If you’re a high earner living in a blue state, your tax bill might be substantially higher in a few years. A number of states have proposals to tax the wealthy more.
These proposals have the potential to influence where Americans choose to live, work and retire.
Behind the proposals
Certain states are looking for ways to generate revenue.
As Lucy Dadayan, principal research associate and state tax expert at the Tax Policy Center at the Urban Institute, explained to CNBC:
“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.”
Inflation has squeezed middle- and lower-income families, creating political pressure to shift more of the tax burden upward.
Meanwhile, states that have already raised taxes on the wealthy point to better-than-expected results.
Massachusetts voters approved a 4% surtax on income over $1 million in 2022, and the tax generated nearly $3 billion in annual revenue in its second fiscal year. That’s more than twice the original estimates. Democratic leaders say this proves predictions of mass wealth flight were overblown.
4 states looking to tax the wealthy
California’s proposed Billionaire Tax Act would impose a one-time 5% tax on total net worth for residents worth $1 billion or more. And the proposal would tax assets rather than just income.
Virginia’s new Democratic-controlled legislature has proposed a 10% tax bracket for those earning more than $1 million annually. Currently, all income over $17,000 gets taxed at the same 5.75% rate.
A separate Virginia proposal would add a state-level net investment income tax on capital gains, dividends and rental income for those with modified adjusted gross income over $500,000.
In Washington state — which currently does not tax wages — legislators are proposing a 9.9% tax on income above $1 million. In 2022, the state imposed a 7% tax on long-term capital gains over $250,000, and a state Supreme Court ruling upheld it, potentially opening the door for broader income taxation.
Michigan’s proposed Invest in MI Kids measure would add a 5% annual income tax for single filers earning over $500,000 and joint filers earning over $1 million, starting in 2027.
Learn more about the states lowering tax burdens for their residents in “9 States That Just Cut Income Taxes (in Some Cases Dramatically).”
Should you consider relocating for tax savings?
Moving from a state with a 10% top rate to one with a much lower income tax rate could save a million-dollar earner $100,000 annually. Over a decade, that’s a substantial sum.
But consider what you’d leave behind. Family ties, professional networks and career opportunities don’t relocate with you. If your industry is concentrated in high-tax states like tech in California or finance in New York, moving might stifle your earning potential.
Those taxes also fund services. States with higher rates often provide better public schools, infrastructure and social programs for kids and elderly adults.
Also, residency rules can be complicated. Some states are increasingly aggressive about auditing former residents who claim to have moved. Maintaining a second home, keeping business ties or spending too many days in your old state can trigger tax liability anyway.
High earners in states proposing aggressive new taxes should understand their exposure and factor potential changes into long-term planning.
Never make a move based on tax rates alone. A state that looks optimal for taxes might be miserable for your actual life.