Idaho Taxes vs. Washington: A Tax System Comparison

For those considering a move to the Pacific Northwest, Idaho and Washington have very different tax systems. Their approaches to funding state and local governments lead to varied financial outcomes for residents. The ideal location from a tax perspective depends on a person’s income sources, spending patterns, and financial goals, as a high-income professional, a retiree, and a young family will experience these two tax systems in different ways.

Individual Income Tax

The primary difference between the two states is their approach to taxing individual income. Washington is one of a handful of states that does not levy a broad-based personal income tax. This means that for most residents, wages, salaries, and retirement income are not subject to state-level taxation, a financial advantage for those with high earnings.

Washington does have a 7% tax on certain long-term capital gains from assets like stocks and bonds. This tax is targeted at high-income individuals, with an annual exemption of $270,000 per person, so most residents are not affected.

In contrast, Idaho has a personal income tax to generate revenue. The state uses a flat tax system, where all taxable income is subject to a single rate of 5.695%. For example, an Idaho resident with $70,000 in taxable income would owe $3,986.50, while a Washington resident with the same wages would owe no state income tax.

Sales and Use Tax

Washington relies more heavily on sales taxes to fund state operations, a direct consequence of not having a broad income tax. The statewide sales tax rate in Washington is 6.5%, but this is a baseline. Local municipalities add their own sales taxes, resulting in a combined rate that often ranges between 9% and 10.5% in urban areas.

Idaho’s statewide sales tax rate is 6%. Local jurisdictions can also impose their own sales taxes, though they are less common and lower than in Washington, with combined rates often ranging from 6% to 9%.

A key distinction is the taxation of certain goods. Washington exempts most groceries from sales tax, while Idaho taxes them at the full rate. To offset this, Idaho offers a $120 grocery tax credit per person on state income tax returns. Washington also taxes a much wider array of services, such as landscaping and consulting, while Idaho’s tax on services is more limited. Both states exempt prescription drugs from sales tax.

Property Tax

In both states, property tax is calculated based on the assessed market value of a property, which is then multiplied by a local levy rate. These levy rates are a composite of taxes from various local entities, including counties, cities, and school districts. Washington’s average effective property tax rate is approximately 0.94%, while Idaho’s is lower at around 0.63%. This means that for a home with the same market value, the annual property tax bill would be higher in Washington.

Both states offer programs to reduce the property tax burden. Idaho’s primary relief is the Homeowner’s Exemption, available to all residents on their primary dwelling. This exemption reduces the taxable value of a home by 50%, up to a maximum reduction that is adjusted annually.

Washington’s relief programs are more targeted, focusing on specific demographics. The state offers property tax exemptions and deferrals for senior citizens, veterans with disabilities, and individuals with disabilities. These programs are income-based, meaning applicants must have an annual household income below a certain threshold to qualify.

Business Tax Environment

The business tax environments in Idaho and Washington are different, reflecting their opposing approaches to revenue collection. The core distinction is Washington’s use of a gross receipts tax versus Idaho’s corporate income tax.

Washington levies a Business and Occupation (B&O) tax on the gross revenue of a business. This means the tax is calculated on total income before business expenses, such as rent or payroll, are deducted. B&O tax rates vary by business classification, with different rates for activities like retailing at 0.471% and services at 1.5%. This system can be challenging for businesses with high sales volumes but low profit margins.

In contrast, Idaho taxes businesses based on their net income, or profit. The state has a corporate income tax, applied only after all operating expenses have been subtracted from revenues. Idaho has a flat corporate income tax rate of 5.695%. This net income approach is more favorable for startups and low-margin businesses, as a company that is not profitable owes no state income tax.

Estate Tax Considerations

The transfer of wealth upon death is treated very differently in Washington and Idaho. Washington is one of a dozen states that imposes its own estate tax, which is separate from the federal estate tax. This tax is levied on the total value of a person’s estate before it is distributed to heirs.

Washington’s estate tax applies only to estates that exceed an exemption of $2.193 million. For estates that exceed this value, a progressive tax rate ranging from 10% to 20% is applied to the amount over the exemption.

Idaho, on the other hand, does not levy an estate tax or an inheritance tax. This means that regardless of the size of the estate, no state-level tax will be imposed on the transfer of assets to beneficiaries. This distinction has major implications for wealth preservation for individuals with a net worth near or above Washington’s exemption level.