Washington state lawmakers deliberately included public pensions in the state's new income tax, devoting 14 sections of the law to revising pension statutes even though retirement benefits for teachers, police, and firefighters fall far short of the million-dollar incomes tax supporters have emphasized, according to a report published by the Washington Policy Center. The analysis argues that legislators structured the tax in anticipation of lowering the current $1 million deduction threshold, which would expose retirement income to taxation without requiring further legislative amendments.

Public employees retiring from Washington's PERS 2 and TRS 2 systems receive pensions calculated at 2% of final average pay for each year of service, the report details. Someone retiring after 30 years with $100,000 in annual pensionable pay would receive $60,000 yearly. In the Department of Retirement Systems' 2025 financial report, PERS 2 members who retired in fiscal 2024 with at least 31 years of service averaged roughly $62,000 annually. A retiree receiving that $62,000 pension would need more than $938,000 in additional income before owing any tax under the current threshold. Federal law further limits the maximum annual benefit from defined-benefit pension plans to $290,000 in 2026 under IRC Section 415(b). To reach that ceiling under the PERS 2 or TRS 2 formula, a member working 40 years would need annual pensionable pay of $362,500—yet even that pension would still fall $710,000 short of the $1 million deduction.

The report concludes that the current deduction level can't explain why lawmakers revised pension statutes, leading to one rational inference: legislators built the tax expecting the deduction to drop. According to the analysis, ten states with income taxes provide broad, uncapped exemptions for qualifying pensions from their own public systems—New York fully exempts its own state and local pensions along with federal pensions, Alabama exempts qualifying defined-benefit pensions, and Illinois broadly excludes qualified retirement income. Washington could have written a similar exemption into the law but chose not to, the report states. Federal law prevents states from taxing comparable federal retirees more harshly than their own public retirees but doesn't require states to tax public and private pensions identically.

The structure creates risk for both public and private retirees if the threshold falls, the report warns. A private-sector worker withdrawing their entire $1.5 million traditional 401(k) in a lump sum in 2028 would face a state income tax bill of $49,500 on the $500,000 above the deduction—potentially equaling a full year of planned retirement income from that single withdrawal. Public employees can't renegotiate pension formulas after retirement to cover new taxes, the analysis notes, and pension decisions about when to retire and survivor benefits are made over a working lifetime and can't be reversed. Washington enacted a ban on personal income taxes in 2024, then amended that ban two years later to authorize this tax. Retirees are being asked to trust that a Legislature willing to reverse the income tax ban will leave the $1 million deduction untouched despite deliberately including pensions and the tax's primary architect openly supporting a universal income tax, the report states. Voting yes on Initiative 645 will repeal the income tax and prevent lawmakers from lowering the threshold and taxing pension income.