The Washington Legislature began the 2025 session facing a $15 billion operating budget deficit and a $1 billion transportation budget shortfall over four years. Click here to read more from our post a couple of weeks ago. With state law requiring a balanced four-year budget, lawmakers were left to make tough decisions. In response, the Legislature pursued a two-pronged approach. This included generating new revenue via increased and new taxes, while also pursuing cuts and delaying expenditures to rein in future costs.
Lawmakers Advance Major Tax Reform to Tackle Budget Shortfall and Address Regressive Tax Code
To begin closing the $15 billion gap, legislators adopted a tax package. It attempted to stabilize the budget in light of the shortfall. Five major bills were passed. Combined, they generate approximately $3.8 billion in the current biennium and $9.5 billion over the next four years:
- Senate Bill 5813 imposes an additional 2.9% tax on capital gains over $1 million. It restructures the estate tax to target high-value estates. Revenues will support public education, child care, and higher education.
- House Bill 2081 revamps the business and occupation (B&O) tax system by raising rates for high-earning businesses. It also increases the Advanced Computing Surcharge Cap (ACS).
- House Bill 2077 establishes a novel excise tax on surplus zero-emission vehicle (ZEV) credits. Revenues are directed toward electric vehicle incentives and the general fund.
- Senate Bill 5814 expands the retail sales tax to include digital and service-based sectors such as IT support, advertising, and security services.
- Senate Bill 5794 eliminates obsolete tax preferences and increases tax obligations for credit unions and self-storage facilities.
Key Spending Cuts Adopted to Address Budget Shortfall
While adopting new tax increases played a critical role in balancing the budget, lawmakers also turned to spending reductions. A series of bills were passed to unwind statutory commitments, restructure programs, and curb future spending growth:
- House Bill 2047 accelerates the sunset of the Washington Employee Ownership Program. It ties remaining activities to future legislative appropriations, limiting future costs.
- House Bill 2050 restructures how the state distributes local effort assistance (LEA) for K-12 schools. While some districts may see increased per-student caps, overall funding growth is constrained.
- Senate Bill 5807 eliminates the Smart Health wellness incentive program beginning in 2028.
- Senate Bill 5785 tightens eligibility and award levels in the Washington College Grant and College Bound Scholarship programs. The bill reduces funding for students attending non-profit private schools, and eliminates funding for students attending private for-profit schools.
Program Implementation Delays
In addition to raising revenue and cutting costs, the Legislature delayed the implementation of several high-cost programs. This pushed their fiscal impact outside the four-year budget window:
- House Bill 1648 delays new child care workforce training requirements to as late as August 1, 2030, while introducing alternative, lower-cost pathways.
- House Bill 2039 postpones the start of child support pass-through reforms by more than three years, moving the effective date to July 1, 2029.
- Senate Bill 5361 delays updated Medicaid managed care criteria under ASAM from 2026 to 2028, deferring associated costs for state agencies and providers.
- Senate Bill 5752 shifts full statewide entitlement to the Early Childhood Education and Assistance Program (ECEAP) from the 2026–27 school year to 2030–31, also phasing in related eligibility changes more slowly.
- Senate Bill 5761 extends the deadline for appointing attorneys for children in dependency and termination cases to January 1, 2032, and limits case growth. The bill is void unless funded by June 30, 2025.
By delaying these programs, the Legislature freed up space in the near-term budget to cover the shortfall, while maintaining a commitment to eventual implementation.
Takeaways
The 2025 legislative session marked a defining moment for Washington State’s fiscal policy. In response to an unprecedented deficit and constitutional requirement to balance the budget, lawmakers made difficult but deliberate decisions—combining new tax reforms with targeted program cuts and strategic implementation delays.
Is this the end of the Legislature’s tax reform season? Not quite. In a press briefing on May 20th, Governor Bob Ferguson noted that next session would likely bring legislation to fix some of the newly passed tax bills to prevent “unintended consequences”. Moreover, budget leaders and the Governor are closely monitoring the coming June revenue forecast, which will tell lawmakers whether to prepare for more cuts in the 2026 supplemental budget.