Washington‘s tax system ranks 45th overall on the 2025 State Tax Competitiveness Index. Washington forgoes an individual income tax on wage income due to constitutional constraints, though the state recently imposed a tax on high earners’ capital gains income, a policy that raised constitutional questions but ultimately secured the assent of the state supreme court. The constitution has been similarly interpreted as blocking a corporate income tax, but Washington instead imposes a high multiple-rate gross receipts tax, called the Business & Occupation Tax. Because it is based on gross revenues rather than net income (profits), it yields very high rates of taxation on low-margin businesses and leads to tax pyramiding, where goods and services have the tax embedded several times over, imposed on each transaction within the production process.
The state’s sales tax, imposed atop the gross receipts tax, is not just a high rate but is also imposed on a base that includes an unusual share of business inputs, particularly in the digital products space. Washington also levies a progressive real estate transfer tax and the nation’s highest-rate estate tax. High UI taxes and an uncompetitive UI tax structure also contribute to the state’s poor Index ranking despite the state forgoing an individual income tax, which might otherwise be expected to yield a much more competitive tax environment.
The One Big Beautiful Bill’s changes to the taxation of international income have surprising implications for state codes, yielding tax increases and a revised tax base that, through quirks of state incorporation, bears very little resemblance to the federal base and almost nothing of its purpose.
Summer has arrived, and states are beginning to implement policy changes that were enacted during this year’s legislative session (or that have delayed effective dates or are being phased in over time).