Why Washington State Never Adopted a Personal Income Tax: A First Look

11/14/2025

Why Washington State Never Adopted a Personal Income Tax: A First Look

Welcome to the first part of our blog series on personal income tax in Washington State. In this article, we explore why Washington does not have a statewide personal income tax and what would be required to establish one. We also consider how this tax structure impacts businesses, local communities, and the broader economy. Future parts of the series will take a deeper look at the advantages and disadvantages of introducing an income tax, how much revenue it could generate, and what policy designs might look like.

Washington is one of the few states that does not tax personal income. Instead, it relies heavily on sales and business and occupation (B&O) taxes. This unusual mix is rooted in old court decisions and policy choices, which shape how both residents and employers experience the cost of government. For business owners, understanding this history is important because any move toward an income tax would change the state’s overall tax landscape.

In 1932, voters approved a personal income tax, but in 1933, the Washington Supreme Court struck it down. The court stated that income should be treated as property under the state constitution, which requires uniform tax rates. A graduated income tax, where higher earners pay higher rates, was ruled to be unconstitutional. In response, lawmakers adopted the Revenue Act of 1935 and created the sales, use, and B&O taxes that still form the backbone of state revenue.

Consequently, Washington relies more on taxes paid at the cash register and gross business receipts rather than on income or profits. For households, this means that more of the tax load shows up in purchases and fees instead of paychecks. For businesses, especially small ones, the B&O tax can be challenging because it applies to gross receipts rather than net profit. A low-margin firm pays the same rate as a high-margin firm with the same revenue, which can squeeze cash flow when times are tight.

If Washington chooses to adopt a personal income tax, it must first address the constitutional barrier. This likely means a constitutional amendment approved by voters. Lawmakers must then decide which types of income to tax, such as wages, investment earnings, or business income, and whether to use a flat or progressive structure. They would also have to determine what exemptions, credits, or deductions to allow, which would influence both fairness and complexity.

For the business community, the key questions would focus on costs and competitiveness. How would an income tax interact with existing taxes, such as B&O and sales tax? Would it replace part of those taxes or simply add a new layer? How would it treat pass-through income for partnerships, LLCs, and sole proprietors? Depending on the design, some firms could face higher overall tax burdens, while others might benefit if income taxes allowed for reductions in other areas.

Any income tax proposal would also raise broader questions about how to use new revenue. Supporters might argue that it could stabilize funding for education, transportation, and public safety, which businesses rely on. Critics might worry about higher living costs, reduced disposable income, or the perception that Washington is less attractive for investment purposes. In the end, whether Washington keeps its current structure or considers an income tax, the business community will be central to the debate because employers feel the impact of tax changes in both their balance sheets and workforce.

As this series continues, we will look more closely at the pros and cons of implementing a personal income tax in Washington, including how it could be structured and what effects it could have on families, workers and the economy. By understanding the history and complexity of this issue, we can have better conversations about the future of our state’s tax system.

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