Legislation introduced in Washington State, known as the “millionaires’ income tax” or Senate Bill 6346, aims to impose a 9.9% tax on high earners. While marketed as a measure targeting the ultra-wealthy, many small and mid-sized construction contractors argue it will have an adverse impact on their operations. This proposed tax threatens to disrupt the cash flow that is essential for sustaining their businesses.
Most construction firms in Washington are not large, publicly traded corporations. Instead, they are locally owned entities such as LLCs, partnerships, and S corporations, which are classified as pass-through entities. This means that business income is reported on the owners’ personal tax returns. On paper, this income might appear as personal wealth, but in practice, it often represents the operating capital necessary for day-to-day business functions.
The construction industry is characterized by its cyclical nature, capital intensity, and traditionally low profit margins. Construction margins lag significantly behind those in sectors such as technology, finance, and pharmaceuticals. Contractors commonly reinvest their earnings into critical resources, including equipment, bonding capacity, payroll, insurance, and safety programs.
Income in this sector is frequently recognized at the conclusion of significant projects, leading to temporary spikes in reported income. This situation may result in an owner’s income exceeding $1 million in a single year, but it does not indicate the presence of that amount in cash reserves. Instead, it often means that a contractor has completed a large project and is now preparing for the next one.
Should Senate Bill 6346 be enacted, pass-through construction firms would be subject to the 9.9% tax either at the entity level or passed through to their owners’ personal returns. This taxation mechanism effectively removes cash from their operations. The timing of cash flow is critical in the construction business, where contractors are required to front payroll for skilled workers and apprentices on a weekly basis. Additionally, materials are often purchased well before any reimbursement occurs, further complicating financial management.
Contractors face frequent payment delays, which can extend for weeks or months. Retainage is typically withheld long after a project has concluded, placing the financial burden on contractors rather than project owners. As a result, cash flow gaps are a persistent challenge in the construction industry.
When the state imposes a new 9.9% tax on what is essentially operating capital, it diminishes the financial buffer that contractors rely on to pay employees, secure bonding, and bid on future projects. A decline in working capital leads to a decrease in bonding capacity, which can prevent firms from competing for larger contracts. This scenario can also result in slower hiring processes and halted business expansion, creating immediate ripple effects throughout the industry.
Small and mid-sized firms are especially vulnerable to these changes. Disadvantaged and minority-owned businesses, often operating with tighter margins and limited access to credit, face heightened risks from cash flow disruptions. For these firms, a loss in working capital could translate into lost opportunities.
The proposal is described as a tax on “millionaires,” but for those in the construction sector, it functions as a tax on the cash reserves critical for managing payment delays, absorbing cost increases, and maintaining employment during billing cycles. It fails to differentiate between personal wealth and the operating capital necessary to run a job site effectively.
The construction industry in Washington is integral in building essential infrastructure, including schools, hospitals, roads, and bridges that support local communities. Effective tax policy should recognize the operational realities of these businesses. In construction, cash flow is not merely a financial metric; it is vital for survival. Taxing it as if it were idle wealth risks slowing down critical projects, stifling growth, and undermining the very businesses that contribute to the state’s economic development.
In conclusion, for many small and mid-sized contractors, the proposed measure is not a tax on millionaires. It is a tax on the cash flow that keeps their operations running and their workforce employed. Jeff Tiegs, president of the Associated General Contractors of Washington and Lincoln Construction, emphasizes the need for tax policies that support, rather than obstruct, the construction industry’s essential role in the state’s economy.
