Democratic states seek to hike taxes on the wealthy

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A new “blue wave” of tax hikes on the wealthy is rippling through state legislatures, as Virginia, Washington state, Rhode Island and others join California in calls for higher taxes on top earners and billionaires.

With states facing potential cuts in federal aid and Democrat lawmakers emboldened by rising populism and a growing economic divide, legislators and governors in many blue states 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 become more competitive.

“What you’re really seeing is divergence,” said Lucy Dadayan, principal research associate and state tax expert at the Tax Policy Center at the Urban Institute. “On one side, some states are doubling down on rate cuts, rebates, and tax competitiveness. On the other, some are turning to targeted surtaxes on high earners as a way to fund fast-growing priorities without raising broad-based taxes.”

While tax hikes are floated by left-leaning state legislators almost every year, the latest push has added momentum. Inflation has increased the economic pressure on middle- and lower-income earners, sparking renewed calls for higher taxes on the wealthy to offset higher health care and education costs. State spending has continued to rise since Covid, renewing the need for revenue.

Many Democratic leaders are also heralding a tax hike on high earners in Massachusetts as proof that the wealthy won’t flee. In 2022, Massachusetts voters approved “The Fair Share Amendment,” a 4% surtax on income over $1 million. The tax generated nearly $3 billion in annual revenue in its second fiscal year – more than twice the original estimates. Many Democratic leaders say the revenue shows that predictions of mass wealth flight in the face of higher taxes are misleading.

Like the Massachusetts amendment, the latest proposed tax increases only target top earners. Jared Walczak, senior fellow at the Tax Foundation, said efforts to single out millionaires and billionaires differ from previous tax hikes, which sought higher, progressive marginal rates on a broader population to raise revenue.

“Now it’s a starker divide,” Walczak said. “It’s not just that as incomes rise people should pay progressively more. It’s an effort to only have taxes on a specific subset of the population.”

California is leading the charge to tax the wealthy. The state’s Billionaire Tax Act, a ballot measure likely to head to voters in November, would impose a one-time 5% tax on the total net worth of California residents worth $1 billion or more. The tax would be the first of its kind, since it would tax assets rather than wealth. It would also be retroactive, taking effect Jan. 1, 2026.

While its passage remains uncertain, some billionaires have already moved out of the state. Google co-founder Larry Page moved to Florida in December, dropping more than $170 million in Miami’s Coconut Grove neighborhood and moving his family office and several business registrations. David Sacks, the tech billionaire and AI and crypto czar for the White House, said he moved to Texas after 30 years in California. He told CNBC the proposed Golden State tax amounts to “an asset seizure” and would likely become permanent once approved.

“It’s not one-time, it’s a first time,” he said.

Since the proposal is a ballot measure, the billionaire tax would bypass the governor and legislature. California Gov. Gavin Newsom opposes the tax, saying it would drive the wealthy to lower-tax states. In other blue states, however, tax hikes on the wealthy are coming from the top down.

In Virginia, the election of Gov. Abigail Spanberger gave Democrats control of the state’s General Assembly and governorship. Legislators have proposed a new tax bracket of 10% on those making more than $1 million a year. Currently, all income over $17,000 is taxed at 5.75%. A second proposal would add a state-level net investment income tax, applied to capital gains, dividends and rental income, for modified adjusted gross income over $500,000.

Virginia’s neighbors, meanwhile, are cutting taxes. West Virginia lawmakers are in the process of phasing out their income tax, while North Carolina’s flat tax fell from 4.25% to 3.99% in January. North Carolina aims to bring down its income tax rate to 2.49% in the coming years.

Elizabeth Bennett-Parker, a member of the Virginia House of Delegates who’s proposed the net investment income tax, said the revenue is needed to help working families better afford health care, education and groceries. She cited Massachusetts as an example of success.

“Other states have recently passed laws to ensure the ultra-wealthy pay their fair share and have not seen significant impacts on population,” she said. “There is momentum across our country to rebalance state tax codes, following the extreme Trump tax bill that further skewed the federal tax codes to benefit the wealthiest Americans.”

In Washington state, legislators are making a bold bet on a possible millionaires tax. Washington is one of only nine states that currently don’t have statewide income taxes. Opponents say an income tax would violate the state constitution and existing law.

Yet in 2022, the state imposed a 7% tax on long-term capital gains of over $250,000. The following year, Amazon founder Jeff Bezos, a longtime Seattle resident and one of the world’s richest people, announced that he was moving to Miami. Opponents said in 2022 that the capital gains tax would open the door to a broader income tax.

Now, that prediction is coming true. Washington state legislators are proposing 9.9% tax on those earning more than $1 million a year. They’re hoping that a state Supreme Court ruling that upheld the capital gains tax will offer a potential legal path for a broader millionaire tax.

“It was very predictable that once you had a court ruling that allowed for the capital gains tax, the dominoes would start to fall,” Walczak said. 

In Michigan, a proposed “Invest in MI Kids” measure would amend the state constitution to impose a 9.25% top rate on those with 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 education.

The new rate would also be on top for municipal taxes, with Detroit residents facing a combined rate of 11.65%. At the same time, Michigan’s neighbors, Indiana and Ohio, have flat individual income tax rates of 2.95% and 2.75%, respectively.

Rhode Island, fresh off last year’s so-called “Taylor Swift Tax” on expensive vacation homes, is now considering an added 3% surtax on incomes over $1 million. An estimated 2,300 Rhode Island millionaire earners would see their top tax rate jump from 5.99% to 8.99%, according to an analysis by the state budget office. It estimates that 5,500 nonresident millionaires who have tax liabilities in the state could also be affected.

In New York, newly elected Mayor Zohran Mamdani continues to pressure Gov. Kathy Hochul to raise taxes on the wealthy to fill what he says is a $12 billion budget hole and to pay for added services. He’s proposed an added 2% income tax on millionaire earners, which would bring the top combined city and state tax rate for New York City residents to 16.8%. Adding in federal taxes, and the top rate would be 53.8%.

While the fates of the tax proposals remain uncertain, experts say the growing chorus of higher taxes in many blue states will cause business owners and top earners to consider moving to lower-tax states.

“Doubling down on higher taxes in states like California, Washington and others makes them far less attractive, especially given how many other options are now available to businesses and individuals who want to move,” Walczak said. “In California you’re always wondering what will come next in terms of taxes. In Texas, that’s not a concern.”