Washington’s Billion-Dollar Tax Gamble Threatens Business Exodus | Image Source: taxfoundation.org
OLYMPIA, Washington, March 31, 2025 – Washington legislators are about to pass one of the most ambitious and controversial reform packages in recent state history. At the centre of the debate is SB 5796, a proposed 5% wage tax that indicates remuneration above the federal social security wage ceiling for large employers. Although this is a tax fairness initiative, the proposal has led to a sharp decline in the number of industrial leaders, business groups and even parts of the state administration itself.
What is SB 5796 and why is it so controversial?
SB 5796 would impose a 5% wage tax on salaries above the current social security ceiling of $176,100. This measure would affect approximately 5,300 companies with a payroll of over $7 million and is expected to generate $2.3 billion per year. According to supporters of the bill, Washington’s largest employers, who benefit more from infrastructure and public services, provide their fair share. But critics say that this is a disguised income tax, one of Washington’s voters has repeatedly rejected it.
The definition of taxation as a simple removal of the social security ceiling has been criticized by tax policy experts. Social security has always been conceived as a capped profit system, which collects untied public revenues by imitating this structure, they say, confuses the public. According to the Tax Foundation, this is not a modest adjustment, but a significant change in the way employment is imposed in the State, especially since companies are already making redundancies and market contractions.
Who would bear the payroll tax burden?
Initially, the burden is on employers. Over time, however, as economists agree, the cost will likely be passed on to employees through lower wage growth or reduced employment opportunities. Given that wages are “dangerous”, i.e. they are not easily reduced without causing employee dissatisfaction or legal problems, companies are likely to reduce their costs in the short term. This could mean redundancies or job relocations outside Washington.
The president of Microsoft Brad Smith highlighted the possible fall in a recent direction:
“If you do more expensive jobs, it becomes more difficult to keep jobs or grow here. »
Smith also highlighted a worrying precedent: a number of European countries adopted similar taxes in the 1980s, leaving them only after discouraging job creation and damaging economic growth.
What do entrepreneurs think of tax proposals?
State giants don’t hold. A coalition of companies including Amazon, Microsoft, Alaska Airlines, Costco and Nordstrom recently sent a letter to the heads of state urging them to reconsider the large tax scales. The letter, signed by the Seattle and Bellevue Chambers of Commerce, points out that the proposed tax increases – totalling $17 billion – are excessive and risk taking businesses out of the state.
“These proposals would lead to the largest budget increases in the history of the state… threatening our economic stability,” the coalition wrote.
They also highlighted the JumpStart tax in Seattle as a precautionary story. Amazon, for example, moved 10,000 jobs from Seattle to Bellevue after its implementation. Since then, employment growth has stagnated in Seattle, but has increased in Bellevue and other areas with lower tax burdens.
Is Washington’s fiscal climate already problematic?
The data show a steady deterioration in Washington’s fiscal climate. Starting in 2025, the state was among the worst five in the nation according to the Washington Policy Center, a spectacular fall from the sixth best in 2014. This is largely due to the reduction of taxes, such as the company’s gross invoices and the occupancy tax, the increase in sales taxes on business purchases and, possibly, on wages and property taxes.
Although Washington is one of the states that do not have personal income taxes, the cumulative effect of these phased taxes is beginning to emulate one. The proposed total tax burden for high-income wages could reach 11.5 per cent when paid family leave and long-term taxes are recorded, making it much heavier than the national median of 5 per cent.
What do legislators say to defend the plan?
Democratic legislators argue that the tax is on equity and investment in public goods. State Senator Rebecca Saldana (D-Seattle), the lead author of Bill SB 5796, described the bill as a movement towards equity:
“Middle-class workers already pay a much higher share of their income in public and local taxes than the richest. This bill calls on older employers to contribute to the maintenance of public education, health and essential services
Supporters argue that Washington’s economy continued to grow despite similar policies. They argue that investments in education, health care and infrastructure are essential to long-term prosperity and that the benefits will ultimately exceed short-term costs.
How does this fit into the broader budgetary perspective?
Governor Bob Ferguson’s administration is facing a budget deficit of millions of dollars and has issued warnings about unsustainable spending. In a nine-page letter from its budget manager, Ferguson called for tax moderation, urging legislators to find savings before using new taxes. However, the governor also avoided offering specific reductions, which caused frustration among legislators.
Senator June Robinson (D-Everett) pointed out the paradox: the administration calls for savings, but leaves legislators without guidance on the issues to be reduced. Meanwhile, Republicans like Senator Chris Gildon (R-Puyallup) insist that the deficit be resolved without new taxes, accusing the legislator of overcapacity to raise revenues for unsustainable programs.
Could these tax increases get businesses out of the state?
The short answer: Yes, and some are already. The change in technology jobs outside Seattle, as well as companies opening offices in states like Idaho or even Canada, is not hypothetical, it happens. Smith noted that the use of a software engineer in Vancouver is already 30 percent cheaper than in Puget Sound, partly because of the exchange rate, but also because of taxes.
In addition, start-up activity and enterprise risk-taking – the main drivers of innovation – could be drowned by a tax regime considered a punishment for success. As technology leaders, Vancouver, Toronto and even the cities of Texas and Utah point out, they are aggressively courting the same talent group. Washington can no longer assume that its talented workforce and quality of life are sufficient to maintain firm anchors.
What happens next?
With the ongoing fiscal negotiations and legislators struggling to bridge the gap between growing obligations and the limited political will to cut spending, it is unclear to what extent the proposed tax package will survive. Governor Ferguson highlighted the doubt, especially about the tax on wealth, questioning its legality. It remains to be seen whether it will use its veto power to restructure the final budget.
For now, the business world is ringing the alarm. If legislators hear warnings, it is always an open question, but one thing is clear: the outcome of this legislative session will shape the economic landscape of Washington for years.
Takeaway: Washington is at a critical juncture. In the face of a large budget deficit, the State applies new taxes that could fundamentally reshape its business climate. If these changes result in a more equitable and resilient economy – or by accelerating the flight of jobs and investments – they will depend on the options taken at Olympia this spring.
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