OLYMPIA — Lawmakers adjourned the 2026 state legislative session Thursday after 60 days defined by an urgent effort to close a multibillion-dollar budget shortfall and advance what could become the most significant shift in Washington’s tax structure.

In the final hours, legislators approved an $80.2 billion supplemental operating budget, largely along party lines, updating the $77.8 billion spending plan adopted last year for the 2025-27 biennium. The closing days were dominated by marathon floor debates, including more than 24 hours in the House over the proposed income tax on high earners that Democrats ultimately passed over unified Republican opposition.

The budget deal capped a historic session in which majority Democrats sought to reshape how to raise revenue while closing a roughly $2 billion budget gap against the backdrop of affordability pressures and uncertainty over federal policy and the broader global economy. Lawmakers also attempted to establish new guardrails for rapidly expanding technologies such as data centers and artificial intelligence.

Gov. Bob Ferguson said Thursday he was mostly pleased with the final budget package, calling it “responsible” and saying it “makes life more affordable for thousands of Washingtonians and businesses.”

One disappointment, he added, was lawmakers’ decision not to approve his proposal to borrow $1 billion to accelerate construction of new state ferries.

Budget gap patch

Republicans and Democrats have not seen eye-to-eye on how to shore up the shortfall, with Republicans arguing lawmakers should rely primarily on cuts, blaming what they described as Democrats’ out-of-control spending. Democratic leaders, while including targeted cuts, instead leaned on a mix of reserve funds, accounting shifts and new revenue options to stabilize the budget

The roughly $2 billion gap developed from several pressures, including the rising number of Washington residents relying on state programs, increases in mandatory spending, higher spending levels approved in recent years by lawmakers and changes in federal funding.

Lawmakers relied on tapping $880 million from the state’s Rainy Day Fund, one-time revenue shifts and closing certain tax preferences.

They passed legislation to siphon $4 billion in surplus funds from the state police and firefighter pensions to replenish state reserves in the coming years.

Major spending increases include $956 million in liability payouts and $71 million in Medicaid increases. Lawsuit payouts by the state of Washington have led to ballooning legal costs, driven largely by claims of alleged abuse suffered by children in the foster care system over many decades.

Major reductions include a $143 million cut to the state’s Working Families Child Care program — which subsidizes child care for eligible families — $27 million in reductions to the Transition to Kindergarten program and $22 million in administrative cuts across state government.

Sen. Chris Gildon, R-Puyallup, called closing the budget gap a “manageable challenge,” but said Democratic lawmakers, instead of pursuing cost controls and sensible reforms, “continued the habit of new and unnecessary spending propped up by raids on funds meant for other priorities.”

“If that lack of discipline continues, structural deficits will keep returning — because taxes can’t keep up with an endless appetite for spending,” Gildon said.

Before adjourning, lawmakers also approved an $889 million capital budget along with a $16.6 billion transportation budget.

Historic tax push

Democrats muscled through what progressives have long viewed as the holy grail for state tax policy.

The so-called ‘millionaires tax’ will hit individuals and couples earning more than $1 million a year with a 9.9% tax, a move expected to affect roughly 20,000 to 30,000 taxpayers and generate billions of dollars for state services. Ferguson has pledged his signature.

The passage of the state’s first income tax since 1933 arrived rapidly, as most Democratic lawmakers a year or two ago were not even talking about it, and in some cases denying they’d do it. But the election of President Donald Trump turbocharged the movement.

Supporters say the measure is meant to address what they view as a deeply unbalanced structure. Washington currently relies heavily on sales and other consumption-based taxes, and is ranked among the most regressive tax codes in the country. Democrats argue this will shift some of the economic burden onto the wealthiest residents.

They also approved Thursday a partial rollback of last year’s increase in top estate tax rates — the highest in the nation — in a move that highlights a delicate balance as they pursue new revenue from wealthy residents while acknowledging concerns that one recent hike may have pushed the state outside the national norm.

Republicans say the income tax leaves open the possibility that future Legislatures could lower the income threshold and eventually expand it to include all Washington taxpayers. They also argue it is unconstitutional and expect it will face legal challenges if enacted.

Revenue will be used in part to expand the state’s Working Families Tax Credit, which provides some tax relief for lower-income households, allowing more families to qualify and increasing benefit levels. Lawmakers also paired it with smaller relief measures, including sales tax exemptions on hygiene products and a nonbinding statement of intent to provide free lunches to all K-12 students, a plan reflected in the budget.

Part of the revenue from the income tax offsets an exemption for small businesses from paying the state’s high business and occupation tax. Sales tax increases that were enacted last year, as part of a $9 billon revenue package, were also rolled back after some school districts were concerned about the tax applying to temporary staffing and live performances.

Federal uncertainty

House Democrats said another focus this session was responding to actions by the federal government.

Speaker of the House Laurie Jinkins, D-Tacoma, said they entered the session ready to play defense.

Among the measures passed was legislation prohibiting state and federal law enforcement from wearing face-concealing masks while interacting with the public, and one aimed at limiting federal immigration agents’ access to data collected by automated license plate readers. The bill exempts the footage from public disclosure, limits data retention to 21 days, and bars public agencies from using the technology for immigration enforcement.

Another proposal ensures workers receive timely notice when federal immigration authorities conduct workplace employment eligibility inspections by requiring employers to inform then when notices are received and when the results are issued.

Tech fends off regulations

This marked a banner year for Big Tech companies hoping to fight back any new regulations on their booming data center operations.

One sweeping and bill sought to require data centers to pay higher electric rates, more transparently report on their water and power use, and even take energy cuts during shortages. But lobbyists for companies like Microsoft and Amazon rallied against the proposal, diluting its language and urging lawmakers to kill it outright. A watered-down version of the bill passed the House only to die in the Senate Ways and Means Committee, marking a significant victory for the tech companies.

Tech companies and their allies also tried to beat back an attempt to remove state tax exemptions for upgrades on their hardware that had been meant to attract them to Washington in the first place, but lawmakers in their final hours passed the bill on tight margins.

Numerous bills to regulate AI were introduced at the start of the session, but only one measure, to address companion chatbots and establish safeguards for minors and protocols for users expressing suicidal ideation or self-harm, advanced in the short session.

What’s next

The end of the session also signals potential significant turnover in the Legislature. Several lawmakers announced plans to retire or not seek reelection, and some have launched campaigns to pursue different offices. Sen. John Braun, R-Centralia, and Sen. Matt Boehnke, R-Kennewick, are both running for seats in Congress.

Debate over Washington’s tax structure is also far from settled.

Legal challenges are widely expected once Ferguson signs the bill. Democrats seem supremely confident the state’s high court will finally overturn a 1933 court ruling that classified income as property and blocked a graduated income tax.

But the second hurdle could be higher, as voters have rejected income taxes 10 times. The last attempt, in 2010, failed in all but one county — even going down in King County.

One question for opponents of the income tax is whether to pick a ballot fight this fall, which would be dangerous given a likely anti-Trump midterm backlash that will bring Democrats out in droves.

Ferguson, meanwhile, seems unbothered by the threat of electoral backlash. He pointed to sweeteners in the “millionaires tax” package, including sales and business tax cuts and the pledge to fund free school breakfast and lunch for all kids.

“I feel confident when people see where those dollars go … I think the people are going to like it,” he said.

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