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A state advisory group continues to grapple with the technical complexities of Washington state's newly enacted income tax, as the measure faces a ballot challenge.
Among the issues is a lack of a "safe harbor" provision for people who unexpectedly become subject to the new tax, which currently applies to households earning $1 million or more.
However, some Democrat lawmakers have suggested lowering it to anywhere from $750,000 all the way down to $250,000.
A safe harbor rule lets a taxpayer avoid a penalty not making sufficient quarterly payments by demonstrating their total withholding and estimated tax payments met a minimum threshold, even if their actual tax bill turns out to be higher than what they paid during the year.
Quarterly tax payments are required when someone is estimated to owe over a certain amount for that year.
However, individuals who didn’t owe the tax one year but then owe it the next have no baseline comparison to use to make payments that match the amount owed.
This could lead to someone, including nonstate residents, fully paying the tax amount owed, but still owning a penalty for not making adequate estimated payments during the year.
Advisory group member Bea Nahon, a CPA and principal at Kirkland-based Sweeney Conrad, told colleagues at their Oct. 5 meeting that “if I didn’t have to file in 2028, I don’t have a safe harbor or 2029. The federal equivalent is you don't have a safe harbor for the prior year tax, unless you filed in the prior year.”
Because the tax currently has an exemption threshold for incomes below $1 million, Nahon noted that “this is a tax that you may file one year, and two years go by and you have to file for two years, and then for three years you don't.”
Rep. Noel Frame, D-Seattle admitted that “we solved the problem for just the taxing and effect initially, but we didn't think about it for somebody who's not subject to it in a previous year, but becomes subject to it.”
She added that “the first payments aren't due until April of 2029, so we have a whole year of this tax being in effect so that when we get to the second year we have a baseline from which to operate, that was a very intentional choice in part from our learnings from implementation of capital gains (tax).”
House Finance Committee Chair April Berg, D-Mill Creek, said that “with our tech community...it's definitely gonna happen.”
The advisory group has faced numerous challenges, including tracking and collecting taxes owed by non-state residents who generate the tax due to participating in partnerships invested in other partnerships that generate income in Washington state.
Additionally, The Center Square recently reported that the state Department of Revenue warned SB 6346 sponsor Sen. Jamie Pedersen, D-Seattle, during the legislative session that it would be difficult to determine who owed the tax, while other provisions would create “political and optics issues.”
Frame later said “I'll just say it out loud and our tax professionals can think about this: If you do this where they have no obligation for estimated payments in the their first year because they didn't know they were subject to it, it works the same way on the other end - which is the next year they are going to owe estimated payments, 90% or 100%, even if they don't qualify the next year."
"They'll get a refund at the end of the year, but if you're going to make it easy for them…they're going to have a higher obligation on the way out if it's a one time event and then they go out the next year,” he added.
Initiative 645, which would repeal the income tax, will be on the ballot after it received the necessary number of signatures earlier this year. If approved by voters, it would represent the 12th time since the 1930s that they have rejected a state income tax, the last time in 2010, after rejecting Initiative 1098.
