Washington state lawmakers passed a series of tax increases on businesses as part of an effort to plug a massive budget gap, sparking strong backlash from tech and business groups who warn the moves could weaken the economy and startup ecosystem.
The state’s legislative session wrapped up this weekend with the passage of several new tax measures impacting businesses across various sizes and industries, including:
- Senate Bill 5813: Increases the state’s capital gains tax by creating a progressive rate structure — 7% on gains up to $1 million, and 9.9% on gains above $1 million. The tax passed in 2021 and sparked controversy within the tech industry.
- Senate Bill 5814: Expands the application of the retail sales tax to a broader range of digital and professional services, such as advertising agencies, software development firms, and IT support providers. Companies must begin collecting sales tax from customers starting in October 2025.
- House Bill 2081: Increases business & occupation tax (B&O) rates across numerous categories and adds a temporary 0.5% B&O surcharge on companies with more than $250 million in annual Washington taxable income.
- For service businesses (including many tech startups and software companies) earning more than $5 million per year, the B&O rate jumps from 1.75% to 2.1% — a 20% rate hike.
- The legislation also raises the “Advanced Computing Surcharge” — paid by major tech companies such as Microsoft and Amazon — from 1.22% to 7.5% and lifts the annual payment cap from $9 million to $75 million, according to a Senate Bill Report. Companies paying the ACS are exempt from the new 0.5% B&O temporary surcharge.
The bills, authored by Democratic lawmakers, narrowly passed each chambers. Most take effect next year.
Lawmakers pushed for new taxes to address a projected $16 billion budget shortfall, including a payroll and wealth tax that drew intense pushback from tech companies including Microsoft. Both of those taxes did not ultimately pass.
In total, the business tax increases make up a majority of about $9.4 billion in new revenue over the next four years, the Washington State Standard reported. They will fund K-12 education, health care, social services, and other state-funded services.
Republicans and some local officials argue the state should instead focus on cutting spending. Business groups are sounding alarms about the potential economic consequences.
The proposals represent “the largest tax increase in Washington state history to essentially cover unsustainable spending growth,” said Rachel Smith, president and CEO at the Seattle Metro Chamber, during a media briefing last week.
At a Sunday press conference, Rep. April Berg (D-Mill Creek) defended the tax increases, saying lawmakers took a “very strategic approach.”
“I think what Washington businesses are going to see is that this is still the best place in the United States to do business,” she said.
Many business and tech leaders fear that may change.
“If our state targets the tech sector with billions more in taxes while in the midst of significant national economic turmoil where many firms are already grappling with layoffs and making their own budget cuts, it would be an unmistakable signal to the market that tech is no longer welcome here in Washington state,” said Kelly Fukai, CEO of Washington Technology Industry Association, at the Chamber’s media briefing.
Raji Subramanian, a longtime Seattle-area tech exec and and former CTO of Opendoor, shared concerns about the new taxes as an entrepreneur working on her own stealth startup.
“We always work with very limited capital, and if the cost of business increases, it impacts our ability to demonstrate product market fit and prove out our business models,” she said during the briefing.
Sergei Dreizin, CEO at Bellevue, Wash.-based software engineering company Akvelon, said lawmakers are “doing everything possible” to drive businesses out of the state.
“They think they can milk this cow forever, but cows eventually always move to the greener pastures,” he told GeekWire.
Scott Foreman, CEO at Seattle advertising agency Copacino + Fujikado, said he’s sympathetic to the budget issues but raised concerns about the new sales tax on advertising services. He said his industry is “already running on razor-thin margins.”
“So that cost won’t just disappear,” he said. “Agencies will have to pass it along to clients. At the end of the day, it means businesses will pay more to get their message out.”
The new bills are headed to Gov. Bob Ferguson for review. Ferguson said in a statement that he plans to “carefully review all revenue increases” over the next few weeks. A bill can become law without his signature if he does not act to veto it.
Earlier in the legislative session, Ferguson expressed strong opposition to the proposed wealth tax, which passed out of the Senate but was not debated in the House.
Looking ahead, Democratic leaders remain optimistic about the prospects for a wealth tax in future sessions.
“I think this was a significant step forward and an opportunity for us to present a vision of what a world could look like in terms of better-funded public schools — and perhaps less regressive taxation — if we were able to call on some of our most fortunate community members to contribute a higher share of their property to the general welfare,” said State Senate Majority Leader Jamie Pedersen (D-Seattle).
Washington is one of a few states without a personal or corporate income tax. Most state revenue comes from sales, property, and business and occupation (B&O) taxes — a system critics say disproportionately burdens lower-income residents.
“This progressive revenue proposal raises taxes on some of the biggest, most profitable corporations worldwide and the wealthiest few individuals, directing funding to public schools, community safety, and the essential services people count on from their government,” Sen. Noel Frame (D-Seattle), said in a statement earlier this month. “These proposals are a key step in modernizing our nearly 100-year-old tax code to meet the economy and needs of the 21st century.”
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