What Taxes Does Washington Not Have?

Washington state’s tax system is notable for the taxes it does not impose, a structure that influences the financial landscape for its residents and businesses. The state’s approach sets it apart from most others in the United States, creating a distinct economic environment.

Washington’s Lack of an Income Tax

Washington is one of the few states that does not levy a personal income tax. The absence of an income tax extends to retirement, as income from pensions, Social Security, 401(k)s, and IRAs is not taxed at the state level.

The state also forgoes a corporate income tax. Instead of taxing corporate profits, Washington levies taxes on gross receipts. This distinction is a key factor for businesses operating within the state, as their tax liability is not based on their profitability but on their total revenue.

Primary State Revenue Sources

Without an income tax, Washington relies on other sources to fund state operations. The primary driver of state revenue is the retail sales and use tax. This tax is applied to the sale of most tangible goods and a range of services, including construction, certain recreational activities, and telecommunications. The state sales tax rate is 6.5%, although local jurisdictions add their own sales taxes, increasing the total rate for consumers.

Another significant source of revenue is the Business and Occupation (B&O) tax. The B&O tax is a gross receipts tax levied on businesses for the privilege of operating in the state. Unlike a corporate income tax, the B&O tax is calculated on a company’s total revenue without deductions for the costs of doing business. Tax rates vary depending on the specific business classification.

Property taxes also contribute to the state’s revenue, although they are a more significant funding source for local governments, including schools, cities, and counties. While the state levies its own property tax, the combined state and local property tax rates are a considerable part of the overall tax burden for property owners.

The State Capital Gains Tax

While Washington does not have a general income tax, it does impose a tax on certain investment profits from the sale or exchange of long-term capital assets, such as stocks and bonds. This tax only applies to gains exceeding a substantial annual deduction that is adjusted for inflation. For the 2025 tax year, gains above the deduction are taxed at 7%, with a higher rate of 9.9% applying to gains that exceed $1 million.

This tax is narrowly focused and includes several important exemptions. Most notably, gains from the sale of real estate are exempt from the capital gains tax. Other exempt assets include those held in retirement accounts, certain agricultural property, and interests in some family-owned small businesses. This means the tax primarily affects individuals with significant profits from the sale of financial instruments rather than from real estate transactions.