Steps Toward a Fairer Tax System

Washington’s tax system was built nearly a century ago. It has not kept up with rapid population growth, higher costs for core services, and the pattern of federal decisions that have shifted responsibilities to states without providing matching funding. Even after difficult reductions, the state still faces a projected gap of $2.3 billion to sustain essential services like education, housing, and health care.

Governor Ferguson’s 2026 supplemental budget takes a balanced approach. It protects critical services, makes targeted cuts, and raises new revenue by closing outdated tax breaks that primarily benefit a small number of large corporations. These proposals bring in a total of $145 million in the 2025–27 biennium.

Data center refurbishment exemption

The state’s 6.5% sales tax on goods and services is collected by retailers and remitted to the state to pay for various government services out of the general fund. Washington currently waives sales tax on replacement server equipment in qualifying data centers, which was intended to attract investment and jobs, particularly in rural communities. However, over time, data centers became major users of electricity and created fewer permanent jobs than originally expected. Effective July 1, 2026, the proposal ends the sales tax exemption for replacement server equipment, which was utilized by about 25 data centers this past year.  This gives operators time to plan while ensuring they contribute more fairly to the grid and infrastructure they depend on.

Prescription drug wholesalers

Today, businesses that warehouse and resell prescription drugs pay a special business and occupation (B&O) tax rate of 0.138%, far below the roughly 0.5% rate paid by other wholesalers. This was originally meant to level the playing field for distributors with a physical presence in Washington. Today, all distributors are subject to the B&O tax regardless of physical location, making this tax preference obsolete. It now mainly benefits a small group of large national distributors, not patients. Under the proposal, about 49 wholesalers would move to the standard rate and be treated like many other wholesalers in Washington. Some costs may be passed along in the supply chain, but the impact is expected to be small compared to overall drug prices. The additional revenue will go back to the state to help preserve medical and behavioral health services that families rely on.

Insurance premiums tax

Washington charges insurance companies a 2% tax on gross premium payments. Currently, state law gives a B&O tax exemption to entities that already pay the premiums tax to prevent double taxation. However, a recent court case ruling allowed certain affiliate companies, such as pharmacy benefit managers and administers, to claim the B&O exemption even though they do not pay the insurance premiums themselves. As a result, some companies have been able to avoid paying either tax on the same revenue. The governor’s proposal closes this loophole by clarifying that only entities that actually pay the premiums tax may claim the related B&O exemption. This restores the law’s original intent, promotes consistent treatment across the industry, and prevents corporate structures from being used to sidestep both taxes. Any impact on individual premiums is expected to be minimal compared to larger drivers like medical costs and federal policy.