The Washington State Legislature’s recent actions — characterized by new taxes and the removal of critical incentives — threaten to stifle reinvestment and shift the state’s focus from economic vitality to finding more revenue to spend.

For businesses and employers, the session is considered "disaster adjacent," says Morgan Irwin, government affairs vice president at the Association of Washington Business. 

The most significant blow to the business community is the new income tax on high earners, often referred to as the "millionaires tax." This policy is expected to have a cooling effect on the state's economy, specifically targeting S-corporations and limited liability companies, which comprise the majority of businesses in the state.
 
Unlike the federal government, which typically taxes only personal distributions, this state tax will treat business profits over $1 million as personal income. Consider a business that earns $5 million in profit. While the owner might only take a $200,000 personal distribution to live on, intending to reinvest the remaining $4.8 million into the company for improvements, the state will now tax earnings in excess of $1 million at 9.9%. This results in less revenue for reinvestment.

Additionally, there's a genuine concern among the business community that the high earners tax is merely signaling the beginning of a statewide income tax for everyone. Some experts are anticipating legal challenges to the new tax.

Beyond direct income tax pressure, the Legislature has also targeted essential infrastructure by removing tax preferences for data centers and pharmaceutical wholesalers. Many businesses and employers have expressed frustration about the eliminated tax preferences as these services will become more expensive to provide.

Data storage isn't an isolated industry; it's a necessity for everyone from high school students to Fortune 500 tech firms. So, if the cost of building data centers increases, so too will the cost of providing data storage. Similarly, eliminating tax preferences for pharmaceutical wholesalers is likely to increase the cost of prescription drugs and drive up health insurance premiums for all employers in the state.

These combined pressures are leading to a phenomenon described as "quiet quitting" the state, in which highly mobile professionals in industries such as tech and finance are showing interest in relocating to states such as Nevada, Wyoming, and Idaho to find tax-friendly jurisdictions that want to attract corporations and other business investments.

Their flight could lead to a dangerous fiscal spiral: If even 5% of these targeted households leave, the state will miss its revenue projections, likely leading to further tax hikes on the remaining population to cover budget deficits in the future.

Washington remains a place where people want to live and work, but a pivot is desperately needed.
 
The Legislature needs to shift its stance on squeezing employers for increased revenue and prioritize a jobs-based agenda that aims for 5% annual economic growth. By focusing on economic growth rather than aggressive revenue gimmicks to fill a seemingly insatiable desire to spend, Washington can remain a vibrant economic engine as opposed to slipping further into a "disaster adjacent" reality.