On May 20, 2025, Washington state Governor Bob Ferguson signed into law Washington Senate Bill 5813, which provides significant increases to the state’s capital gains tax and estate tax.
Capital Gains Tax
The Washington state capital gains tax has a short, but frenetic history. Since January 1, 2022, a long-term capital gains tax of 7% has applied (but with first $270,000 is exempt, adjusted annually for inflation). On March 24, 2023, the Washington State Supreme Court upheld the capital gains tax as constitutional. And now, effective retroactively to January 1, 2025, an additional 2.9% tax on top of the original 7% applies to gains exceeding $1 million.
The new tax brackets for the Washington state capital gains tax are:
Estate Tax
The new law also makes two significant changes to the Washington state estate tax, effective July 1, 2025.
First, the state estate tax exemption is increased from $2.193 million to $3 million, adjusted annually for inflation. This might help a small fraction of estates, but it’s really just a pretend act of reasonableness, as an attempt to mask for the massive rate increases for the large estates.
Second, state estate tax rates are being increased for almost every bracket. The highest rate is now 35%(!!) for estates with net assets exceeding $9 million, which is the highest state-level estate tax rate in the nation by a wide margin. For large estates subject to both the federal and state-level estate tax, the combined effective tax rate is a maximum of approximately 61%.
The new Washington state estate tax rates are as follows:
The extent to which the Washington legislature considered that it’s extremely easy for high-net worth individuals to simply change their state of residency (particularly late in life), is unknown. Regardless, this reminds me of when the U.S. Congress passed a law in 2010 allowing anyone (regardless of income) to convert their pre-tax IRAs to Roth IRAs – but then 10 years later are upset because wealthy people have large Roth IRAs. What do you expect to happen?!
The amount of money that will leave the state of Washington (and thus, theoretical capital gain and estate tax revenue) in future years is certain to be very large. After all, high net-worth individuals are not only keenly aware of these taxes, but they also have the easiest time avoiding them. With wealth comes mobility!
The risk of losing economic drivers (e.g., high performing companies and individuals) is too great to justify the relatively small benefit of these tax increases.