Dec. 26, 2025
Gov. Ferguson Releases Budget Proposal, Announces Support for State Income Tax
Sean Graham, WSMA Senior Director of Government Affairs and Policy
The 2026 legislative session that begins in January will be defined largely by the state's continued budget challenges. Those challenges, and the dynamic around tax increases that may be considered next year, came into shaper relief this week with Gov. Bob Ferguson's release of an operating budget proposal.
In broad strokes, Gov. Ferguson proposes a mix of spending reductions ($800 million), fund transfers and tax preference modifications ($500 million), and tapping into the state's budget reserve account ($1 billion) to bridge what he defined as a $2.3 billion shortfall over the duration of the state budget cycle that runs through June 30, 2027. But the headlines from the governor's budget rollout will be focused on his announcement that he's supporting the establishment of a state income tax.
In a press conference held on Tuesday, Gov. Ferguson stressed that his support for a "millionaires' tax" was separate from the budget he was proposing and intended to rebalance the state's tax system, which is generally considered regressive in its reliance on sales and property taxes. The governor's preferred income tax approach would be applied to individuals who make more than $1 million per year, assessed at a rate of 9.9%, with revenue going towards education, small business tax relief, and increases in the state's working families tax credit program.
During the 2025 session, Gov. Ferguson was critical of budget proposals from legislative Democrats that would have balanced a state budget shortfall with, among other measures, the establishment of a wealth tax. He drew a distinction with his income tax proposal in that it would not be intended to solve the state's short-term budget challenges, as it would be subject to referendum by the voters and legal challenges on its constitutionality. And while he expressed optimism that both could be overcome, he acknowledged that any revenue from a state income tax likely would not be received until at least 2029.
Turning to Gov. Ferguson's operating budget proposal, there are substantial impacts for the physician community and state health policy. Notably, cuts to Medicaid reimbursement rates for physical and behavioral health services are not included in the proposal, a distinction from other states that have recently closed budget gaps in part by cutting rates. And no new taxes are proposed on physician organizations. The proposal also assumes the federal government will provide the state $150 million through the Rural Health Transformation Program (with details on how funding would be allotted to be determined).
But the proposal does include reductions in state support for Medicaid coverage for undocumented residents to reflect program enrollment reductions ($55 million), Foundational Public Health Services ($29 million), and Medicaid facility fee payments ($11 million), among other proposed cuts. The Medicaid pharmacy benefit would also shift from managed care to fee-for-service, which would save state funds and have impacts on drugs that may be prescribed for Medicaid enrollees, as well as associated utilization management changes.
On the revenue side of the ledger, Gov. Ferguson proposes ending preferential business and occupation tax treatment of prescription drug wholesalers ($27 million), clarifying application of premium tax to insurance carriers ($56 million), and eliminating a sales tax exemption for refurbishment of data centers ($63 million). There are also numerous fund transfers proposed, including a shift of the medical test site licensure account to the general fund ($1.5 million) and funding several programs through the health professions account which is comprised of licensure fees from physicians and other licensees.
As in the 2025 legislative session, the state's budget deficit will dominate discussions in Olympia next year. In the 2025 session, legislators worked to close a $16 billion shortfall using a combination of budget cuts and tax increases. Closing the current deficit, estimated at $3 to 5 billion, may seem like an easier task but it's made more difficult by virtue that some fiscal levers have already been pulled, and the state is partway through the two-year budget cycle meaning there's a shorter runway to bring the budget back into balance.
The 2026 legislative session convenes on Jan. 12 and is scheduled for 60 days. In addition to budget negotiations, legislators will consider thousands of bills through the course of session. Your WSMA advocacy team is at the Capitol daily, ensuring that the voice of the physician community is represented across policy and budget discussions. If you're interested in more information on what's on the table next session, join us for our pre-session webinar at 5:30 p.m. on Wednesday, Jan. 7. Register here.