‘Marriage penalty’ in Washington state’s new tax stirs debate

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Washington state’s proposed new income tax includes the largest “marriage penalty” in the country and would impose higher taxes on some couples filing jointly, tax experts say.

The state’s House of Representatives approved Washington’s first income tax, imposing a 9.9% tax on income over $1 million a year. The decision, which passed the State Senate, will now go to the governor, who plans to sign the bill into law. Washington is currently one of nine states without a state income tax, and the new rate would be one of the highest in the country.

While Democratic lawmakers are calling it the “millionaire’s tax,” some taxpayers who earn much less as individuals would also be subject to the tax because of the hefty marriage penalty. According to the legislation, the $1 million tax threshold applies to individuals, couples and cohabiting partners. So if a married couple makes $600,000 each, their combined income of $1.2 million would trigger the tax.

“According to the law, it doesn’t matter if you’re married or single, the exemption is $1 million,” said Joe Wallin, a Washington lawyer who advises companies and tech founders. “This should be called the half-millionaire tax.”

While marriage penalties are not uncommon in state or federal tax laws, Washington’s stands out for its size. Most states use two income thresholds for tax brackets, one for individuals and the other for couples, usually twice as high. Some high-tax states, such as California and New York, impose marriage penalties only on the highest earners, according to the Tax Foundation, a nonprofit tax policy think tank.

In New York, for example, income thresholds for each group are doubled to 9.65% for joint filers; This applies to income over $1,077,550 for single filers and $2,155,350 for joint filers. However, the income thresholds for the special millionaire surtax rates of 10.3 percent and 10.9 percent, which relate to those earning more than $5 million and $25 million, respectively, are the same for joint and sole filers.

In California, tier thresholds are doubled for joint filers, with the exception of the 1% Mental Health Services Act, which applies to incomes over $1 million for both single and married filers.

Marriage penalties in New York and California are relatively small, accounting for a 1% tax rate difference in California and a 0.65% difference in New York, said Jared Walczak, senior fellow at the Tax Foundation. In Washington state, the difference can be as high as 9.9%.

“In the extreme case, if there were two single applicants who both earned exactly $1 million, they would owe $0, but if they got married and earned the same income, they would owe $99,000,” he said. “Washington’s marriage penalty will be largest ever.”

The state’s Democratic lawmakers and governor did not specifically address concerns about the marriage penalty. State Sen. Noel Frame, who leads fiscal policy for state Senate Democrats, said the standard deduction of $1 million per household is the same structure used for the state’s capital gains excise tax passed by voters in 2021.

“As we work to ensure two separate tax structures work together, consistency in the deduction helps both ensure tax administration by our Department of Revenue and provides simplicity for taxpayers,” he said in a statement. “Since the tax does not apply to incomes under $1 million, there are many high-income couples who are not affected much by the tax even if their combined income is over $1 million.”

But in a state that depends on high-skilled, high-wage workers at companies like these Amazon, Microsoft Many dual-income families could be affected by the tax, analysts said, along with other tech startups.

“There’s this idea, ‘We’re just taxing rich guys with yachts,'” said Brian Heywood, a Washington hedge fund manager who founded Let’s Go Washington, a conservative political action committee that opposes the tax. “They’re not being very honest about who they’re after and what the numbers are.”

Wallin joked that some dual-earner couples might even consider legal divorce for tax reasons, even if they effectively want to stay married. “The tax savings alone will more than offset the costs of a divorce attorney,” he said.

The marriage penalty is the latest controversy over Washington’s new income tax, which has become a beacon in the Democratic party’s drive to raise taxes on the wealthy. Democrats in state legislatures from Rhode Island and New York to Virginia and Michigan are trying to counter rising inequality and federal funding cuts to health care by increasing taxes on top earners. California is considering a ballot initiative to create the first state wealth tax, which would tax the total net worth of billionaires in the state.

Washington will be a closely watched experiment in the debate over the impact of higher state taxes on wealth migration.

Two of the state’s most famous entrepreneurs – Jeff Bezos from Amazon and Howard Schultz of Starbucks have already left the state for Florida, which has no income tax. Bezos announced he will move to Miami in 2023 after the state’s new 7% capital gains tax takes effect. By selling more than $9 billion worth of Amazon shares in 2024, it effectively saved over $600 million in capital gains taxes it would have to pay to Washington state.

Schultz recently announced that he is moving from Seattle after 44 years. He said his family office will also move to Miami, but his foundation will continue to operate in Seattle.

“We hope that Washington will remain a place where business and entrepreneurship will thrive and create significant opportunities for residents of Seattle and surrounding areas,” he wrote.