could offset 50% or more of the projected $3 billion gain within 3–5 years, per analyses from the Washington Policy Center and Tax Foundation. While a narrow tax on millionaires might mitigate some flight, historical data from similar hikes (e.g., New Jersey's millionaire tax) shows migration at "margins of significance" but compounding over time. Policymakers would need offsets like sales tax cuts to avoid net losses, but past hikes (e.g., 2025's $9.5 billion package) haven't led to such relief.