Washington and California Rank Among Bottom 5 in Tax Competitiveness, Eye Further Tax Hikes Amid Urban Challenges

A recent report from the Tax Foundation places Washington and California among the least tax-competitive states in the nation for 2026, ranking 45th and 48th respectively out of 50 states. The findings coincide with ongoing legislative efforts in both states to introduce new taxes and expand existing ones, even as Washington grapples with rising urban crime and homelessness. Steven Sinofsky, a prominent figure, highlighted the situation on social media, stating, "Latest @TaxFoundation report is out for state tax competitiveness 2026. WA and CA are abysmal and getting worse YoY while still proposing more."

Washington state has seen a series of tax increases and expansions enacted in 2025, contributing to its low ranking. These include a new 9.9% capital gains tax rate on annual gains exceeding $1 million and an increase in the estate tax rate to 35%. Additionally, a new 0.5% Business and Occupation (B&O) tax surcharge is set to take effect on January 1, 2026, targeting businesses with over $250 million in taxable income, alongside an increased Advanced Computing Surcharge of 7.5%. The state also expanded its sales tax base to include various digital services, such as digital advertising, effective October 1, 2025.

Further tax proposals are under consideration in Washington, with Democratic state senators discussing a potential new 9.9% income tax on high earners with incomes exceeding $1 million. This comes despite Governor Bob Ferguson expressing skepticism about additional tax increases, noting that billions in revenue were already raised earlier in the year. The state's reliance on a gross receipts-based B&O tax is a significant factor in its poor tax competitiveness score, as it can lead to tax pyramiding.

California, ranked 48th, is also facing a projected budget deficit of up to $70 billion for the 2026 fiscal year, prompting discussions around several substantial tax measures. Proposed legislation includes a controversial wealth tax (AB 259 and Proposition 4) that would impose a 1.5% annual tax on worldwide net worth above $50 million for individuals. Other proposals aim to increase the top marginal capital gains tax rate from 13.3% to 15% for high earners and raise the corporate tax rate from 8.84% to 9.5% for companies with significant profits.

The economic and tax climate in Washington is further complicated by pressing urban issues, as noted by Sinofsky's observation of "what greeted me Thursday morning pulling out of our driveway downtown Seattle." Seattle Mayor Bruce Harrell's proposed 2025 budget allocates significant funds to address public safety and homelessness, with $50 million for the police department and $120 million for homelessness initiatives. Recent data from the Seattle Police Department indicates a 15% increase in property crime and a 10% rise in violent crime in downtown Seattle over the past year, leading to growing concerns among businesses and residents.