Simone Barron

The marriage penalty isn’t the only disastrous flaw in Washington State’s incoming 9.9% income tax (SB 6346). The legislation is drafted so poorly that it creates an absurd tax cliff—triggering an effective marginal tax rate of over 1,300% on people who realize just a tiny amount of taxable capital gains. While modeling WA’s 9.9% tax on income over $1M (scheduled for 2028), a bizarre edge case emerged in how the new income tax interacts with Washington’s existing capital gains excise tax. Here is the breakdown: The Background The Existing Capital Gains Tax (RCW 82.87): 0% on the first ~$278k of long-term capital gains (standard deduction, indexed for inflation). 7% on gains above ~$278k up to $1M. 9.9% on gains above $1M. The Incoming Income Tax (SB 6346): 9.9% on Washington taxable income exceeding $1M (derived from federal AGI). To prevent double-taxing capital gains, the bill establishes an adjustment mechanism in Section 302: Sec. 302(1): First, you deduct all long-term capital gains from your federal AGI. Sec. 302(3): Then, you add back the WA-taxed gain plus the standard deduction (~$278k) to fold capital gains back into your Washington base income. The Statutory Glitch: The critical drafting flaw lies in the final sentence of Section 302(3): "This subsection (3) applies only to taxpayers owing tax under chapter 82.87 RCW for that taxable year." Because the add-back only triggers if you actually owe capital gains tax, it creates two wildly divergent outcomes for high earners: Gain under ~$278k: You owe $0 under RCW 82.87. Because you owe no capital gains tax, Sec. 302(3) does not apply. Your capital gains were stripped out in Sec. 302(1) and never added back. Your capital gains completely escape the 9.9% income tax. Gain $1 over ~$278k: You now owe capital gains tax under RCW 82.87. Suddenly, Sec. 302(3) triggers. The statute forces you to add back the taxable gain plus the entire ~$278k standard deduction. The whole gain is thrown back into your income tax base. The Math: A $27,600 Penalty for Making $2,000 More Consider a single filer earning $1.2M in W-2 wages (using the ~$278k deduction threshold): Scenario A: $277,000 Long-Term Gain Capital Gains Tax (RCW 82.87): $0 (under the deduction) Sec. 302(3) Add-Back: Does not apply. Income Tax Base: $1,200,000 (gains remain fully excluded) Taxable Income over $1M: $200,000 9.9% WA Income Tax: $19,800 Total WA Tax: $19,800 Scenario B: $279,000 Long-Term Gain (Just $2,000 more) Capital Gains Tax (RCW 82.87): 7% on $1,000 = $70 Sec. 302(3) Add-Back: Triggers because $70 of tax is owed. The full $279,000 is added back into base income. Income Tax Base: $1,479,000 Taxable Income over $1M: $479,000 9.9% WA Income Tax: $47,421 Total WA Tax: $47,491 The Takeaway By realizing an extra $2,000 in capital gains, this taxpayer’s total state tax liability jumps by $27,691 ($70 in capital gains tax + $27,621 in new income tax). That is an effective marginal tax rate of 1,384% on that $2,000. This cliff affects anyone whose other income (wages, business income, RSUs) already puts them over $1M—such as dual-income tech households or startup employees experiencing a liquidity event. Crossing the capital gains exemption line by even a single dollar unexpectedly exposes the first ~$278,000 of previously exempt gains to a 9.9% tax penalty. Whether this was an intentional trap or simply careless drafting, it underscores how poorly structured this legislation really is.