A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
A new “blue wave” of higher taxes on the wealthy is making waves in state legislatures, with states like Virginia, Washington and Rhode Island joining California in calling for higher taxes on high earners and billionaires.
As states face potential cuts to federal aid and Democratic lawmakers emboldened by rising populism and widening economic inequality, many blue state legislators and governors are preparing a range of new taxes on the wealthy. At the same time, many red states continue to cut or eliminate income taxes to increase their competitiveness.
“What we’re really seeing is a disconnect,” said Lucy Dadayan, a senior researcher and state tax expert at the Urban Institute’s Tax Policy Center. “On the one hand, some states are focusing on lower rates, rebates, and more competitive taxes. On the other hand, some states are turning to surtaxes on high earners as a way to fund fast-growing priorities without widespread tax increases.”
Tax increases have been proposed nearly every year by left-leaning state legislatures, but recent pushes have gained more momentum. Inflation has increased economic pressure on middle- and low-income earners, prompting renewed calls for higher taxes on the wealthy to offset soaring medical and education costs. Since the coronavirus outbreak, national spending has continued to increase, reinforcing the need for revenue.
Many Democratic leaders have also threatened to raise taxes on Massachusetts’ high earners as proof that the wealthy are not fleeing. In 2022, Massachusetts voters approved the Fair Share Amendment, which imposes an additional 4% tax on income over $1 million. The tax generated nearly $3 billion in annual revenue over two fiscal years. This is more than double the original estimate. Many Democratic leaders say the revenue shows that predictions of massive flight of wealth in the face of tax hikes are misleading.
Like the Massachusetts amendment, the latest tax hikes target only high-income earners. Jared Walczak, a senior fellow at the Tax Foundation, said the effort to single out millionaires and billionaires is different from previous tax hikes that called for progressive marginal tax rate hikes for a broader group of Americans to raise revenue.
“Now the rift is even more intense,” Walczak said. “It’s not just that people should pay more and more over time as their incomes rise. This is an effort to tax only certain subgroups of the population.”
California is leading the way in taxing the wealthy. The state’s Billionaire Tax Act, a measure likely to go before voters in November, would impose a one-time 5% tax on California residents’ total net worth of $1 billion or more. This is the first tax of its kind, as it taxes assets rather than wealth. It is also retroactive and will take effect on January 1, 2026.
Although the bill’s passage remains uncertain, some billionaires have already moved out of state. Google co-founder Larry Page moved to Florida in December, spending more than $170 million to relocate his family’s offices and several corporate registers to Miami’s Coconut Grove neighborhood. David Sachs, the tech billionaire and White House czar of artificial intelligence and cryptocurrencies, said he moved to Texas after living in California for 30 years. He told CNBC that the proposed Golden State tax amounted to an “asset seizure” and would likely become permanent if approved.
“It’s not a one-time thing, it’s a first,” he said.
Because the proposal is a ballot measure, the millionaire tax would bypass the governor and the Legislature. California Governor Gavin Newsom opposes the tax, saying it would push wealthy people to states with lower taxes. But other blue states have implemented top-down tax increases on the wealthy.
In Virginia, the election of Governor Abigail Spanberger gave Democrats control of the state legislature and the governorship. Lawmakers are proposing a new 10% tax on people making more than $1 million a year. Currently, all income over $17,000 is taxed at 5.75%. The second proposal would add a state-level net investment income tax that would apply to capital gains, dividends, and rental income when modified adjusted gross income exceeds $500,000.
Meanwhile, Virginia’s neighbors are cutting taxes. West Virginia lawmakers are phasing out income taxes, while North Carolina’s flat tax fell from 4.25% to 3.99% in January. North Carolina aims to lower its income tax rate to 2.49% over the next few years.
Virginia Representative Elizabeth Bennett Parker, who is proposing the net investment income tax, said the tax revenue is needed to help working families better afford health care, education and groceries. She pointed to Massachusetts as an example of success.
“Other states have recently passed laws that guarantee a fair share for the ultra-wealthy, but we haven’t seen a significant impact on the population,” she said. “In the wake of President Trump’s extreme tax bill, which further distorts the federal tax code to benefit the wealthiest Americans, momentum is building across the country to reshape state tax laws.”
In Washington state, lawmakers are making bold bets on the possibility of taxing millionaires. Washington state is one of only nine states that currently does not impose a statewide income tax. Opponents say the income tax violates the state constitution and current law.
But in 2022, the state imposed a 7% tax on long-term capital gains over $250,000. The following year, Amazon founder Jeff Bezos, a longtime Seattle resident and one of the world’s richest people, announced his move to Miami. Opponents argued that a capital gains tax would open the door to a broader income tax in 2022.
Now, that prophecy is becoming a reality. The Washington State Legislature is proposing a 9.9% tax on people making more than $1 million a year. They are hopeful that a state Supreme Court ruling upholding a capital gains tax could provide the legal possibility of a broader millionaire tax.
“Once the court ruled that a capital gains tax was allowed, we could very well expect the dominoes to start falling,” Walczak said.
Michigan’s proposed Investing for MI Kids bill would amend the state constitution to impose a top tax rate of 9.25% on incomes over $500,000 for single filers and $1 million for joint filers. Supporters say the new tax would generate an additional $1.7 billion in revenue for the education sector.
The new tax rate would be the highest in city taxes, meaning Detroiters would face a total tax rate of 11.65%. At the same time, Michigan’s neighbors Indiana and Ohio have flat personal income tax rates of 2.95% and 2.75%, respectively.
Rhode Island, which imposed the so-called Taylor Swift tax on luxury vacation homes just last year, is now considering a 3% surtax on incomes over $1 million. Rhode Island’s 2,300 millionaires are estimated to see their top tax rate rise from 5.99% to 8.99%, according to an analysis by the state Budget Office. It is estimated that 5,500 non-resident millionaires who owe taxes in the state could also be affected.
In New York, newly elected Mayor Zoran Mamdani continues to press Governor Kathy Hochul to raise taxes on the wealthy to plug a $12 billion budget hole and pay for additional services. He is proposing an additional 2% income tax on millionaires, which would bring the combined city and state top tax rate for New York City residents to 16.8%. Add in federal tax and the top tax rate is 53.8%.
Although the fate of the tax plan remains uncertain, experts predict that growing calls for higher taxes in many blue states will prompt business owners and high-income earners to consider moving to lower-tax states.
“Doubling tax increases in states like California and Washington greatly reduces the attractiveness of those states, especially given that there are many other options for businesses and individuals looking to relocate,” Walczak said. “In California, you’re always thinking about what your next tax bill is going to be. In Texas, you don’t have to worry about that.”
