Washington Legislature adjourns after contentious income tax debate, budget maneuvers, and limited policy movement

The 2026 session of the Washington State Legislature adjourned sine die at 8:25 p.m. Thursday, concluding a contentious final week dominated by tax and budget debates. The session’s most notable development was passage of a new 9.9 percent tax on high-income households, following a record-setting 24-hour House floor debate. Outside of the fiscal arena, however, lawmakers produced relatively few major policy changes across most issue areas – despite beginning session with nearly 1,400 new bills filed.

The Governor has 20 calendar days, excluding Sundays, to take action on bills that reach his desk within five days of the adjournment of session. The Governor can sign a bill, veto a bill, veto just sections of a bill, or take no action in which case it becomes law without his signature.

A final bill tracking report is also attached, showing the bills that passed as well as those that failed this session.

Operating Budget

• Despite last year’s record-setting tax package, lawmakers entered session already facing a projected $2 to 3 billion deficit in the second half of this biennium, fueled by declining revenue projections, rising lawsuit payouts, growing human services costs, and federal spending cuts. By the time House and Senate Democrats hammered out a final supplemental operating budget, the Legislature ended up spending $1.6 billion more, increasing last year’s $77.8 billion biennial spending plan to $79.4 billion. This included a $1 billion “down payment” on future lawsuit settlements. The budget balances over the required four-year outlook period with a mix of accounting assumptions, transfers from the state’s “rainy day” fund and first responder pension reserves, and revenue from a mix of tax increases. By many accounts, the budget maneuvers used to balance this fiscal year’s budget likely leave the Legislature with an estimated $878 million structural deficit heading into the 2027-29 biennium next year.     

Taxes

• Income Tax: Chief among the tax increases passed this year is the 9.9 percent tax on household income above $1 million, set to go into effect January 1, 2028, with collections starting January 1, 2029. Originally passed by the Senate, House Republicans put up a record-setting floor fight that lasted 24 continuous hours from Monday evening into Tuesday evening, debating nearly 80 amendments (all but a couple were voted down). A more subdued floor debate ensued Wednesday in the Senate, at which point the body concurred in the House version and sent it to the Governor. The final bill made very little change the treatment of income from pass-through entities, which was the business community’s top concern. Two notable components of the bill include a repeal of all but the advertising component of the 2025 sales tax on services bill (SB 5814) set for 2029, and for trade associations, a repeal of the sales tax on live presentations, set to go into effect July 1 of this year. While the bill contains an expanded B&O tax exemption for small businesses, no structural tax reform was included in the measure.   
• Tax Preferences Eliminated: The other revenue items booked in the supplemental budget involved eliminating tax preferences for data centers (SB 6231), prescription drug warehousing and reselling (SB 6228), and certain insurance operations (HB 2487). All three were in contention until the last days of the session, particularly on data centers and insurers. The insurance bill passed with an amendment attempting to make clear that core insurance business subject to the state premiums tax is not swept into the B&O tax base, but downstream payments to affiliate service providers will be a new source of B&O revenue, retroactively applied as far back as 2019.

Sales Tax on Services

• DOR Clean-Up Bill: The Legislature also passed SB 6113, at the request of the Department of Revenue, to make a series of technical and administrative clarifications to SB 5814. The bill clarifies definitions for several newly taxed services including information technology services, investigation services, and temporary staffing, and it narrows the scope of activities considered taxable “live presentations.” It also creates a transition period for certain existing service contracts and requires the Department to waive penalties (but not interest) for businesses that inadvertently failed to collect the new sales tax during the early implementation period. The bill also establishes sourcing rules for advertising services and makes numerous conforming changes to align the new service tax framework with existing law.
• As noted above, the enacted income tax bill repeals all but the advertising portions of the SB 5814 sales tax on services, set to take place January 1, 2029. Notably, for trade associations, the bill includes a provision repealing the sales tax on live presentations given by non-profits under 501(c) of the Internal Revenue Code (including 501(c)(6) non-profit trade associations). This repeal goes into effect July 1 of this year.

Labor and Employment

• Usually an active policy area, only three major labor and employment bills passed this session. HB 1155 will ban all non-compete agreements and limit employers’ ability to enter into non-solicitation agreements with employees. The bill goes into effect June 30, 2027.
• HB 2471 creates a state-level labor relations regulation in the event the National Labor Relations Board declines or loses jurisdiction over labor disputes. These so-called “NLRB trigger” bills are trending in blue states as a response to concerns the federal administration or U.S. Supreme Court will chip away at the scope of the National Labor Relations Act or the jurisdiction of the NLRB. The bill goes into effect June 10, 2026, however is operative provisions are subject to the described contingencies taking place.
• HB 2105 is the Attorney General’s Immigrant Worker Protection Act, requiring five days’ notice to current employees of a federal I-9 work eligibility audit. The bill has substantial penalties for non-compliance, including an action by the Attorney General or a private right of action in court. A provision that will affect every employer in Washington requires jobsite posting of the requirements of the bill in English and the five most commonly used non-English languages in the state. The Attorney General’s Office will develop the language of the required posting. The bill takes effect October 1, 2026.

Payroll-Tax-Funded Programs and Workers’ Compensation

• This session saw a high volume of bills introduced targeting the state’s expensive workers’ compensation system. In the end, three passed the Legislature. SB 5847, narrowing the Labor & Industries medical provider network and imposing penalties for employers found to have directed medical care, awaits the Governor’s signature. Most of the bill’s provisions take effect January 1, 2028.
• SB 6136, requiring additional transparency in industrial insurance rate-setting, passed. The bill requires L&I to alert the public to the differences between the premium rates its actuaries say it needs to break even on its insurance operations, and the premium levels it actually adopts. The bill also requires visibility when the Department caps the premium rate increases for certain risk classes and socializes the difference across the rest of the system. The bill takes effect Jun 10, 2026.
• HB 2405, creating a pilot program to provide additional treatment options in PTSD presumption claims, also passed. The bill allows up to 11 mental health treatments before a PTSD claim is accepted or after the claim is closed, to test the hypothesis that increased treatment will improve return to work outcomes and avoid permanent total disability. The pilot begins July 1, 2026.
• In Paid Family & Medical Leave Insurance, SB 5292, modifying the statutory basis for setting premium rates in favor of actuarial determination, passed in its second year of consideration. The bill takes effect January 1, 2028.

Liability Reform and Litigation

• Despite entering session aware of the need for targeted tort reforms, particularly in claims against state and local governments, lawmakers ultimately failed to pass any reform legislation. However, the adopted operating budget creates an advisory group in the Office of Administrative Hearings to meet over the interim and report back by the end of this year on strategies to handle government liability claims. The adopted transportation budget also includes a proviso directing the Joint Transportation Commission to study roadway liability issues, including insurance minimums, whether failure to wear a seatbelt should be admissible in injury actions, and whether an individual’s impaired or reckless driving or racing should be admissible in claims for wrongful death.  That report is also due by the end of the year.  

Insurance

• By the end of session, and despite an active legislative agenda from the Office of Insurance Commissioner, only two bills impacting the insurance industry passed. SB 6248 adopts a regulatory regime for travel insurance products, patterned on the NAIC model law. The bill takes effect January 1, 2027.
• HB 2428 requires lapse notices and proof of delivery of such notices for most individual life insurance policies. The bill takes effect January 1, 2027.

Lobbying Services Provided by: